My father used to pay me $50 cash NOT to bring my dog when I visited him and my mother at their home on Lake Norman on the Fourth of July. This was back in the 1990s when I was newly married. He offered the same deal to my three dog-loving siblings. The cash offer emerged after a particularly canine-crazy Fourth featuring five wet retrievers charging about the place. Fifty bucks won’t move the needle today, especially after the recent inflation we’ve experienced, but back then, it was a chunk of change to me. Rather than question this baffling behavior from the famously frugal Frank Bragg, I took the cash. Bear, my beloved Golden Retriever, celebrated several consecutive Independence Days in the yard back at home.
With time, I’ve come to appreciate this out-of-character and extravagant bribery of my father’s. Maybe I’m showing my age, but I certainly won’t complain when my weekend houseguests leave their furry friends at home. After all, I have my share of pets to care for, with two dogs and a barnyard of assorted donkeys, goats, and pot-bellied pigs. With a few exceptions, my animals were acquired when the kids were younger, and most are getting along in age and have mellowed. That reality, combined with the fact that three of my four kids are off to college, means life on the farm has become a bit more peaceful. And I like it.
Peaceful describes last Sunday evening after dinner when I settled in on my back porch to enjoy some light reading. Alice was taking a short walk with the dogs and honestly, I’m not sure of the whereabouts of my son Charlie (14). I was alone, with only the lightning bugs and chorus frogs keeping me company. The evening was warm but the lazily spinning ceiling fan kept me cool. Just as I was thinking this was too good to be true, my peaceful evening was disrupted by the sound of Alice screaming something no one wants to hear. “SKUUUNK!! The dogs have a skunk! Honey, get out here, now!”
Unfortunately, I knew the drill. Summertime is great, of course: warm weather, fresh watermelon, peaches, tomato sandwiches and all that jazz. But it is also skunk season. And my dog, Teddy, while sweet, mature, obedient, loving, handsome, and athletic, is decidedly not mellow, and he loves a skunk!
As I headed out the front door, I passed my wife headed in. “Not my department,” she said. “They’re in the front yard.” To her credit, she did mix up the secret skunk sauce, the ingredients of which we’ve learned to keep in stock (1 quart hydrogen peroxide, 1/4 cup baking soda, 1 teaspoon of dish detergent). She sent it out to me via Charlie, who also managed to assemble my raincoat, rubber gloves, and rubber boots. He knew the drill, too. But Charlie soon disappeared as well, after realizing that his dog, Mac, about whom I have previously written in these pages, somehow didn’t get sprayed at all! Alone again, I went to work washing the skunk off of Teddy. Bad. Very bad smell. As I sweated in my raincoat and tried not to gag, I offered Teddy $100 to never again disrupt my peaceful evening by getting skunked. He responded by shaking some super-foul skunk water on me.
Speaking of disruptions, we’ve endured our share over the last few years. Not just disruptions but powerful disruptions. Rewind just a few years and reflect on the world as the average middle-class American knew it. Our world was safe, predictable and convenient. A strong dollar, low inflation, low interest rates, and an integrated global economy meant goods and services were available and cheap. Anything you wanted in any size or color was just a few clicks away. The idea of waiting in line for goods or dealing with shortages was foreign, something that happened 50 years ago during the energy crisis or 70 years ago during the rationing of World War II. Inflation? High mortgage rates? Food shortages? Non existent. This, of course, created a wonderful environment for investors.
The last few years have revealed the reality and fragility of our world. The global pandemic, the government’s reaction to it, and Putin’s war in Ukraine have been tremendously disruptive and instructive as well. Here are a few reflections on each.
Almost every human on the planet was significantly impacted by the pandemic. That is a remarkable statement, isn’t it? And what a toll it has taken on us, be it health (physical and mental), economic, political or social. I don’t need to list the ways; you’ve lived it! COVID-19 is still with us and will continue to be, but remarkably, we are adapting and moving forward.
The virus revealed the intricacies and marvels of our modern economy, in which market forces and powerful incentives stitch together a global web of suppliers of raw materials, labor, manufacturing, assembly, and transportation. This provides a standard of living for billions of the world’s inhabitants that was simply unimaginable just 75 years ago. Just since 1990, more than a billion people have been lifted from extreme poverty by the forces of globalization. This global web took a hit during COVID. As a result of what COVID revealed, and as a result of our fraying relationship with China as well as Putin’s war in Ukraine, some have predicted the end of globalization. We disagree. While the “end of globalization” makes for a compelling (and scary) narrative that sells books, we think the incentives to trade are too great for the world community to abandon efforts to work together. Difficult times lie ahead with regard to our relationships with China and Russia, and trade patterns will evolve as always, but the global web will prevail and will continue to create prosperity.
Markets like certainty and the pandemic offered anything but certainty. As you know, the ride was rough during COVID. The S&P fell 34% in 23 trading days ending March 23, 2020. Then, responding to the massive stimulus of governments and central banks around the world, the market soared, with the S&P 500 climbing 114% before peaking on January 3, 2022. Since then, the market has fallen over 20%, wiping out a healthy portion of the gains since the pandemic low. The market is now 69% above its pandemic low and, remarkably, is just 12% above its February 2020 high prior to the start of the pandemic decline. While there is now more certainty regarding the virus itself, economic uncertainty remains and signs are pointing toward a significant slowdown if not a recession in the months ahead. Market prices reflect this expectation.
We’ve written extensively about the fiscal (Congress) and monetary (the Fed) response to the pandemic. “Overwhelming” and “unprecedented” are perhaps the best descriptors of the response, and given limited space and perhaps limited reader interest, I will spare you the details. You can read about the actions of Congress and the Fed in previous commentaries It’s the Fed (Q2 2020) and Donkeys for Sale (Q1 2021). I’ll only add that the response was another tremendously disruptive force. Witnessing the repercussions has been instructive as well. I won’t add to the ample Monday morning quarterbacking and second guessing going on regarding the excessive amount of money pumped into the economy to offset the impact of the virus and the forced shut-down of the economy. As for instructive, with inflation running higher than we’ve seen in forty years, we are now seeing the hard limits of government intervention and central bank largesse.
I’m not suggesting that a dramatic response was not needed; it was. We’ll never know how bad things would have been without it. I’m pointing out that government intervention—including distributing trillions of dollars to individuals, businesses and non-profits by Congress and purchasing trillions of dollars of bonds by the Fed—disrupted and distorted the normal workings of the economy and the markets. Market forces were pushed aside and we are witnessing the unintended consequences. Earlier, I described the intricacies of the modern economy as a marvel. The government response was less of an intricate marvel and more of a blunt cudgel. Again, we had little choice. But it is our hope that important and useful lessons are being learned during this very expensive and ongoing experience.
Bipartisan leadership and a comprehensive plan will be required to move our $20 trillion economy to carbon neutral. The US can’t go from using 20 million barrels of oil per day to zero overnight. Demonization of the “other side” won’t get us there and all parties must be at the table, including producers of fossil fuels, nuclear, wind, solar, hydro, and other alternatives. We’re far from having a plan and the scattershot, politically driven approach of the last ten years is wasteful, distorts markets, and puts our economy and the livelihoods of our citizens at great risk. Easy for me to say, right? Maybe if more of us say it, we can make progress.
Some leading thinkers believed the world was beyond major armed conflict. We’re obviously not. Our bubble lives featuring smart phone clicks, safe spaces, and convenient consumption were majorly disrupted this year by Putin’s pulverizing bombardment of the cities and towns of Ukraine and the killing of innocent civilians. Beyond the tragic loss of lives and property experienced by the citizens of Ukraine, the war has greatly exacerbated the inflationary forces roiling the world economy, especially in fuel, food, and certain commodities. Grain shortages will lead to food inflation for all of us and starvation for the poorest. Spiking prices for oil, fertilizer, and other commodities are a major disruptive force on the global economy and a significant contributor to the current slowdown in the US. Hard power still exists in our world. Since the end of World War II, we’ve enjoyed the fruits of globalization. The US promised the world the oceans would be safe for shipping and trade and the resulting wealth creation has been staggering. Putin’s aggression has reminded us of our blessings and made it clear that the US can’t withdraw from the world stage. There is serious work ahead.
A final major force in the recent experience of investors has been emotion, specifically fear and greed. Sir John Templeton said it well long ago: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We certainly witnessed each during the last two years and now we find ourselves in a true bear market. The S&P is down 20% but some parts of the market are down far more. In particular, the leading stocks of the pandemic period, including growth names in the technology and communications sectors, have gotten clobbered. Euphoria was in abundance as story stocks and cryptocurrencies soared. The fear of missing out (FOMO) led to irrational behavior by some investors and ultimately to wealth destruction. These investors, many of whom were inexperienced but some of whom have no excuse, have taken huge losses relative to the broad market.
There was carnage in the crypto industry—and yes, it has become an industry, one designed to separate naive investors from their money. Perhaps you saw the multiple Super Bowl ads for crypto featuring celebrities including Lebron James and Larry David, clearly designed to appeal to youthful investors who don’t want to miss out on quick riches. “Fortune favors the brave,” claimed actor Matt Damon in a spot for Crypto.com, which likened buying cryptocurrencies to landing on the moon or climbing Mt. Everest. We could be wrong but in our opinion, much of the cryptocurrency industry will go away. Some parts will survive. Bitcoin does have value. But what value? It is currently trading for $20,000, down 70% from its high. $20,000. Why not $2 million? Or $2? On what is the value based? It has lured millions of investors for two reasons, one big and one small. The small reason is that the blockchain mechanism/technology on which it is built makes sense, is very compelling, and is here to stay. But the BIG reason it has lured millions of investors? The price went up. A lot. Had it not, it never would have gotten off the ground. Again, it has value. But what value, we can’t tell you.
After the major disruptions we’ve lived through since the market began its pandemic descent in February 2020, stock prices are marginally higher (valuation multiples are lower) and bond prices are lower (yields are higher). Prices may go lower as we move through this difficult time and we should tell ourselves that they will. But at some point, prices will stop falling and they’ll go up.
As for the portfolio, we feel better about it at these prices than we did six months ago. Your bonds now yield far more than they did at the beginning of the year; some would say that for the first time in many years, bond yields are normal. And valuations are more attractive for stocks today as well, with forward P/E ratios approximately 25% lower than at the start of the year.
At Bragg, we think long-term money should be in stocks. The people who run good companies will work hard to solve the problems they face. They’ll suffer disruptions, even major disruptions, but they’ll figure out how to move forward. We’ve gotten skunked so far this year (Bears 100 and Bulls 0) but the game isn’t over.
I hope your July Fourth was spent with loved ones and filled with the celebration of our wonderful country. Thank you for your trust in Bragg Financial Advisors.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.