The Financial Advocate: Summer 2021
Each year the Federal Reserve holds a conference in Jackson Hole, Wyoming. The purpose of the conference is to discuss the nation’s monetary policy and economic health. This year, due to Covid-19, the conference was held virtually. Last Friday, the conference gave us some clarity on the direction of the Federal Reserve’s policy moving forward.
Let’s begin by saying that we are fans of Fed Chairman Jay Powell. He has a difficult, thankless job. No matter what he says or does somebody will criticize it. Under-stand that the Fed has hundreds of economists and data analysts – people parsing every bit of data on which its decisions are based. The Fed also has 12 regional districts analyzing data from San Francisco to Boston. The regional districts are responsible for studying their geographic footprint. All this data is compiled to give the Board of Governors the information it needs to make policy decisions.
This is a summary of what we received last Friday. The Federal reserve is satisfied that its inflation goal has been reached. They continue to believe high inflation will be transitory. The “full employment” goal has not yet been reached. Powell further acknowledge that the Delta variant of Covid-19 may put a damper on eco-nomic growth. Due to these concerns, they will continue to add stimulus to the economy. However, they be-lieve that stimulus can be “tapered” beginning at the end of this year. This is slightly more dovish than most analysts expected, causing equity markets to make new highs.
Let’s take a moment to explore the size of the balance sheet, different policy measures, and potential market and economic reactions.
Following the Financial Crisis of 2008, the Federal Reserve, through programs dubbed “quantitative easing,” pushed $4 trillion dollars in liquidity (read: stimulus) into the US economy. It took a decade to pump up the economy to full employment and stable (low) inflation. But, that was accomplished in 2019, just before the pandemic struck.
When Covid hit, the Federal Reserve doubled the size of its balance sheet to over $8 trillion dollars.
How does this work? Where does the Fed get the money? It’s reserves? Nope—it doesn’t have any. It comes from “printing presses” at the Fed. The Fed uses the money it prints to buy bonds (primarily from the Treasury), pushing mountains of money into the marketplace. Doesn’t this mean that one hand of the gov-ernment is giving money to the other hand of the government using investment markets and investors as in-termediaries? Yup, but it’s doing so in the open market, thus providing investors with money to continue to invest.
This is where we are: the US Treasury (in effect) owes the Federal Reserve $8 trillion dollars!
The Federal Reserve cannot indefinitely print money to bail out the economy. What it must do, in some order, is stop printing money to provide stimulus, reduce its balance sheet, and raise interest rates to some “normal” lev-el that reflects actual economic conditions. They have indicated that, barring a severe spike of Covid from the Delta variant, they will begin reducing stimulus by the end of this year. This “tapering” process could take as long as one year. Only then will they reas-sess their policy to include the other policy steps of 1.) reducing their balance sheet (approximately $8.5 trillion—chart right) and 2.) raising interest rates to a “more normal” level. All of this is dependent on the mone-tary and economic conditions of the US econ-omy as it recovers from the pandemic.
Where does this leave us? We will have some continued inflation, a vigilant Federal Reserve, and the Delta variant creating a level of disruption with economic growth. Only time will tell…
The simple truth is this – the economy is recovering, corporate profits are booming, and consumers are spending. Demographics are in our favor. Baby Boomers (68 million people) and Millennials (90 million people) represent big pockets of continuing consumption. Boomers are living longer, healthier lives. They continue to spend, spend, spend. Millennials are just entering peak spending years of family formation, home ownership, child raising, pet ownership, and the like. Between the two groups, they represent approximately half of the US population – then there’s everyone else! With consumer demand being strong and vaccines doing their part, we may be entering a period of seasonal weakness, but it’s important to remember that the economic recovery is full speed ahead.
We do not yet see a time of slowing profits or economic retracement. Instead, we see continued growth and development along with continued technological advancement. In growth portfolios we continue to invest in e-commerce, fintech, semiconductors, AI, robotics, 5G, biotech, software, and cloud computing. In moder-ate accounts we continue to seek and find opportunities in various economic segments that provide solid div-idends and steady, predictable returns. In all models we have added equities that give us exposure to the economic recovery. Steel, copper, industrials, materials all share this “recovery” thesis.
Lastly, a comment about bonds. Bonds are underweighted in most portfolios for the simple reason that we do not think bond yields can go much lower. Remember that bond prices move in the opposite direction of yields. So, if yields go up (due to economic recovery), bond prices will go down. We have opted to lower our bond exposure and shift focus to floating rate and / or inflation-adjusted bond holdings.
We have exciting news! There are three new additions to the VWM team.
Let’s begin by introducing you to Roger Klein. Roger joins the team as an economist, a money manager, and a professor of economics. Roger tells us that he is planning for retirement (we don’t believe him) but wants to spend some years working. He brings a wave of experience and knowledge as he began his career in the late sixties. His intimate knowledge of macroeconomics, the Federal Reserve, and real-time money manage-ment during the inflationary period of the 1970’s adds another dimension of our already robust research ef-fort. Welcome Roger!
Now, on to Jerry Fiess. Jerry is multitalented – really! Jerry is an accomplished song writer and musician. He has a strong finance background as well, and is a graduate of Virginia Tech. Jerry has a degree in finance with over ten years of industry experience at Merrill Lynch and Alliance Bernstein. He will be a team mem-ber in the wealth management area, delivering wealth management and portfolio advice. He also has strong capabilities in analytics and will likely assist Tom Cahill and Bill Purdy on the research team. Did we men-tion multi-talented?! Welcome Jerry!
Last, but certainly not least, is Jessica Duggan. Jessica comes to us with a strong background in customer ser-vice. Notably, she is a United States Army veteran. It appears that service is in her blood! Jessica will be part of the operations/customer service team with Mary Marciante and Terry Sawyer. Jessica will be taking over some of the tasks that in the past were handled by Morgan Downs, who is moving into a more client-facing role for the team. Welcome Jessica!
Covid-19, while challenging, was a unprecedented growth period for VWM. Client referrals accelerated, portfolios grew, and the sheer number of people seeking our unique blend of portfolio management, financial planning, and customer service boomed. Our additional staff and new office space in Yardley, PA are de-signed to accommodate this growth and continue the level of customer service that you have come to expect. Each day the entire team meets to discuss both client issues and communication, news events that impact our clients’ lives and the investment markets, as well as any improvements we can make to our firm. The under-lying theme is delivering excellence. If you ever have a suggestion for us on how to make your client experi-ence better, please reach out to any team member. Your thoughts will be heard!
Exciting times for VWM, largely as a result of your continued support—thank you!
Our Milestone 360 topic this quarter is “Last Chance to Refinance!” In our economic summary, we mentioned how bond yields are problematic for inves-tors. However, low interest rates provide great opportunities for those that have existing debt. Now is an excellent time to refinance. With the potential for interest rates to drift higher in the quarters ahead, taking advantage of refi-nancing for your personal residence, vacation home, student loans, car loan, etc. can be extremely beneficial to your present cash flow and overall financial situation.
Enjoy the rest of summer!
Nick Ventura, CFP® CPWA® President / CEO