Why this is a weird time and the market is erratic and volatile


In a nutshell, I've come up with the following assessment based on my research that isn't calling a bottom or anything but is driving my investment strategy.

Since 2009, the market has been driven more by the Federal Reserve Fund Rate (FFR) that enabled a lot of companies to grow, particularly in the tech industries, due to easy debt availability. The FFR was negative in real terms (in relationship to true inflation rates) and off-shoring allowed for easy access to cheap labor on staples and manufacturing. This allowed wages to be suppressed, even in non-staple industries. An example is why your support phone calls to Dell are taken in Mumbai. The CSR's are getting paid fractions of what US CSR's would receive for the same work.

The COVID shut downs of 2020 came with unemployment at 3.5% leading into it. However, there was stagnant wage growth at that time. For reference sake, average unemployment from 1948 until 2015 was 5.8%. The Federal Reserve targets 5% unemployment as its target. Above that isn't necessarily healthy because it leaves companies short staffed and doesn't allow for wage growth in-line with the Fed's target inflation rate of 2.5%. Since wages were not increasing at a rate commiserate with inflation in real terms and because social security payouts were so low as well in terms of pre-70 retirements, older folks were working longer. Then along came COVID.

COVID-based lockdowns caused massive layoffs, to the tune of a 12-13% spike in unemployment. The US went from 3.5% to 14.7% unemployment basically in the course of weeks. The easing of the lockdowns took over a year. The Federal Reserve and Congress' response was to dump a ton of money in enhanced unemployment benefits, drop nominal rates to zero, and juice the stock market from a massive drop into a blow-off top with the S&P hitting 4800. Suddenly, a lot of 60+ year old's retirement accounts got a lot more valuable. There was a lot of incentive to stop working for a lot of people who historically would have been out of the workforce 5-10 years earlier. This is tied to a demographic issue based on lower birth rates tied to stagnant wage growth, higher debt levels, and higher quality of life and fundamental shifts in how people chose to live life.

In lockstep, the outsourced staples and manufacturing had inflation problems because the labor issues spread globally as entire continents locked down. The entire global supply chain got, for lack of a better term, FUBAR'ed. This jacked shipping, production, and commodity prices, on top of what had been developing upward pressure on those prices due to global climate concerns. This caused inflation which is still manifesting.

Historically, inflation can't be tamed until the FFR is positive in real terms (rates above inflation rate). We aren't there yet, but should get there by Q1 of '23. History says a “soft landing” is not likely because the very thing the Fed has to do to tame inflation is recessionary. Unemployment has to go up. And that's the crux of why I am writing this:
We're in a weird time, because unemployment isn't likely to give much of a care about rates. Simply put, the available labor force has contracted dramatically. And this isn't really tracked well. In '20-'21 there were massive spikes in new company registrations, so a lot of people left the workforce to start their own little gigs, likely in many cases with zero rate debt for startup costs, and those likely aren't being tracked that well. The stock market, which is essentially all very large companies, feels this strain the worst, because the only way they are going to keep up is by offering higher wages from the bottom to the top of their employment pay scales. We will likely see continuing white-collar job cuts and continuing pay and benefit raises at the bottom, which vastly out number the top. There is very little incentive these companies can provide without higher pay. And no Fed changes will help this. The job market is going to persist at a very tight state, the demographics demand it.

All that will happen is that the Fed will tighten, even into real positive rates of 6-7%, and eventually the issue will be servicing US debt as a percentage of GDP. It will hit a point, stop, and the pivot won't happen for a very long time back into easy monetary policy because the stagnation of the labor pool and avenues for self-employment contradict the large corporate structure that has existed to this point. My personal investment thesis right now is to maintain exposure in solid, mature companies, preferably with dividends, emerging market exposure into places with positive demographic trends (India, South Africa), and buy bonds when the fed announces a stop to rate hikes because I think they will largely outperform the market in the 2-5 year term until the pivot to rate cuts (probably 2H 2024) due to political pressure and the ever increasing appetite by the general populace for entitlements.
At that point, buying TLT will be how somebody could get very, very wealthy and since that is not some secret anymore, that could re-ignite the entire cycle. Because it will happen at that scale. Institutional money will absolutely clobber that trade.


Comments

Leave a Reply

Your email address will not be published. Required fields are marked *