ECONOMIC IMPACT. Since our last newsletter we went from ZERO rate cuts & soaring 10 yr rates last Fall to 6 at the peak in 2024 last month to now somewhere in between. The confusion stems from the fact that govt spending is distorting economic data (which is also being message to appear better) in part tied to multiple wars and in part tied to environmental agendas ie tax credits/grants and illegal immigration. Spending by the govt is swamping the economy as inflation eats into consumer spending. That's why you see such disparity when you listen to corporate earnings calls and see actual results as well as speak to real American's about their standard of living declines vs govt stats. Simply put the wild spending is benefiting some but not most and making the situation worse. In sum, the govt via wild spending is stoking the very inflation that prevents lower rates to occur. To make matters WORSE the inflation as estimated in GDP is being under reported which inflates growth and its clear employment data too is being messaged via boosts in season adjustments, part time workers etc. This too is causing rate cuts from happening sooner as well.
INVESTMENT IMPACT. Markets are at a critical junction as rate cut expectations are very high vs the reality of inflation remaining elevated and govt data either GDP or employment not all supportive of rate cuts never mind 4 which markets now expect in 2024. Without such cuts the stress on the consumer will continue as will stresses on the banking system and real-estate sectors never mind the overall real economy. As a reminder the market recovery from the Fall was a function of expectation of rate cuts which we believe is very much in doubt. Add on top of signs of retail speculation in small caps and a possible AI tech bubble you have a recipe of caution. On price to sales basis the market is MORE expensive than it was in 2000. In reaction to this we recently sold many of our rate sensitive holdings such as banks in lei of other holdings, raising cash overall choosing investments which have justifiable valuations for the given growth. We have learned from past you don't chase bubbles you sell them even though performance may suffer in short term. Given its an election year many of this things stated above we suspect may get glazed over and be ignored till after next Fall. Then like in recent past all at once get recognized as risk. In mean time we stay with our selective strategy focused more on value/ yield vs high valued large cap tech. We do think rates are on their way down cause what's occurring is unsustainable especially when considering the burden of debt and interest on that debt either for govt or otherwise.
We remind investors that going forward expectations for returns for the overall market over the next decade remain low as we expect well below returns vs history. Be that it may we are hopeful our models can improve on that going forward.
Our model portfolio performance has been updated as of the date of this newsletter as tracked by Sharesight.
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