What a few rough months of the year it has been so far. The unevenness of the markets, rising and falling, is enough to induce vertigo in many.
Portfolio values being so choppy is the everyday 'seen' and that rightfully so causes some amount of angst... however, what is the greater 'unseen' is that health care bill waiting for you 20 to 30 years out, the expense for that product that doesn't yet exist and will be an everyday item decade from today, enhancing your quality of life... those are the unseen that we are solving for in the portfolios we have created for you.
Innovation that we cannot see, hear or feel today is happening this very moment as surely as day follows night. The human advancement that we will see in the future is going to be mind-boggling... the amount of progress we read about e.g., in the medical journals (which will enhance the quality of life hence allowing all of us to live longer, better, and more productive lives) sometimes feels unreal.
The pundits and the talking heads of CNBC/ Bloomberg/ Fox etc. keep on twittering about the gloom and doom as if the markets will never recover. Do keep in mind they are not solving your future challenges in the coming years; instead, they are just seeking our attention in the here and now with fearful headlinesthat somehow this time it's different.
Now on to data and facts.
The data shows in our view that inflation has peaked and started to come off its high (Fig 1.). Core inflation (which excludes energy and food) has started to trend down.
Energy prices (both regular gasoline and crude oil) are down to almost pre-invasion (of Ukraine) levels. (Fig. 2.), which are declines of 30-40% from peak prices.
Food prices which had skyrocketed post-invasion have come down closer to earth. The massive shortages and possibility of famines predicted by the same twittering pundits have not come to pass. The United Nations Index of World's Food Price has this to report (i). The benchmark for world food commodity prices declined significantly in July, with major cereal and vegetable oil prices recording doubledigit percentage declines, the Food and Agriculture Organization of the United Nations reported.
Money Supply (M2) has also come off its high. (Fig. 3.), it has almost contracted to a point last seen in late 2000.
All the above is happening against the backdrop of the consumer demand still being strong (Fig.4.) in fact demand for services seems to be picking up pace, while demand for goods is stabilizing. This is likely as supply chains that satisfy goods demand are normalizing at a rapid pace hence reducing the inventory pressure.
The federal reserve (Fed) continues to raise short-term interest rates, including a 75 bps increase today as it seems to be battling inflation which in our view has already peaked. When this becomes clear to the market, sentiment to the upside should swing rapidly providing rocket fuel to the bull rally we have been expecting.
There is a gap between economic reality and the perceived reality by the investors... when this gap between reality and expectations is bridged, the market will rebound in our view, which should be about late 3Q- early 4Q,22 as mentioned in our prior communications.
Please keep center stage the view that while all is not great with the world, it is neither the end of days. Dawn is close at hand. Together we march to it.
Warm Regards...Team OneNorthStar
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