Summer Investment Letter

                                       Snippets From a Post Locked Down World

 

I wrote the original draft of this letter while on a plane trip to and from California.  It was formalized while driving our car with my family out to Rhode Island over the 4^th of July holiday.  There the car  will stay until we return around Labor Day.  I come and go during the summer,  but it only gets to make one trip.  It will be the last one for this particular model, but more on that later.  The trip to California was part business and also to attend a wedding.  The traveling allowed me to catch a glance, snippets of people’s lives as they left the darkness behind that has been our pandemic world.  Things may not yet be back to normal, but Americans at least seem to be charging hell-for-leather in that direction.  We seem to have emerged from our locked down world with a bit of a wanderlust.  Airplanes and airports are swamped.  Lines inside airports at times resemble Disney World.  You still must wear a mask in terminals and on planes, but these seem to be some of the few places where you still must do so.  Demand for rental cars allows the companies to charge prices unheard of to them a few years ago.   The wedding we attended was held in a lovely part of Southern California’s wine country.  Everything that we attended, mostly vineyards and restaurants, were overflowing with people.  Again, we saw very few masks.   LA roads seemed to back to full capacity, proving that the gridlock  we’re seeing on Chicago’s expressways  isn’t a fluke.

 

Driving  across the Eastern third of the country wasn’t much better.  There are large trucks everywhere, which alongside  the normal summer vacation traffic, added immensely to interstate congestion.  Trucks basically form a solid line in the right lane of most interstates now.  They are both a testament to the nation’s infatuation with overnight delivery and businesses scrambling to get products out the door.  Truckers can only drive something like eight hours a day.  Then they have to pack it in somewhere, so rest areas and gas stations catering to big rigs are full of them.  Traffic also isn’t helped by the amount of construction that I’ve seen everywhere.  Seems the states are finally taking some of that Government largesse and putting it to work on their roads.  Finally, everything costs more, particularly gasoline which is the highest I’ve seen it in years.  People seem determined to escape the captivity of the past year and I wonder who will ever be able to put the horses back into the barn now that the door’s been left wide open.  By that I mean good luck telling most people ever again they’re going to be confined to their homes.  Governments seem to be figuring this out as well.  The Delta Variant is now the main type of Covid in the United States, but you don’t hear much talk of national or statewide lockdowns again.  Vaccinating seems to help, but I doubt there’s too many politicians willing to take the heat by locking Americans back up.

 

The stock market as well roared out of the gates early this year as investors anticipated the coming Covid recovery.  Major market indices returned on average about 13% and have now exceeded most market pundits’ expectations for the year.  We wrote last winter about how it is likely that economic growth will overshoot investors’ expectations and so far, that has proven to be the case as these forecasts continue to be revised higher.  Having said that, markets may be in a more “show me” mentality in the next few months as investors wait to see if expectations match reality.   While economic growth  has so far surprised to the upside, bottlenecks in the economy, employers desperately looking for workers and inflation are starting to become a noticeable drag.  I think much of this is a temporary problem.  Last year we shut the economy down in roughly two months.  Now we’re trying to open it back up in about the same period of time.  In such a scenario it’s impossible to meet demand, particularly when that demand comes all at once for nearly everything.  Problems are likely to rise as all those people and businesses that put off spending money last year now open their wallets.  As such, everything now seems to be on back order.  I’m an example of this as I’m trying to buy the afore mentioned car right now.  So it seems is everybody else.  One car we looked at was quoted with a two-month waiting period.   

 

You have to go back to the end of World War II to find wait times for products like these.  That’s one of the reasons I’ve said the best economic comparisons right now are similar to what happened when that war ended and the soldiers came home.  There were also problems then as the nation transitioned from a war time economy back to a civilian market, but it turned out well as US GDP grew at above trendline levels until the 1960s.   I think there’s a high probability this period of time could turn out in a similar fashion.  Maybe not for the same length of time, but I believe we’ll see above trendline GDP growth for at least the next several years.  That has the potential to be supportive of the equity markets, especially in a low interest rate world.  

However, given how far we’ve already come this year in terms of price appreciation and some of these current bottlenecks it’s reasonable to point out that the markets may now try and  catch their breath.  It is possible some sort of correction could occur in these next few months.  Of course this is true in almost every year at this time as we’ve now entered the seasonally worst period for stocks.  I’ve often written about how Wall Streeters are more interested  in the beach, their handicap or dinner reservations between now and Labor Day than the normal fluctuations  of stock prices.  I’ve also pointed out how foreign crises or unsettling events out of the blue seem to occur the most frequently as summer turns to fall.  Volatility could return between now and when the leaves start to turn colors.  However,  I also think markets have the potential for solid returns in the critical 12–18-month period that is my investment time horizon for all the reasons I’ve previously written about.  In brief, I believe we are seeing advances in technology and productivity brought on by the virus.  Couple that with  increasing employment, low interest rates, higher wages  and pent-up demand for almost everything.  These factors should drive economic growth above historic trend rates over the next few years.  This should lead to economic growth and advances in stock prices.  As such and given what we know today, it’s my belief that any decline in prices would have a high probability of being temporary.

I wanted to tack on with this letter a few examples about how the rapid increases we are seeing in information, is impacting advances in technology and adding value to our lives.  Unfortunately putting all of what I wanted to say about that would make this letter way too long, so I’ll save that subject for another time.  I’ve said before that the development of the vaccine is truly a marvel of modern science and could not have come about in the time period we’ve seen without the rapid increase of information which has spurred advances in both medicine and health care technology. The pandemic has also spawned new methods of working and interacting across society.  Perhaps nowhere will we see a more obvious manifestation of this than our smartphones.  These are evolving away from luxuries to utilities and are wrapping themselves into our lives in such a manner that it will be almost impossible to separate ourselves from them in the next few years.  Technological advances have sparked the growth of the United States almost from the beginning.  Wars and times of crises often are the major agents of such technological change as governments and businesses are incentivized to do what’s necessary to win.  Such gains in turn hold the promise of  a better quality of life for many as new products and industries often lead to better quality jobs.  Economic advancement in turn has historically led to growth in stocks.  This rapid growth of information and its impact on our lives is exciting and full of investible promise in the coming years.  Again, I’ll have more to say on this subject in a future letter.  In the meantime I hope you all enjoy your summer, which for many of us is the first taste of normality we’ve had in some time.  Stay healthy, and God bless.

 

I know it is fashionable in the financial and popular press to be pessimistic most of the time as that’s what attracts eyeballs.  However, I see the investment landscape laden with hope.  While those opportunities may take some time to pan out over the next few years, I believe there’s a higher probability of the world adopting my investment views over time rather than the other way around.