What happened to gas and food prices?
If you pulled into your local gas station today, you may have blanched
to see the price to fill your gas tank. It is far more costly than what we
are used to.
If you then left the gas station to go to the grocery store, you received
another price shock at checkout register. So, what exactly is going on
with some many everyday items costing far more than six months ago?
Over the past several months, the country has experienced price
inflation on virtually every household item. This past week, we received
data from the Federal Government that reported that inflation is now
running at +6.2% for the year. Remember that 6.2% is the average
number, many things that you purchase are up more than that
percentage. You might faint if you walked into a lumber yard and saw
the price of a 2X4!
It may be helpful to review what has happened over the past year and a
half that results in higher inflation. When the pandemic began back in
March of 2020, corporations looked at the horizon and saw reduced
demand for goods and services across the board. Corporate leaders
accurately predicted that government lock downs and mandates to
socially distance/quarantine would have a dramatic effect on
commerce. Please recall that a vaccine for Covid 19 was merely a hope
in the Spring of last year.
Over the past decade, corporations had moved to become more efficient
and profitable by implementing “just in time” delivery of their products.
When they hit the brakes in the Spring of 2020, the warehouses had
little inventory. For a period of time, there was not a problem as demand
did indeed fall off the table, as anticipated. However, as the vaccine
became available and lock downs were lifted, consumer demand picked
up…in a hurry. Pent up demand for products took over as people reemerged
to resume normal life.
However, as corporations ramped up production to respond to higher
demand for goods, the production supply chain was found to be badly
impaired. As new orders flooded in, factories could not secure enough
raw materials, that supply chain was in disarray. The factory work force
that had been laid off in the Spring of 2020 did not come back to work
in sufficient numbers to resume productions. Some workers opted for
retirement. Other moved to different locations. And, others had family
responsibilities that prevented them from resuming work.
To complicate things even more, the transport system had also shrunk
during the 2020 downturn. Shipping had a massive downturn in 2020,
and you don’t just flip a switch to get vessels back into the sea lanes. As
shipping began a slow ramp up, there were too few workers available to
offload ships and too few truckers to move merchandise.
The bottom line is that demand for goods was outstripping supply.
When you have demand dollars chasing too few goods, prices escalate,
and inflation rises. And, inflation can rise very quickly. This will
continue until equilibrium between supply and demand is restored.
Will we be getting to a new equilibrium soon? The answer is complex.
In some parts of the economy, it will happen within a few months. In
other parts of the economy (capital intensive sectors such as energy) it
may take another year or so.
In normal times, when inflation rears its ugly head, the Federal Reserve
begins a cycle of raising interest rates. In the past, when the Fed was
forced to raise rates, it was in response to an overheated economy (again
demand outstripping supply). Raising rates reduces money supply and
that reduction results in a slowdown of the economy. As the economy
slows, inflation eases.
But hold on. Our economy is not overheating, it is simply attempting to
get back to a reasonable growth rate that can support job growth and a
healthy economy. So, if the Fed imposes significantly higher interest
rates now, it is very likely that our economy would simply stall. This
will result in an economic recession, an unwanted result. Therefore, the
traditional cure for inflation (higher interest rates) is the exact opposite
desired policy outcome. The Fed is in a pickle!
Chairman Powell of the Federal Reserve argues that current inflation we
are experiencing is temporary. He suggests that as supply chain issues
ease and the labor market recovers, inflation will roll back. Therefore,
he is committed to keeping rates lower for longer. Is he right? Or, is he
pursuing a policy that will yield runaway inflation that may require
more extreme measures a year from now? We shall see.
Where are we in the Bull Market?
We are now completing year three in a very strong bull market. And
shouldn’t we be expecting a bear market soon?
There are arguments on both sides. The Bears say that the economy is
on its last legs. The government has run up large deficits and Congress
is adding new spending programs, driving the debt level higher. The
Bears say that Chairman Powell is already too late in raising rates and
inflation is out of control and going higher. The Bears say that the stock
market is overvalued, a product of too loose Fed policy. The Bears say
that the housing market is in a new bubble. The Bears say that a major
economic and market correction is needed to get the economy back to
basics. Only then the Bears say that a new economic expansion can
commence without artificial government intervention.
The Bulls have other thoughts. The Bulls say that government economic
stimulus is warranted since the economy has languished in the 2%
growth range for most of the past decade. The Bulls say that inflationary
pressures will ease as the supply chain issues are addressed. The Bulls
say that the economy has tremendous potential for expansion due to
disruptive technologies and as innovation continues to be centered in
the United States. The Bulls say that the U.S. is still the global engine for
worldwide economic growth.
So, who is right? We think that the Bulls have an edge here. The U.S.
economy is leading the world and it appears that that will continue to
do so. Government stimulus was sorely needed to get by the Covid year,
and we can benefit from additional stimulus to achieve 3% plus growth
We are not yet convinced that inflation will ease in the short run but
hope that the Federal Reserve is correct that this problem will moderate
in the medium to long term. We do not welcome significant interest rate
increases today; it is a prescription for economic malaise.
Overall, we are optimistic! Our economy is resilient, and innovation
abounds. Corporate earnings are at all time highs and projected future
earnings are expected to rise as full economic recovery is realized. There
is plenty of sunshine in our future!!
As we roll toward Thanksgiving, the news cycle will turn towards the
government action/inaction on the debt ceiling and money to fund
governmental operations. If the Republicans are consistent, they will
say that they will vote against raising the debt ceiling, once again. But,
just like in October, this will prove to be a hollow threat. No political
party wants to be saddled with the blame of the United States of America
defaulting on the national debt. Period.
The shenanigans around the debt ceiling and funding the government
are all about politics. The Republicans wish to have the Democrats take
responsibility for raising the debt ceiling. Now please remember that
the national debt has been accumulated under both Democratic and
Republican administrations. Nevertheless, there may be a political
advantage for the Republicans going into the 2022 elections to have the
Democrats blamed for the historic high level of debt. So, look for the
issue to be brought up once again, and go away once again, without an
- Required Minimum Distributions from IRAs and other retirement
plans are due by the end of the year. We plan to do all of these
distributions by December 15th. If you have any questions, please
contact Jim Sambold.
- As is our normal practice, we will be contacting you concerning
realized gains in your taxable accounts. We will call you in
December or January with our estimate of the gains so that you
have ample time to prepare for any tax consequences in your 2021
- The Federal Government will allow you to funnel more money into
your 401k/403b plans (also the Thrift Savings Plan and most 457
deferred compensation plans) next year. The maximum personal
contribution will increase to $20,500, up from 19,500. Workers
over the age of 50 can also take advantage of the catch-up
provision of $6,500. Thus, for those over the age of 50, the
maximum contribution for next year will be $27,000. Please note
that this maximum contribution is separate from what your
employer may put into your plan as a contribution or a match to
your contribution. That is over and above your personal
- The Federal Government was not so generous when it comes to
IRAs (traditional and Roth). The maximum contribution remains
at $6,000. Workers over 50, can take advantage of the catch-up
provision that allows another $1,000.
What a difference a year makes. This year, we have greater freedom to
celebrate with family and friends thanks to Covid vaccines and drugs
that do moderate Covid symptoms, hospitalizations, and deaths. So, we
have much to celebrate this year. From everyone at Compass Rose and
BeckBode, we wish you a healthy, safe, and joyful holiday season!!