Donkeys for Sale: 1st Quarter 2021 Commentary

Donkeys for Sale

I have two miniature donkeys for sale. Maybe. Their names are Murray and Ethel, they currently reside here on the Bragg farm, and they are the cutest little things you’ve ever seen. They stand about 33 inches tall and have dark gray fur with black and white highlights. They have those trademark donkey ears, long, tall, and so soft to the touch. Their big brown eyes open wide and their curious ears stand straight up when you approach with a treat. They would be right at home in your backyard, just as they’ve been in mine for the last 13 years. Your children, grandchildren, and neighbors would delight in hearing their chorus of “hee-haws” each day at feeding time. Now is the perfect time to bring them home to your place. With spring here, they are shedding the last of their thick winter coats, giving them a clean, sleek look, and just last weekend I trimmed their little hooves to perfection. If you missed out on a “pandemic puppy,” a “back-to-normal burro” would be even better.

You might have noticed that I wrote that the donkey sale was a “maybe.” I’m torn. A week ago I was ready to sell; I was writing the Craigslist ad, but now I am wavering. I go through this twice each year, just after I trim their hooves. The semi-annual hoof trim is quite an ordeal, you see. Let me tell you about it.

First, you should know that my donkeys do not like to have their hooves trimmed. Set aside your romantic notion of the gentle steed contentedly munching hay and standing patiently as the sturdy, leather-chap-wearing farrier calmly practices his craft with his heavy, blackened tools and hot, crackling forge. No. This is a two-hour-long battle of wills—a display of sheer stubbornness, brute force, and sweaty determination on the part of all participants. I’ll elaborate.

For starters, Murray and Ethel don’t come when they are called. Instead, my son Charlie and I chase them around the pasture for about 25 minutes until all four of us are exhausted. Eventually we get them cornered between the chicken house and the pig run. There they stand quietly and seemingly harmless, noses together in the fence corner such that I have to approach from their rear. They wait calmly until I get within striking distance and then both launch multiple violent kicks targeted for my knees or shins. When I’m good, I manage to avoid the incoming hooves and slip a rope around one of their necks; usually Murray gets snared first. He then resists with every ounce of his strength as I physically drag him over to a fence post and tie him up securely. To calm him down I scratch his head, rub his ears and neck, give him apple slices, and tell him in a soft, gentle, slow, Benton-like voice that, “Everything is going to be fine. Good boy, Murray. Good boy.”

I then slowly grasp the hoof clippers and all hell breaks loose. He starts bucking, snorting, kicking and jerking like he just stepped on a hornets’ nest. I’ve yet to touch him! A few more pieces of apple and another head scratch calm him down and I lean over and pick up his front left hoof. With targeted precision he stomps down on my foot—I learned the hard way to always wear steel-toe boots.

I start trimming (he can’t feel it; it’s just like trimming your fingernails) and he reacts like I’m sawing off his leg. More bucking, snorting and kicking. He then employs his leaning trick. At first it is endearing, almost like he’s nuzzling up against me, but gradually he puts more and more weight on me. Yes, he is a “miniature” donkey but he weighs about 250 pounds and sometimes it feels like I am supporting his entire body.

I move to his back left hoof and that is when the fun really begins. He starts this rotary kicking motion—around and around and around, almost like he is violently swimming. I’ve learned that if I let go of his hoof he considers it a win and does it repeatedly but if I hang on for dear life, he will eventually stop the rotations. My kids think it’s hilarious watching their dad try to hang onto this desperado donkey with his rotary kicking action. I actually caught them making a video of it one time. They have no respect.

Eventually I make it over to Ethel who has her own bag of tricks. She is 10 years younger, has more stamina and never learns from her mistakes.

Benton Bragg and Ethel

I’ve trimmed Murray and Ethel’s hooves twice each year for 13 years. It’s actually become a challenge for me to prove to myself that I’ve still got it. And make no mistake, I’m a winner: Benton 26, Murray and Ethel 0. But it gets harder every year. For the last few years as I have sweated, groaned, and strained as Murray leans on me or stomps my foot, I’ve found myself thinking, “Enough is enough! As soon as I get these hooves trimmed I’m putting these fools on Craigslist.”

But then I finish my work, straighten my sore back and there they are. Two cute little donkeys with the finest looking hooves you’ve ever seen! I give them one more neck rub and a final head scratch and set them free.

Speaking of head scratching, if you’re like me, you’ve been doing a lot of it lately as you’ve read or watched the news. There’s just a lot going on in our world, be it in the marketplace, in government or in the investment world. Maybe I’m getting old but it seems like the pace of change has never been greater. Here are a few things I’ve been scratching my head about and a few thoughts about each that I hope are helpful to you.

Inflation. How can it not be inflationary when the Fed and Treasury are pouring gas on an already hot fire? As mentioned in Market & Economy by Matt DeVries, Congress has passed six bills totaling $5.3 trillion to sustain the economy during the pandemic and the Biden administration has recently unveiled an infrastructure modernization plan sporting a price tag of another $2.3 trillion over eight years. Much of the largesse thus far has been financed with deficit spending—the US Treasury has sold bonds and the US Fed has purchased almost all of them. The Fed’s balance sheet is now at record levels and government debt as a percentage of GDP is nearing the record levels last seen at the end of World War II. The flood of cash and liquidity provided by the Treasury and the Fed has increased the money supply. According to Ed Yardeni Research, over the past 12 months through January, currency in circulation has increased by 16%, demand deposits and other liquid deposits by 112% and 20.8% respectively and M2, a commonly used measure of the money supply, has increased by 25.8%. Supply and demand imbalances have caused prices for many commodities and other assets to surge. It’s no secret that stock prices and residential real estate prices have soared.

The question is whether this will be a prolonged period of inflation like we experienced in the 1970s, or will it be a temporary spike? We think an argument can be made for it being a temporary but potentially years-long spike as the world economy recovers from the pandemic. There are significant long-term counterwinds to inflation. First there are technology and disruption which increasingly deliver a higher quality of life to consumers at a lower cost. Next are demographics. Population growth is slowing, especially in developed countries, and this has resulted in a slowing global economic growth rate.

Prior to the pandemic, unemployment in the US reached its lowest levels in fifty years and yet economic growth remained below 3.5% and measures of inflation remained comfortably below targets set by the Fed. The fact that there generally is peace in the world with no major armed conflicts means trade is robust, resulting in efficient allocation of capital and a dampening effect on inflation. And finally, the threat of inflation pushes up interest rates, increases the cost of borrowing and slows an overheated economy. In summary, we think we’ll see interest rates and inflation continue ticking up as the year progresses but in the long term we’ll continue seeing moderate to slow growth with a backdrop of low inflation and interest rates.

Bonds. As a result of interest rates moving higher, bond prices have fallen this year. The Barclays Aggregate Bond index was down 3.4% for the first quarter, erasing much of the strong performance of the last 12 months. How should we think about our bond portfolio as we read headlines about inflation and higher interest rates? In short, we think the risk in stocks is far greater than the risk in bonds and that bonds remain an important part of a balanced portfolio. Despite the exposure of our bond portfolios to the ravages of higher interest rates and inflation, we think bonds, including inflation-protected treasury bonds or TIPS, provide much needed dry powder, liquidity and a buffer against the volatility of the stock market. We often remind ourselves that with our stock portfolio, we worry about losing 30% or 40% in a terrible year for stocks whereas with our bond portfolio, we worry about losing 4% to 6% in a terrible year for bonds.

Energy. As a result of the power shift in Washington, we think it is likely that big changes are coming with regard to energy policy. The Biden administration will dramatically accelerate efforts to reduce carbon emissions. The goal of eliminating carbon emissions completely will be a massive and long-term effort, perhaps humanity’s most difficult and most expensive undertaking ever, given how dependent humans are on fossil fuels. Regardless of your stance on climate change, if you’re interested in learning about the extent of the challenge and cost of this project, I suggest the easy-to-read, just-released book by Bill Gates entitled How to Avoid a Climate Disaster. Gates certainly doesn’t have all the answers but I found his description of the overall picture very helpful. This challenge will be with us for decades and the portfolio implications are significant.

Taxes. We expect taxes to go up. Based on President Biden‘s tax plan as well as several other plans being floated in Congress, we think that by 2022 we will see higher marginal income tax rates, higher corporate tax rates, higher tax rates on capital gains and higher taxes on gifts and estates. We don’t have a new law yet but given the balance of power, we think it is highly likely we will. A higher tax burden will have implications across the economy and within portfolios. This is something we are watching closely. Please let us know if you would like to discuss your estate or income tax planning.

Digital Currency. Bitcoin and other digital currencies have garnered a lot of press of late, in part because their prices have soared, but also because blockchain, the technology underlying most digital currencies, has enormous potential to change the world of business and even government in fundamental ways. Some consider Bitcoin to be an alternative currency while some consider it an asset or property. The IRS considers it property. It is clear that it is different from traditional assets and different from currencies like the US dollar or British pound which are the currencies of sovereign states. It and other cryptocurrencies are digital units of confidential ownership maintained on decentralized networks of computers around the world. Because cryptocurrencies exist outside the domain of government, a case can be made that this will create irreconcilable conflict in the future. After all, nation states have great power. In the meantime, it is very interesting to watch this unfold.

Blockchain, the underlying technology of Bitcoin, is being embraced by the world of business. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. It is a digital ledger of transactions that is duplicated and distributed across a decentralized network of computer servers. This system of recording information has tremendous appeal to corporations, individuals, and any number of market participants. It can create great efficiencies, eliminate friction, cost and theft, and provide greater control to creators of content or other intellectual property. As for investing in blockchain, we see blockchain as more like the internet. Rather than try to “invest in the internet” like so many unfortunately did back in the tech bubble, we learned that the internet would transform every company. In similar fashion, blockchain has the potential to transform the way much of business is transacted in the future. It will create great value for all of us as consumers and investors.

Diversification. With all of the aforementioned transformation taking place in the economy and society, an investor may quickly conclude that this is the time to be nimble and tactical to take advantage of a changing world. We urge caution. Recall that the market is forward-looking. Most of the information we glean from following the news is already reflected in stock prices. Said another way, if it is in the headline, it is in the price. An illustration may help. Above I described amazing things happening in technology. I also talked about green energy and the obvious negative implications for fossil fuels. And yet in the first quarter performance derby of S&P 500 sectors, energy was up over 30% while technology was flat. Who woulda thunk it? We think diversification is key.

And one final thing. America! What has become of you? Are we really this divided? Pick an issue—the role of government, the pandemic, race, election law, education, debt, gender, sports, environment, finance, tech, taxes, trade, art, privacy, religion, and the list goes on. See the outrage spewing from both sides. I have never really worried about the future of our country, agreeing with my father, Frank Bragg, who likes to say, “Things are good and getting better!” I have always believed that we Americans could resolve our differences or at least agree to disagree but then move forward together. The virus has pulled us away from one another and the algorithm-driven news delivery of today has put us each into an echo chamber. As a result, it is much more likely today that each of us thinks everyone in the “other party” is an extremist when the truth is that most of us are in the middle. Most media outlets have been exposed as putting profits ahead of a balanced approach that is truthful and healthy for our country. It is my hope that we come together post-pandemic, and that we recognize the need for community, for conversation, for understanding. We must! I hope you join me in being optimistic that we will.

Thank you for reading and thank you for trusting Bragg Financial with your planning and investing.