From the Desk of Joe Rollins
I watched in amazement as the media distorted financial information based on an uninformed reading of the above statistics. I never really know whether this misinformation is due to the lack of intellect in economic terms or maybe there is a political motivation to their lack of clarity. This month was a really good example of how the media misinterprets information and unfortunately misleads investors.
I told you last month that October was the scariest month of the year for reasons other than Halloween. It is a month of extraordinary volatility and sometimes major corrections. How surprised were we this month to have an extraordinarily profitable month of October in the face of staggering misrepresentations of economic data?
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Father + Son - Josh & Joe at the World Series
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I really want to cover some subjects that the media is misleading you on and I also want to reflect on the ineptness of Congress and how they are misleading you on current legislation. I want to
into words the economic damage that they are trying to force onto the American public. Hopefully you will find this information as interesting as I do. But before I cover all of those interesting topics, I must report on the stock market performance for the month of October. It was quite a remarkable month all around.
The Standard and Poor’s Index of 500 stocks was up nicely at 7% for the month of October and for the year 2021 is up 24%. For the one-year period, that index is up a very satisfying 42.9%. The NASDAQ Composite was up 7.3% during October and year-to-date is up 20.9%. Like the S&P 500, it is up 43% for the one-year period then ended. The Dow Jones Industrial Average was up 5.9% during the month of October and for the year 2021 is up 18.8%. The one-year performance on the Dow Jones Industrial Average is 37.7%.
I always like to compare stock market indexes with the bond index just so you have a reference point to the different asset classes. The Bloomberg Barclays Aggregate Bond Index was absolutely zero for the month of October and for the year 2021 was down 1.7%. The one-year performance on this bond index was -0.4%. As you can tell the major market indexes were at a minimum of 37% for the year while the bond index was a negative. I often think about this bond index when I see the recommended asset classification by other advisors. I saw one this week that was most distressing. An advisor put 70% of a portfolio in bonds for a client that was in their early 50’s. I really do not know whether that allocation to the bond index was due to a lack of intellect or just a misunderstanding of the economic circumstances today. Anyone that would allocate a 70% allocation to a bond index which will almost assuredly lose money over the next year is certainly not doing their clients a service.
Over the last several months there has been constant talk in social media about how ending unemployment benefits was not helping the job market. Basically, these articles were stating that the employment situation in America had not improved after unemployment benefits were stopped in most states. That is absolutely, unequivocally, incorrect yet the article stated otherwise. It just goes to show that nobody fact checks social media and when you classify anything as an opinion, you can rest assured there is some agenda behind that opinion. The evidence is clear that ending extended unemployment in the United States has greatly increased employment. While it seems so intuitive to think that would be the case, many have argued the opposite.
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| Reid Schultz, Age 6, with his pit crew |
The unemployment report for the month of October clearly illustrates this economic reality. This is the first job report that actually included the entire period not covered by the extended unemployment in the United States. The report showed private payrolls jumped 604,000 during the month and the unemployment rate dropped from 4.8% to 4.6%. While that was certainly good news for employment even better news was that for the months of August and September, jobs were increased by 235,000 from the reported totals. They were a lot of reasons why employment was better in October, but undoubtedly the fact that the virus counts have dropped dramatically have certainly helped. Kids going back to school and childcare freed up a lot of people to go back to work that previously were not. But there is no question that cutting off the pandemic unemployment programs including the $300 federal bonus and the 79 weeks of eligibility versus the normal 26 weeks, have forced people off the government payroll and back to private employment. This is very good for America.
We have not yet reached the unemployment rate of 3.6% that we enjoyed prior to the pandemic but clearly, we are headed in the right direction. If you want a sign of how far employment has come, just take unemployment in the city of Atlanta. In September of 2020, the unemployment in the city of Atlanta was 7.3%. For the month
of September 2021, the unemployment in the city of Atlanta was 2.6%. It is almost impossible to get unemployment down to zero. There will always be some people that are unwilling to work, regardless of their financial circumstances.
I sat down and I read all the reports regarding the unemployment in October. For the most part, the articles raved about how good the report was, but there was this underlying contentious perception that somehow the numbers were distorted because the participation rate was only 61.6%, which was the lowest level since the 1990’s. Basically, that means that of all the workers that were available to work, only 61.6% either had a job or were looking for a job. At the current time, there still remains 10.4 million posted job openings and the number of unemployed people in America is 50% of that number. There are many reasons why certain people do not go back to work, but why anyone would consider that to be a negative is beyond me.
If American citizens want to stay out of work, for whatever reason, that should not form a negative reflection on the economy. There are many reasons why they do not want to work and why we care makes no difference. I am of the opinion that these people that do not want to participate in employment have their own issues and we as investors should ignore this particular economic reality.  |
| Austin, Dakota, Joe, & Shelley - chilly night, hot win for the Braves |
A good example of how the press misinterprets economic data is the current supply chain and labor shortage issues. There is no question that these issues have slowed down production in the United States and have created delays in delivering product. But it is not a negative. You have to realize that the real reason that we are facing these issues is a demand surge unprecedented in the United States. We had a period of 18 months where people were restricted from buying, traveling, and doing things that they want. When the negative vail of the Covid-19 shutdown was released, there was an unprecedented surge to buy. We were seeing it throughout all phases of the economy. And that is a good thing.
There is a shortage of new cars. There is a shortage of used cars. There is a shortage of hotel rooms in resort areas. Americans are buying like “drunk sailors” in every phase of the economy. Resort properties and mountain homes have essentially doubled in value over the last several years. It is reported that Hawaii has virtually no hotel rooms available during the upcoming holiday season. Las Vegas has reported records unprecedented and even larger than the pre-pandemic. Everywhere you look there is a shortage because of the extraordinary post-pandemic demand and available cash.
As I reflect on the things I have written above, maybe you can understand why the media misunderstands this concept. While certainly all of these are problems, they fall into that “high-rent” district problem of a good thing. Americans would not be traveling, buying, and investing if they did not have money. This surge in demand is created by tons and tons of government money forced on American citizens during the pandemic. Since people were restricted in what they could do, travel, and purchase, they just waited until they got the green light. Once they started spending, the supply chain just could not keep up. It is not a negative that all these supply chains are backed up, it is very much a positive. People have money and they are using that money for additional consumer items and pleasure traveling.
While business travel is not back to pre-pandemic levels, leisure travel has exceeded it. I have not been on an airplane in over a year that was not filled to capacity. Unfortunately, I travel a lot and the airports are overwhelmed with people going somewhere to their liking. This huge demand by definition would slow down the supply lines, but is not a permanent problem. Logistic experts tell us that the price of ocean freight has gone up 10 times pre-pandemic prices. Once again, a positive outcome for excess demand exceeding supply. There will be a day in the next year or so where supply chains will catch up and prices will fall. The reason I do not fear major long-term inflation is I see already prices moderating in real estate and in automobiles. Once the supply chain catches up with demand, prices will moderate, and inflation will not be a major concern.
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Ava & Randy Wittman relaxing at the Rollins Beach House
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Recently one of my clients sent me a video regarding the governmental debate over the new stimulus bills. It was a simple video that got me thinking about exactly what is going on in Washington these days. Basically, the video said that if you counted from one to a million and each second was another number it would take you 12 days to get to one million. While I did not try that myself, it certainly seemed reasonable. The video went on to say that if you did the same counting to one billion it would take you a cool 31 years to get to that number. It gave the impression that most people believe that one trillion is 100 billion. In fact, one trillion is 1,000 billion, not 100 billion. To count from zero to one trillion it would take you 31,688 years. There are not many readers of this posting that will live so long.
Put this perspective to what we are witnessing in Washington at the current time. There is no question that the country needs the roads, bridges and airports fixed and that would be money well spent by the U.S. government. The other bill debated in Congress is less clear that it is even wanted or needed. But make no misunderstanding exactly what is going on here. In my opinion, it is not a matter of satisfying the needs of the American people; it is more likely an attempt by the progressive party to do long-term damage the American economy to meet their political goals of weakening America against the rest of the world.
Believe me, I am not a conspiracist, but I do know numbers and I do understand them. Take for example Senator Bernie Sanders, age 80, who has indicated that rather than $3 trillion, this social spending bill should be $6 trillion. Just for comedic effect, the number of years it would take to count to 6 trillion is 190,000 years. But the reason that Bernie Sanders wants to spend $6 trillion has nothing to do with the programs in the bill. It has more to do with weakening the American economy for generations to come. He will not be alive that long, but it will be his legacy. To spend $6 trillion, basically the U.S. government would have to print new currency for the full amount. The long-term effect will be devastating.
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DeNay flashing Braves signs at the game
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If you understand economics, you understand that printing more currency creates inflation, creates debt, and creates long-term negative economic effects. While certainly spending that much money over a short period of time would make the economy better over the short-term, the long-term effects would be devastating to the future U.S. citizens. There is no justification for that type of spending where it clearly would all be deficit spending. I have looked at the provisions that they represent would raise the money necessary to fund a bill such as this, and it is an illusion that has no economic backing. Hopefully more informed politicians would put a stop to this silly provision and allow the U.S. economy to grow on its own without governmental backing.
One-time President Obama said, “Elections have consequences,” and the new presidential election certainly had consequences. I will not focus on the politics; I will just focus on the economics. If on the first day of office you shut down a major pipeline to deliver oil to the United States and you cut off all new permits in Alaska and in the Gulf of Mexico, you have reduced the supply of oil. What is the economic effect when you reduce supply in an economy where the demand is going higher? The basic answer is that you have shortages.
The price of oil during the writing of this posting has gone up 70% in 2021. Could anyone be surprised that it went up when you restrict supply? It would have been very easy to phase in each of those changes over a two- or three-year period, but rather the decision was made to do it immediately rather than with common sense. While certainly the people that desire more protection for the environment were elated, they clearly did not think of the unintended consequences of shortages and the price of oil.
Since oil is a major component of virtually all pricing, you can fully expect to see almost everything go up in price based on the price of oil. Whatever you call this, it is a tax on the American citizens. This tax more heavily weighs against the poor people and the people that must commute to maintain a job. If you increase the cost of commuting to these U.S. citizens, you have lowered their standard of living just like an additional tax would do.
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Ava, The Little Sure Shot of Buckhead
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All around the world we are seeing governments make stupid decisions based on environmental concerns. All of us should have environmental concerns, but we should do so with informed data and not by making rash decisions such as we have made in the United States regarding fossil fuels. The examples are overwhelming, and their consequences are downright scary.
Europe is a prime example of many environmental concerns gone awry. While France produces almost all their electricity with nuclear power, Germany has banned nuclear power in that country. Given that they do not have nuclear power plants in Germany, they are running dangerously short on energy and most of their heating is generated with natural gas. The main source of natural gas for Germany is the pipeline coming out of Russia and is controlled by the Russian government. Now if that does not scare you, nothing will. In a time of war what would Germany do?
Although a serious topic, you had to be somewhat amused that recently the President asked the Middle East to produce more oil for the United States to keep the prices down. Basically, the amusing part of this analogy is that we cut off your own supply and production in the United States and the price of oil went up. So now, once again, we are asking countries that are not particularly friendly to the United States to help us out of the energy crisis. Since it takes about 20 years to build a nuclear power plant in the U.S., we are backing ourselves into a corner since we can no longer use coal. Think about it for a second. If we restrict the production of oil and natural gas in the United States and coal is restricted, how are we to produce energy for the future? While solar energy and wind generated energy are nice, at the current time they do not even contribute a rounding error to the needs of energy in the U.S.
It is interesting to see all the car manufacturers reporting that they will be converting to electric cars in the future. Elon Musk made a great point the other day that we should consider. He indicated that if the majority of cars in the United States were converted to electric, we would need five times as much electricity than is being produced in the U.S. at the current time. Just exactly how can we get to those numbers with a restriction on fossil fuels and coal? The only alternative would be nuclear and currently there are no new nuclear plants being planned in the United States. While understanding environmental concerns, this is an area where common sense needs to prevail.
There was much handwringing in the financial media when the GDP was announced for the 3rd quarter at 2%. This was a major move down from the 2nd quarter of 2021 when the GDP was announced at 6.7%. While some of the financial press was sending out an alarm over this sharp reduction, it is quite obvious that they do not understand enough about economics to even form an opinion. While it is true that the GDP fell dramatically, the 2% number is a more realistic reflection of where GDP should be rather than the 6.7% in the 2nd quarter. In the first half of 2021 we had the government passing out money to virtually anyone who asked for it whether they needed it or not. As we now know, much of that money was fraud and siphoned off from the United States by foreign criminals. Whatever the reason, much of this money went into the economy and created excess GDP.
It is always scary when GDP gets that high, since you know the major concern of the Federal Reserve is to control inflation. As inflation goes up, surely higher interest rates will follow. Fortunately, since the GDP took a major step down, it gave the Federal Reserve an opportunity to sit back and wait on higher interest rates. It now looks like there will be no interest rate increases until the end of 2022. Stable interest rates are the most powerful force that leads stock markets higher. It looks like, at the current time, interest rates should be stable and low for another year.
If you believe the 3rd quarter GDP at 2% was correct and that the economy has slowed to an exceptional level, you would be incorrect. We are seeing the economy strengthening all around us before our eyes. Currently the Federal Reserve Bank of Atlanta is forecasting GDP growth in the 4th quarter to be up 8.5%. While the forecast of the Atlanta Federal Reserve has been fairly close in prior quarters if they are correct on this estimate, that would be a huge increase going from 2% in one quarter up to 8.5% in the very next. As mentioned above, one of the reasons why you are seeing such shortages throughout the economy is due to excess demand due to people holding on to excess cash. The reason why you see the stock market going higher is because much of this cash is being deployed in investable assets making all time new highs by the indexes. It only makes sense that people accumulated money over the last 18 months are now free to move around and spend it, creating higher GDP. That is exactly what is driving the markets higher.
I have often written that the major component to higher stock prices is higher earnings. When you see higher earnings then you can justify premium prices for stocks. Of the first 100 companies reporting in the Standard and Poor’s Index 0f 500 stocks this quarter, 84% of them had beat earnings expectations. You are seeing earnings growth throughout the economy in virtually every sector. Bank earnings this quarter were nothing short of spectacular. All of the bad loans that the banks anticipated happening during the pandemic never came to fruition. In fact, loan losses by banks are at one of the lowest levels ever. What we are seeing is corporate earnings exploding to the upside due to U.S. demand, which has been funded by governmental money. Whatever the reason, earnings have been so spectacular it has led to higher and higher stock prices.
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Joe & Ava enjoying daddy-daughter time with the Braves
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Almost daily I am confronted by someone pointing out the inconsistency of higher stock prices as compared to historic averages. They will explain to me that stocks are selling at 27 times forward earnings when historically have been more in the 16 times forward earnings range. Their statistics are not incorrect, but looking in the rearview mirror gives you no perspective of the economy we are in today. One of my go-to comments in these circumstances is show me a time when corporate earnings could be compared to a time when interest rates were virtually zero. It has never happened.
If you go back and look at the average of interest rates when 16 times earnings were reasonable, you will find the Federal Funds Rate at 4% to 5%. Interest rates have never been so low for so long. Yes, you can argue that stock prices are disproportionally high, but that is not the case if you base it on interest rates. Since we know that bonds will likely produce negative returns and cash is paying virtually nothing, the only game in town is stocks. And we are also seeing a huge demand to purchase stocks by the general public given the excess cash they have accumulated during the pandemic.
The Infrastructure Bill will now pass and that is another $1 trillion in government money that will flow to the private sector. Interest rates we know will stay stable or lower for the next year. We also know that corporate America is running at full capacity in every aspect. Hotels are full, airlines are full, manufacturing is robust, and construction is out of control. Everywhere you look around you there are shortages, but not because of an inability to produce but rather due to excess demand over supply. All of that even tells a shade tree economist earnings will be spectacular in 2022. I full expect to see new highs on all of the indexes for at least the next 12 months. As we get closer to the end of the year, I will give you my forecast on 2022, but already the performance of the indexes on 2021 have exceeded the expectations.
As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond. We never left the office during COVID and have been here since day one of the pandemic. If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us. In the meantime, stay healthy and stay invested.
As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best Regards, Joe Rollins
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