Are We There Yet?

 

Are We There Yet?

When my kids were young, they would always ask: “How much longer?” My standard answer was: “5 more minutes.” After many of these exchanges, I would respond with: “6 more minutes” and then “7 more minutes.” They finally figured out that I really had no idea how much longer. This week we try to answer the economic question: “Are we there yet?”


From an investing perspective, I think we are currently in a “Goldilocks” moment for three reasons: (1) inflation has seemingly been tamed to provide price stability, (2) unemployment rates are near all-time lows, and (3) the economy continues to expand. We are long term investors who employ a strategic asset allocation that assures our clients are always "in" the market. We do not believe that a market timing approach works well for anyone who cannot accurately forecast the future (translation: all mere mortals). We will discuss this in detail in our blog next week.


Last week we introduced a cash position to our efficient frontier and gave it a technical term: the risk free rate. This idea has a very deep meaning that we will uncover in this post. As you may know, interest rates had been rock bottom for several years after the 2008 financial crisis and then again during the early days of the COVID-19 outbreak. They then began to rise dramatically as we emerged from the pandemic panic and started to spend money again. The chart shown below illustrates this recent surge in the federal funds overnight rate. The gray shaded bands indicate dates of recession - or quarters with negative gross domestic product.


Source: Federal Reserve Bank Of St. Louis


Federal Open Market Committee 

The Federal Open Market Committee (AKA the FOMC or The Fed) meets eight times per year. These meetings are held just before and just after the end of each calendar quarter to discuss the state of the US economy and what - if any - policy decisions need to be made to fulfill their dual mandate. The dual mandate is to provide price stability and full employment. These two goals are truly a balancing act because as unemployment rates drop, there are more people employed. When there are more jobs than workers, those workers have the flexibility to seek higher pay with their current employer or jump ship for greener pastures. The potential increase in pay translates into increased demand for goods and services - thus pushing prices higher in the form of inflation.


Source: Federal Reserve Bank Of St. Louis


The chart displayed above shows the inflation rate history since 1960. Price spikes in the late 1970s were vivid reminders of the energy crisis when many of us learned to carpool around town and wear sweaters at home. We can see the recent increase in inflation and the very recent drop down closer to the FOMC target rate.


The unemployment rate is charted below from the 1940s. The COVID-19 outbreak put many leisure services (hotels, airlines, and restaurants) employees not out on the street, but back home on their couches. The current unemployment rate is once again hovering close to all time lows. Now may be a good time to consider a jump!


Source: Federal Reserve Bank Of St. Louis

Who Should Pay Attention?

In one word: EVERYONE. The federal funds overnight rate is the lowest risk interest rate on the planet. It is the basis of all treasury rates, all mortgage rates, and all corporate rates in the fixed income world. Movements in the fed funds rate affect virtually every aspect of our global economy and provide important signals from the FOMC regarding our economic future. The chart shown below is about one year old, but it shows the intended glide path of short term interest rates into early 2026. As expectations for inflation settle down to (or below) the FOMC target of 2%, we should expect interest rates to mirror their decline. This would encourage lending and risk taking for the private sector.


Source: Federal Reserve Bank Of St. Louis

 

It is [a good thing] that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. - Henry Ford


JQR Capital offers you a complimentary one hour consultation to “Find Your Bearings” in your lifelong voyage to find your own private island. Please click the link shown below.


Disclaimer

Past performance is no guarantee of future results. Any investment involves some amount of risk and may not be suitable for all — or any — individuals. You should consult with your investment advisor before acting on this — or any — financial information.

References

https://research.stlouisfed.org/

https://www.brainyquote.com/


Copyright © 2024 JQR Capital Management, LLC
Location: 23 Foxridge Rd, West Hartford, CT 06107, USA

Comments

Post a Comment

Popular posts from this blog

Strategic Versus Tactical Asset Allocation

Image
  Source : FRED Data, JQR Capital The Market Portfolio A few weeks ago we introduced a cash asset to augment our efficient frontier set of bond plus stock portfolios.The cash asset allowed us to combine cash with the one portfolio along the efficient frontier that had the highest return versus risk (AKA the Sharpe Ratio). This one portfolio can be thought of as the tangency portfolio or - more commonly - the market portfolio (MP). The mix of bonds versus stocks in the MP will change over time with changes in interest rates and changes in expected returns for our bond and stock indices. The chart below is a quick snapshot of how the risk free rate of cash interest (Rf) interacts with the efficient frontier to create the market portfolio (MP) at only one point in time. This snapshot was taken a few weeks ago. Source : FRED Data, JQR Capital Introducing Naive Forecasting  The chart shown above was generated using average return and risk data over the 1973 to 2022 time period. The hardest
Read more

The Four Most Dangerous Words

Image
The Four Most Dangerous Words... The late great Sir John Marks Templeton - of Templeton Growth Fund fame - once quipped that the four most dangerous words to an investor were: "this time is different." Many market strategists warn that the sky is falling or that the investing principles that worked in the past no longer hold true in this new world of artificial intelligence and political unrest. The truth is that the facts and situations are (slightly) different from anything in the near or distant past. The rest of the story is that the human reaction, however, is the same and reasonably predictable. Read MORE ! Mean Reversion Works In my blog post two weeks ago, I used the analogy of a spring traveling through time while being exposed to compression and extension forces. This spring never gets smushed into a pancake - just the way it never snaps in half. When the forces are briefly taken away, the spring reverts back to the normal (unforced) state. This same principle can b
Read more

Take Your 2023 RMDs

Image
  Take Your 2023 RMDs If someone in your family has turned 73 in 2023, it may be time to start taking the required minimum distributions (RMDs) from an old 401(k) or a traditional IRA. These distributions are required so that the IRS can collect tax revenues on these “before tax” contributions. The laws for these RMDs recently changed and HERE is a quick guide designed to help you estimate how much you need to take out before April 1, 2024. The good news is that the penalty for missing your RMD has gone down from 50% to 25%. Happy Holidays! Convert To A Roth IRA One way to minimize your lifetime tax burden may be to convert your old 401(k) to a Roth IRA. Two of my financial planning clients recently toyed with the idea of converting their before tax money to after tax money through the Roth conversion process. For one of them (a single female, aged 69), a Roth conversion could allow her to generate $55,413 in additional wealth over her expected lifetime. For the other planning client
Read more