“I was just a babe in the markets” when Reagan became USA President and told Federal Reserve Chairman Paul Volker to “keep up the good work.” I don’t know his exact words, but I remember the meaning. Volker had raised interest rates; savers were happy as they earned interest in the high teens, maybe the 20’s. Of course it was only good for the economy if it brought down the high inflation.
Volker kept up the pressure, the markets folded, and interest rates fell below 3%. Janet Yellen, current Secretary of the Treasury was quoted, “The macroeconomy took off. Paul Volcker was an inspiration to me and to everyone in the Federal Reserve. He embodied the values we hold most dear; devotion to public service, the courage to do the right thing, even when it’s immensely unpopular.”
Do we believe that the current raising of interest rates is good medicine for us? That it is medicine we have seen work before? For thirty years ending 7/31/22 the Consumer Price Index (inflation) had averaged 2.4% but then in July, 2022, the trailing12 month CPI average bounced up to 8.5% for the year. Too much money chasing limited supply brought on by the pandemic in our economy is a given reason.
How does the individual deal with inflation and business slowdown? Does it matter what the exact numbers are or if we did or did not enter a recession? Can one simply stop buying certain things when they cost too much?
People with a plan know what a reasonable price is to pay for most items. They are not threatened by fears that they better buy before the price goes up again. That’s it – quite simply. Options change so wait for other options to appear. Frequently, doing nothing is a good decision. Economists Art Laffer and Stephen Moore say ‘growth, not austerity, is the best answer to inflation’. And growth is what occurred in the 80’s.
Of course, inflation is real and a serious burden so we remind investors ‘that is why you invest in equities.’ Equities will reflect the increase in costs while continuing to produce the products. Corporations increase the selling price of their product if the cost of producing that product continues to increase. Companies that continue to grow have been able to balance the many facets of production and sales. It’s not rocket science, it’s logic, and that’s why your purchase of the stocks can provide you with a return equal to or over the inflation rate as time moves on. Ownership is democratic. It is the one place where all people can build a sizable nest egg buying them protection from inflation.
Market indexes are down year to date. Not a bad dip but down. You may have been with us in the Fall of 2007 through March 8th, 2009 when accounts declined 50 and 60%. It was rough but clients regained their values and more as the market shot back beginning March 9, 2009. It was a dramatic turn around signaling the beginning of a new bull market.
We consistently argue against the idea that ‘Bonds are safe and stocks are risky.’ We think both bonds and stocks are “risky” and returns on bonds have been low for several years and never approach the value of stocks for any long periods of time. During 2022, the U.S. Aggregate Bond Index is down 10.73% while the DJIA is down 11.52%.
I’ll end with a quote from Ron Baron, founder of the Baron Funds. In his June 30, 2022 quarterly report, he discusses the many projections given by economists or a CNBC guest that “the worst is yet to come.” Ron says, “That is an eventuality we believe is unknowable and unpredictable. I believe this to be the case because in my 52-year Wall Street career, I have never known anyone to accurately and consistently predict markets..economies..interest rates..inflation..oil prices..wars..commodity prices..and election outcomes. Not Warren Buffett..not Elon Musk..not Fed Chairmen..not my friend Peter Lynch..not me..and not even my doorman..who, for several years, as I reported to you in my March 31, 2022 “Letter from Ron” had profitably invested in Bitcoin.” Baron Funds Quaterly Report 6-30-2022
As of 6-30-22, 15 of Baron’s 17 funds have performed better than their benchmark indices since inception.
It’s a good time to increases your purchases of equities. Contact us for a meeting.
Sincerely,
Louise Googins, President, Investment Advisor
Michael Googins, Administrator
Kim Rankin, Accountant
Richard Martin, Investment Advisor
Lynne Goldsmith, Investment Advisor
Dayton Hoffmann, UW-Madison Intern
Andrew Spengler, UW-Madison Intern