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I have been on Wall Street some 48 years now. One of the things that I have learned is that experience is the best of all the possible teachers. It is often the test first and the lesson afterwards, and let me assure you that I have learned some valuable lessons along the many parts of my journey.
Some bright kid can look at the same situation that I am reflecting upon and surmise that there are 12 possible answers. I know there are only 3. This is what experience gives you. Algos, artificial intelligence, wondrous computer skills, and none of them can replace experience.
“The mind once enlightened cannot again become dark.”
– Thomas Paine
Currently, we are in a financial crisis. You may think that my language is too strong, but I am telling you that my observation is accurate. We have a government running off its mouth, which I have seen many times before, but this administration’s policies on oil, natural gas, and energy are not only disrupting the markets but causing a massive amount of inflation. Everyone wants cleaner energy, and it is a policy to seriously work on but not a policy to utilize in the present tense because the resources are not there yet. Plain and simple, they do not exist in the present tense. It is a pie in the sky pipe-dream at this time.
We can not only become energy-independent, as demonstrated by our last government, but ship energy to Europe to combat Mr. Putin’s ambitions, as we have the resources to supply oil and natural gas to Europe and put a serious dent in Russia’s economy. At the same time, this would significantly reduce our inflation rate and add more American jobs. My comment here is not political. My comment is one of American independence. It will also allow us to not have to go to hostile nations to beg for energy assistance.
It is also a workaround to the Fed having to raise interest rates to combat inflation which will cause all kinds of collateral damage to our economy as the cost of money skyrockets, along with the interest rate raises instituted by the Fed. Our country has alternative solutions, and they should be utilized. That is my honest opinion.
As the Fed speaks of its interest rate policies to come with robust abandon, we are caught between the fear of higher rates and the fear of recession. In all likelihood, unless something changes, both scenarios are on the horizon. Consequently, we are watching the stock market dive into the chutes, in a very painful manner not seen in almost 40 years.
The DJIA is -14.42%. The S&P 500 is -19.74%. The NASDAQ is -28.87%. This is pain, real pain, and it is being felt across everyone’s portfolios and IRA plans. The data is from Bloomberg. We are in the frying pan!
Bonds are also in a major disconnect. Even though the Fed is in a clearly stated plan of raising interest rates, government bonds have been the least affected. In the last three months, it is Treasuries -2.94%. Investment grade corporates -6.78% and U.S. high yield -9.72%. To me, this is a clear sign of recessionary fears and what it will mean for the credit markets in terms of ratings, borrowing costs, and bankruptcies. The bloom is definitely off the rose. The credit markets are wilting. This data is also from Bloomberg.
One of the most misunderstood parts of this equation is that while the Fed is raising interest rates to combat inflation, at the same time, higher borrowing costs will also add to inflation as companies increase their spreads to offset the higher cost of money. We are in a “damned if you do” and a “damned if you don’t” scenario. The fallout from this will also have a negative impact on the equity markets, in my view, as corporate revenues and profits decline with higher borrowing costs.
Cash is no great friend now either. With the average of the CPI Index and the PPI Index now at 9.70%, cash is a loser. Suppose you are getting a lofty 1.00% on your money market fund. This puts you at a -8.70% to our current rate of inflation. Here is one more losing proposition.
Screaming is not the answer.
“Nothing ever becomes real until it is experienced.”
– John Keats
We are truly experiencing pain alright, and it may get worse. Hold on to your horses, your hat, and most of all your common sense, which, if you read many of our business publications, is surely lacking. We are now in the thick of things, and it is likely to be a while before we find our way out.
“By seeking and blundering we learn.”
– Johann Wolfgang von Goethe
Keep learning!
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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