Before I review the first half of 2021,
I encourage everyone to reply to this email with a time and date to review their accounts.
In mid to late 2020, the investment current began to shift in ways that echo previous expansions of recovery, notably the recoveries of 2003 & 2009.
There were a few indicators that caught my attention. The bond yield curve steepened, Federal policy was very loose, and Fiscal policy involved spending more than ever.
These broad statements forecasted more robust economic activity 6-12 months out.
My experience told me certain areas would flourish in a more robust economic environment. These include banks, materials, energy, chemicals, manufacturing, metals and mining.
Great investment lesson:
Pay attention to what the bond market is telling you. It can save you lots of potential pain in your investments and help guide you to the right areas to invest.
Fast forward to June this year- I took time off to see my brother and some close friends in California, and naturally, the Market came off the rails the moment I stepped on the plane. We can all relate to this moment -no vacation without something to prevent relaxation. Enter Delta COVID variant and unaware Fed Governors.
Suppose you follow the news reports of the new Delta variant of Covid 19. In that case, you read/ watched/retweeted the still-present danger of the novel coronavirus in countries without access to better vaccine.
The impact has begun to take its toll on economic recovery and continues to strangle material and manufacturing exports to the world's second-largest consumer economy- The USA. [Quick note: not unexpectedly, we lost first place to China for consumerism. Go figure - 4 times as many consumers.]
In my April letter, Value vs Growth FIGHT, I mentioned transit costs as an issue - the 4th of July weekend shattered previous pricing highs in the freight market.
Many items are delayed and unavailable -this roadblock is reflected in the stock market. Consumers are frustrated, and many material and manufacturing companies are beginning to correct prices to reflect this.
The lingering Covid concerns and logistics delays are taking their toll on the economic data.
Let’s move on to our Treasury and Federal Reserve, who are pumping too much money into the system.
The Fed seems to have committed itself to following the "Brezhnev doctrine" -the Soviet system of monetary and political control that started in 1968. This concept expands power and control over systems and policies that the FOMC (Federal Open Market Committee, basically the "good old boy network") determines are a threat to its existence.
The Fed's latest "inflation will be transitory" statement (reference Jerome Powell, June 2021) was the signal that "we are going to make the dollar stronger." The weak dollar has become politically inconvenient to the administration’s narrative of not raising middle-class families' living costs.
What I think the next six months will look like:
A stronger dollar nukes inflation
Suppose the yield curve flattens and the dollar breaks its downturn vs. the Euro and the Yen. In that case, inflation is transitory, and historically, it is the best place to invest in internet stocks, technology, e-commerce, semiconductors, and consumer discretionary.
Why? The strong dollar buys more commodities at a cheaper price, and inflation stays low.
If the Yield curve steepens again, and the dollar weakens vs the Euro and Yen, we are moving toward higher inflation. The best investments are in banks, materials, energy, the chemical industry, manufacturing, metals and mining.
Why? A steeper curve helps banks make more money on loans, and a cheaper dollar buys fewer commodities at a higher price, and inflation rises.
As of June 30, 2021, My strategy remains with option # 2. As you know, I question everything to adapt quickly. Significant signs point me more toward option one, which appears counterintuitive as most have been piling into option 2.
There could be a tremendous opportunity to lean the opposite way and return to the strong dollar investment play.
We are at a turning point that your Financial Consultant will not ignore. I will remain focused and poised to take action.
I hope you all had a great 4th of July!
Christopher R. Lakian
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