I just brought my tomato starts inside for the night because of a frost warning. Spring in Portland has been rather moody. We have had a rapid rotation between heavier than normal rain, fluctuating sunshine/hail storms, and the occasional very nice day. It seems in keeping with world events and economic developments. The ongoing pandemic, the war in Ukraine, and the subsequent energy market disruptions have brought the remarkable stretch of high growth with low interest rates to an unpleasant conclusion.
Economics
The Consumer Price Index rose 1.2% in March, bringing the 12-month change to 8.5%.[1] The graph here makes an interesting point – while the 6.5% change in “all items less food and energy” is nothing to sneeze at, energy is the biggest troublemaker here. Food prices matter too, of course, but it’s easier to switch from beef to beans[2] for a couple months than it is to stop buying heating oil. At the tender young age of 48, I only vaguely remember the stagflation of the 1970’s – clearest in my mind are the commercials for Hamburger Helper, 
which supposedly helped one stretch spendy beef across more plates. The three-fingered talking glove was more interesting than the meal suggestions. Anyway, stagflation is the combination of high inflation with low growth in output. In addition to eroding spending power and economic productivity, this situation it disarms the Federal Reserve Bank of its biggest tool for stimulating growth. Of course, lowering interest rates isn’t the only way to stimulate the economy. It’s just easier to get a dozen economists and finance professionals to agree than it is to get fiscal stimulus through Congress.
An “advanced estimate” of first quarter change in real Gross Domestic Product shows a decrease of 1.4%. According to the US Bureau of Economic Analysis, the contraction came from decreases in government spending, inventory investment, and worsening of the trade deficit (exports minus imports). Spending by consumers, as well as fixed investment (not inventory), increased. Consumers account for about 2/3 of spending in this country, and between that increase and the very tight labor market, I remain cautiously hopeful that we won’t see a repeat of that unpleasant portmanteau, stagflation.
Turning to labor, The US has almost two open jobs per available worker at the moment. Wages are rising, importantly for the lowest-paid workers, who necessarily spend most of what they earn. (An increase in earnings for the highest earners has less of an effect on consumption and therefore GDP.)
Whenever I hear this mentioned in the news, a discussion of a “wage price spiral” follows. This is a situation in which rising wages cause employers to raise the prices of their goods, which causes inflation. Thankfully this cycle doesn’t continue ad nauseum – over time, employers should find a balance of more capital-intensive production that balances out the higher wages so prices resume a more modest rate of change. This works well if we are manufacturing widgets – as labor becomes relatively more expensive, perhaps we buy a second widget press and figure out how to have fewer workers per press. Since we are increasingly a service economy, we’ll presumably have to think of another way to become more efficient. Amazon delivery drones, for example. American industry has been reliably inventive over the years, and I imagine we will figure something out.
Real estate markets continue to fascinate me. The housing market is a little different than many, in that often, rather than accept a lower price, sellers will hang onto a home longer, so you get fewer transactions instead of lower prices. That said, the price rises we have seen since the pandemic are steeper than those before the financial crisis. As we have discussed before, the financial underpinnings of that market were much sketchier, with lower quality mortgages in particular making for a weak foundation. Very low housing supply coupled with rising mortgage interest rates continue to keep a home purchase inaccessible for many buyers in the current market, exacerbating the ongoing housing crisis in many cities. With the growth in investor purchases and build-to-rent single family homes, I suspect we are headed for a mélange of community-based regulatory responses. In the meantime, we continue to emphasize keeping fixed costs within range for household cash flow, and buying a home with a longer time-frame in mind. As mortgage rates rise, we would expect housing prices to slow, which may or may not come to pass, but underscores the inadvisability of buying housing speculatively or for short periods, for the household investor anyway.
Investments
We noted in previous newsletters that we expected volatility in 2022 as the world continues to deal with the pandemic, rotating supply chain bottlenecks (now it’s semiconductors! Now it’s lumber! Wait now it’s China again!) and ten years of workplace culture shift packed into one. What we did not predict was that inflation would stay stubbornly high and Russia would invade Ukraine. Clearly, all these things are unsettling to markets, which are jittery creatures at the best of times.
Market returns:[3]
| $MSACWI | MSCI All-Country World Index | Global stock markets |
| $SPXTR | S&P 500 Index | US Large-cap stocks |
| $RU2000TR | Russell 2000 Index | US Small- and mid-cap stocks |
| $BCAGG | Bloomberg Aggregate Bond Index (fka Barclays Agg) | US bonds |
Month:
Year to date:
Market volatility is uncomfortable for most investors. No one (that I’ve met in 19 years of doing this work) enjoys watching their investment account balances decline. The further out into the future one can convince oneself to focus, the (somewhat) easier it gets to tolerate.
Ten Years:
We are not stock pickers, nor do we 
encourage you to be. But we are happy to use a stock-specific example when discussing market movements. Many of you will have noticed Netflix (NFLX) getting walloped after announcing its negative change in subscribers last quarter. Looking at their history, I noticed that they haven’t even given back the extra subscribers from the spike at the beginning of the pandemic. I also noticed, when I went to look up how many subscribers they lost, that actually they gained subscribers but removed Russia from the platform, resulting in a net loss for the quarter.[4] It seems unlikely (one dearly hopes) that removing an entire, large country from the platform will be a recurring event. It seems to me that chucking out the whole business based on this quarter is a bit like burning down the house because the bathroom needs painting. Which is exactly the sort of dramatic overreaction we see in short-term market movements quite frequently.
I maintain that this is not a stock recommendation, and we would like all of you to persist in your diversified, low-cost, allocation-focused investments. And join us in watching stand-up comedy specials and the Great British Baking Show. We don’t know how long it will take for all these challenges to be sorted out and markets to return to their historically persistent upward march, but there’s plenty of material on Netflix to distract us until then. Of course, as always, we are here to help. Give us a holler if you want to talk.
[1] Bureau of Labor Statistics, BLS.gov. Monthly number is seasonally adjusted. 12-month number is not seasonally adjusted.
[2] I am an omnivore, but this soup is delicious. It needs some lime juice to really pop.
[3] Index data from Kwanti Portfolio Analytics. Past performance does not guarantee future results.
[4] Netflix, Inc., FQ1 2022 Pre Recorded Earnings Call Transcripts, Tuesday, April 19, 2022 10:00 PM GMT, Accessed via S&P Global Market Intelligence
