Category: Market Commentary

Optimism doesn’t wait on facts. It deals with prospects. – Norman Cousins

After having been cast into the role of Santa Claus on September 18th offering his fellow citizens a reduction in interest rates of half a per-cent US Federal Reserve Chairman Jerome Powell ended the month cautioning his listeners not to be overly optimistic about future rate reductions stating “This is not a committee that feels like it is in a hurry to cut rates quickly.” The S&P 500, which had been trading up on the day, promptly declined almost 1% though recovering to close up on the day. And so ended the month and quarter with that index +2.14% for September, 5.89% for the 3rd quarter and 22.08% year to date. The quarter was a bit of a strange one with utility stocks outperforming information technology +19.37% to +1.61%, the average stock in the index returning 9.60% versus the “cap weighted” index’s 5.89% and foreign emerging markets and US small companies both returning just over 10%.

Given their recent challenges in correctly forecasting economic growth rates and financial market trends it perhaps shouldn’t be too surprising that prognosticators have ventured into a side gig of psycho analysis. We have been lectured increasingly to cheer up and celebrate the era of prosperity we’ve been given the good fortune to inhabit. Lower gasoline prices and a ripping stock market. What’s not to love? Apparently, a great deal based upon the current mood of our fellow citizens. To suggest that we’re not a particularly cheerful lot would be an understatement. The University of Michigan has been measuring the American people’s attitude towards their economic prospects for seventy-two years during which we’ve experienced three prior times mirroring our current rate of despondency, 1975, 1980 and 2008. The first two reflect times of high inflation and the third the Global Financial Crisis, We were at close to peak levels of cheerfulness in January 2020 just prior to the onset of the pandemic and at the historically most pessimistic in July 2022. So here is the question. If inflation has declined significantly since its peak level in June of 2022, why are we still so unhappy?

In 1951 the total value of financial assets in the United States were 32% greater than the size of our economy. Today, financial assets exceed it by 518%. In 1980 the value of the US stock market was 40% of our economy. Now it is 160%, meaning that in the past forty-four years the stock market has risen in value at a rate four times that of the growth rate of our economy. This is reflected by the dramatic variance in the growth rate of our incomes and our wealth. From 1970 to 2021 the average family income in the United States on an inflation adjusted basis increased by 22% but our individual net worth, again inflation adjusted, by more than 330%. This is the reason why in so many instances, our children, even in their peak earning years, cannot afford to purchase the houses in which their parents live. An additional effect is the migration of the wealth from the American middle class, those in the 50th to 90th percentile, whose 35.8% share of the wealth in 1990 has declined to 28.1% while the wealthiest 1%’s share now exceeds that of the American middle class rising from 23.4% to 31.8%.

So, what is bothering the American people? Perhaps it is that we are focusing on the wrong side of the equation relating to what we are purchasing and what we are using to purchase it with. Possibly our fellow citizens are now experiencing something that is being missed by most economic commentators. It isn’t the prices we are paying that are going up but the money that we are using that is declining in value. This is the state of reality in which we now find ourselves. Gold prices have risen by 46.29% in the past year and have outperformed the S&P 500 by 10%. The average price for a house was $285,000 in 2016. It is now $426,000. The price of an acre of farmland in Iowa has increased by 60% in the past five years. The issuance of new US Treasury debt was $1 trillion a quarter from 2000 to 2009 and $2 trillion until 2020 when it would reach $3 trillion. This year the level of issuance is $7 trillion increasingly financed through the issuance of treasury bills with maturities of one year or less increasingly purchased by banks with funds provided to them by the US Federal Reserve.

60/40 equity/fixed income investors were lectured coming into the year that bonds had lost their ability to contribute meaningfully to portfolio returns. Most emphatically for 2024 that has not been true. For the quarter portfolio returns were 5.20% with equities contributing 7% and the fixed income 2.5%. For the year to date those returns are 15% at the portfolio level with equities contributing 18% and fixed income 10.5%. 2022 was a year in which both bonds and stocks declined 15% to 20%. In 2023 equities recovered nicely but fixed income contributed relatively little. This year conservative and aggressive investors alike have much to celebrate.

Mark H. Tekamp/October 6, 2024

If we open a quarrel between the past and the present, we shall find that we have lost the future. – Winston Churchill

“The flash crash” on the 5th of August is likely the event during the month that most investors deem as most
memorable but perhaps it is the dramatic revision to the reported number of jobs created by the US economy that will
be the most important. On August 21st The Washington Post headlined “Labor Market Was Weaker Than Previously
Reported in Big Fix to Data” with the second sentence of the accompanying article reading “The government reported
Wednesday that the economy created 818,000 fewer jobs from April 2023 through March 2024 in the biggest revision
to federal jobs data in 15 years, according to the Bureau of Labor Statistics.”

In recent months commentators have been wrestling with the apparent disconnect between the reported robust
condition of the US economy and the increasing negativity of the US population’s attitude towards that same
economy. As the rate of inflation declined and the US economy provided ample opportunities for employment the
University of Michigan’s Current Economic Conditions Index had risen by March 2024 to 82.5. In the following five
months it has fallen to 61.30, a decline of 25%. Almost half of those in the workforce work for small businesses with
fewer than five hundred employees. Larger businesses obtain their capital in the bond market for longer terms and
have been significantly protected from rising interest rates. Small businesses though borrow predominantly from
regional banks at current interest rates. Those borrowing rates are now near 8%. A result is that there has been no
increase in bank loans to businesses year over year. Small businesses with fewer than fifty employees have
experienced a zero-growth rate in employment on a year over year basis and the rate of new business formations
has declined 51%. Possibly a number of widely held assumptions about the true state of our economy are on the
cusp of being significantly altered.

In the pre-pandemic world of the 2010’s the 10 Year US Treasury rate averaged 2.41%, the Fed Funds Rate 0.75%
and the US Consumer Price Index 1.78%. Most expected that to be a state of reality likely to persist. Then there was
the federal government’s public policy response to the pandemic resulting in inflation levels reaching 9% in June
2022 and the Federal Reserve’s hiking interest rates to 5.50% in July 2023 where they currently rest. In the past
three months the Core CPI Rate, which excludes food and energy because of the volatility of those specific inputs,
has fallen to an annualized rate of 1.60%, below the Fed’s 2% target.

The US Federal Reserve has what is referred to as a twin mandate; to maintain an inflation rate of 2% and a level of
economic activity sufficient to support the full employment of the US workforce. The Fed Funds rate is the interest
rate that it uses to influence the rate of economic activity. The “neutral” Fed Funds Rate is thought by many
economists to be 2.75%. Right now, the rate is 5.50%. If the economy is no longer at full employment and the
inflation rate is finding its way to 2% then that rate should find its way to 2.75% and possibly a great deal sooner than
most expect. So far this part of the picture is reasonably clear but there is another part that seems to not being
actively considered. The current Ten-Year US Treasury rate is 3.84%. The break-even rate, as identified by the
Treasury Inflation Protected Security (TIPS) market, is 2.15%, close to the pre-pandemic rate. Let’s propose a
possible scenario. We are returning to our pre-pandemic world with a Fed Funds rate of 0.75%, a CPI rate of 1.78%-
and 10-Year US Treasury rates of 2.41%. For those arguing that this is not possible a reasonable response would be
to ask what has changed that would keep it from becoming so?

With the Federal Reserve poised to take its foot off the brake that is negatively impacting half of our national
economy, the effect of materially lower interest rates could be significantly more positive than is widely assumed. The
news could be especially good for prospective home buyers. Historically, the yield spread between thirty-year fixed
rate mortgages and the Ten-Year US Treasury rate is 1.50%. That spread is currently at 2.50%. With mortgage rates
currently at 6.50% it may be that 5% rates could be in our not-too-distant future. Stock market investors may also be
hearted by the prospects of rising valuations due to lower interest rates and an economy that starts to regain its
stride with borrowing rates that become increasingly affordable.

Recovering nicely from “the flash crash” of August 5th the S&P 500 was +2.43% for the month and +19.52 year to
date but it was a very different market with “the Magnificent 7” stocks -.70% for the month with defensive sectors of
the market such as Consumer Staples, Real Estate, Utilities and Health Care posting returns twice that of the index.
MidCap stocks were flat and SmallCap was-1.44%. Foreign Developed Markets matched the S&P with European
Stocks and Latin American stocks performing particularly well. The curious disconnect between gold and
cybercurrencies continues with gold +2.31% and Bitcoin -8.84%. The 60/40 portfolio returned 1.12% for the month
with the 60% equity share returning 2.35% and the 40% fixed income share flat with portfolio returns now +13.2% ytd.

Mark H. Tekamp/August 31, 2024

It’s ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so
– Mark Twain

Perhaps the greatest challenge for investors in July was to choose the single most important news story for the
month. The shooting at the Trump rally in Pennsylvania? President Biden announcing his intention to not run for
reelection? The CrowdStrike sourced shut down of the internet? The reversal in fortune of the Magnificent 7 stocks?
The S&P 500 itself was +1.2% for the month but the S&P 400 MidCap was +5.8% and the S&P 600 SmallCap
+10.8% while five of “The 7” posted losses ranging from -5.2% (Amazon) to -8.4% (Microsoft). Reuter’s news service
had an explanation at hand in an article published July 18th. “U.S. small-cap stocks are having a long-awaited
moment, ignited by expectations of interest rate cuts and improving prospects for the election of Republican
presidential candidate Donald Trump…” There may be an explanation for the dramatic reversal of fortune in US
equity markets but US presidential politics may not be its source.

The world’s largest financial market, that of foreign exchange, the selling of one nation’s currency for the purchase of
another’s, is larger than all other financial markets combined with a daily trading volume of $6 trillion, half involving
the US dollar, in contrast to $1.2 trillion for global bonds and just over $500 billion for US equities. As nations’
economies have become increasingly interconnected the foreign exchange market has become “the dog” wagging
“the tail” of other financial markets and yet its role is often overlooked or simply ignored. That is a mistake for this is
the market where the global economic and financial systems which have become increasingly out of balance must
literally “balance their accounts.”

Foreign Exchange markets normally have much lower levels of volatility than equity markets with market trends
typically very gradual and of extended duration. The Japanese yen – US dollar relationship though has belied this
characteristic in recent years. In the five years from 2016 through 2021 the US dollar rose in value against the yen by
20%. In the just over two and one-half years from 2022 to July 11, 2024, it rose 40%. Year to date through July 11 the
dollar fell 1.74% against the euro, rose 5.11% against the Chinese yuan but 19.4% against the yen. So, why should
we care and unless we’re planning on joining our one million fellow citizens who visited Japan during the first five
months of this year to take advantage of an entire country on sale for holders of US dollars why would this matter?

Since 1989 Japan has frequently experienced falling prices so Japanese investors had been content to hold their
savings as cash and bank deposits without being paid interest. In 2022 Japan began to experience inflation of just
over 2%. To encourage Japanese savers to assume a measure of risk to earn returns on their savings Japan’s
government introduced the Nippon Investment Savings Account (NISA). In January the allowable contributions to
those accounts were doubled to $24,000 with lifetime contributions also increased to $120,000. Returns on these
accounts are exempt from tax. A preferred investment for investors making use of these accounts is US equities and
individual stocks. Flows into these investments have reached monthly levels of $5.6 billion. While less than the flow of
US investors $30 billion into US equities that amount is material and, more than US investor asset flows, focused on
technology stocks. With the additional benefit for Japanese investors of the declining value of the yen, since the end
of 2022 Japanese investors in US technology stocks have experienced returns of over 100%.

A counter party to the role played by Japan’s individual investor is the global “carry trade” in which hedge funds
borrow money in a low-interest rate currency, the Japanese yen, and use those to purchase US dollars to invest in
bonds and equities in US financial markets. The size of this trade is estimated to be as large as $20 trillion dollars.
Since 2016 the yen has steadily fallen against the US dollar making the trade both extremely popular and profitable.
The declining value of the yen though has created economic problems for Japan leading to higher levels of inflation.
At 8:30 am on July 11th a weaker than expected inflation reading for the US was released. This led to a modest
pullback in the value of the US dollar. Eleven minutes later Japan’s Ministry of Finance stepped into the market
selling US dollar’s and buying Japanese yen causing the yen to rise against the US dollar. At that point the
algorithmic trading platforms kicked in selling those assets which had previously outperformed the market (think the
“Magnificent 7” stocks) and buying the previously underperforming asset class, small cap stocks. This likely explains
the 19% “reversal of fortune” of the two asset classes from that point through month’s end. So, Japan’s individual
investors fed a market trend supported by the global carry trade manifested through the use of electronic trading
platforms that then fell victim to Japan’s monetary authorities seeking to arrest the decline in the value of the yen.
Amidst “the tempest and tumult” 60/40 equity/fixed income investors “enjoyed” a 2% positive month and 11.7% year
to date. Equities returned 2.25% and fixed income, with the interest rate declines occurring late in the month,1.625%.
There is a more than faint whiff of disinflation in the air so perhaps bonds will “spring” as we step into fall.

Mark H. Tekamp/August 3, 2024

The greater the mismatch between perception and reality the greater the opportunity
– Mark H. Tekamp

“AI Frenzy Propels Stocks to Monster First Half” read the headline in July 1st’s Wall Street Journal. J.P. Morgan’s
Chief Global Strategist David Kelly was quoted elsewhere as believing “the outsized sway of technology giants over
US stocks is likely to persist, absent a major market rout.” Outsized it certainly is as the average stock in the S&P
500 declined 2.45% during the quarter in contrast to the index’s rise of 4.28%. “The Magnificent 7” stocks (Nvidia,
Apple, Amazon, Tesla, Meta, Alphabet (Google) and Microsoft) have risen 33% year to date in contrast to 5% for the
remainder of the index with the S&P 500 itself returning 15.29%. Six of the indices’ eleven sectors were negative for
the quarter, as were the MidCap and SmallCap indices and the venerable Dow Jones Industrial Average. Foreign
Developed Markets fell 0.54% though Emerging Markets rose 5.65% outperforming the S&P 500. Interest rates
finished close to where they began the quarter, allowing fixed income securities to earn their cash flow without an
appreciable decline in their market value.

The Federal Reserve seems to have succeeded in convincing the financial markets that any reduction in interest rate
this year will be modest and likely to be late in coming. Beneath the surface though a very great deal has changed,
and investors may wish to pay heed to this emerging reality. The engines of the US economy are exhibiting sufficient
thrust for the time being to keep it aloft, but it is clearly losing altitude and its ability to obtain a “soft landing”
increasingly in doubt. The Atlanta Fed’s GDPNow real GDP estimate for this year’s 2nd quarter was forecasting
growth for the quarter at over 4% six weeks ago. The current estimate is now 1.5%. Real (inflation adjusted) Personal
Consumption Expenditures one year ago were growing at a 3.25% annualized rate. It is now 0.8%. Two years ago,
employment was growing at a three-month average rate of 300,000 and the unemployment rate was 3 ½%. Now
employment is rising 177,000 and the unemployment rate is 4 ½%. Interestingly, full-time jobs have actually declined
on a year-over-year basis with the increase in employment solely attributable to the rise in the number of part-time
jobs. Meanwhile inflation shows increasing evidence of drifting down to its 2% target. The Fed’s preferred measure of
inflation, the Personal Consumption Expenditure (PCE) Core Rate (excluding Food and Energy) is at 2.74% but
excluding Healthcare, notoriously difficult to calculate due to the timing of the reset on insurance premiums, it is
below zero.

Much of the market forecasting fraternity is suggesting the possibility of a market correction due to a visibly slowing
economies effects on corporate earnings. An alternative and possibly more accurate view is that earnings are no
longer the primary driver of equity market returns having been supplanted by valuations. This is evidenced by 14% of
the 26.3% 2023 return and 8% of the 15.3% year to date return of the S&P 500 attributable to that source. And what
is the primary determinant of valuations? Interest rates because the primary demand for capital is no longer the
provision of capital for investment in the “real” economy but to provide sufficient liquidity to roll over the $300 trillion of
global debt. Lower interest rates increase the ease with which the $100 trillion global economy can roll over the
approximately $60 trillion in global debt that will mature this year. The “balance sheet” of the global economy lacks
sufficient size to retire the debt and so, like an interest only mortgage, it must be refinanced. So long as the global
financial markets permit this all things are possible. Should the day ever dawn when it does not nothing is.

The effects of the Federal Reserve’s lowering of interest rates by possibly 2% over the next six months may not be
just the extent of the rise in the equity markets but where that rise may disproportionately occur. Perhaps the market
we’ve been experiencing this past year and a half hasn’t been a bull market in stocks but rather a relatively small
share of the totality of the market experiencing something approximating a mania. Extending one’s time horizon an
additional year is helpful to obtain some additional perspective. 2022 was not a good year for investors in the stock
market with the S&P 500 declining 18.11%. Investors who purchased $1,000 of each of “The Magnificent 7” at the
onset of 2022 would have earned $4,193 by June 30, 2024, but $3,200 of those earnings came from Nvidia. The
$6,000 invested in the other six stocks would have returned 6.31% per annum, a lower return than that of 7.27% for
the S&P 500. Perhaps it isn’t the seven that are so magnificent but the one that has no equals.
60/40 portfolios returned 1.84% for the quarter and 9.90% through the year’s first half. The equity 60% share returned
2.20% and 10.60% year to date. The 40% fixed income share was +.80% for the quarter and is +.75% for the year. It
should be noted that Commercial Backed Securities (CMBS’s) are significantly outperforming the fixed income
universe as the prospect for lower interest rates is leading the market to become increasingly confident that the
commercial mortgages composing those securities will be able to be refinanced at reasonable rates when their
refinancing dates occur.

Mark H. Tekamp/July 6, 2024

“So extraordinary a rise in the market price of Gold in this country…pointed to something in the state of our own domestic
currency…”

– The Report of the 1810 House of Commons Select Committee on the High Price of Gold

May’s reputation as unfriendly to stock market gains has long been noted as evidenced by the mantra to “sell in May
and go away.” The wisdom of that advice, at least for this year, was belied by the S&P 500 providing investors with a
return of 5%, the best performance for the month since 2009. That the love affair of investors for all things related to
AI had not yet reached the peak level of their passion was manifested by NVDIA’s 27% return for the month with
Apple joining in with 13% and even the normally pedestrian utility stocks rising 9% on the prospects for the increased
demand for electricity to power all of those artificial IQ points. Small Cap stocks modestly outperformed “the 500” and
even bonds rallied with many sectors of that market finding their way to close to break-even returns year to date.

Though having outperformed the S&P 500 by almost 40% in the past twenty-five years gold has been relegated to
being among the most forgotten of asset classes. Those proclaiming its virtues are not even dignified by being
compared to a species of animal, a bull or a bear, but that of an insect, “gold bugs.” Though the spotlight that once
shone upon it now increasingly shines upon bitcoin in the past eight months “the barbarous relic” has risen by
25 ½ % which begs the obvious question why? Historically gold tends to do well when inflation is rising, which it isn’t,
when interest rates are low, which they aren’t, and the US dollar is losing value which, at least in relation to most
other currencies, is not currently the case. Something is causing gold prices to rise at a very rapid rate and the
answering of that question might possibly offer some insights helpful to our understanding of a great deal more than
just that of the price of precious metals.

One of the most notable characteristics of life in the United States in the past third of a century has been the contrast
between the rate of growth of our wealth which has increased at a 3.3% real (adjusted for inflation) annual rate from
1990 through 2022 and the .45% annual increase in the median family income. This is further evidenced by the
performance of the US stock market which had a value equal to half that of our national economy in 1990 but was
50% larger in 2022. In other words, for whatever reason, the stock market has grown at an annual rate almost three
times faster than that of our economy.

Accompanying the rise in the stock market has been the growth of our federal government debt. From 1990 until the
Global Financial Crisis of 2008 that form of debt and the national economy grew at an approximately equal rate with a
level hovering near 60%. In the fifteen years since then federal debt has grown at a rate twice that of our economy
and is now at a level of 120%. In the past six months through April the US Treasury issued $16.8 trillion in new debt
with $15.7 trillion of it required to repay the debt that matured during that period. These are figures for six months.
Annualized, that level of debt issuance is now almost 25% larger than our national economy.

Since the onset of 2020 an acre of Iowa farmland has increased by 59 ¼% through 2023, the price of gold 55%
through May 31st and the median selling price of an existing home by 43 ½% through March. Could it be that the
underlying force propelling upwards the value of those assets is an effect not so much of the increase in their value
as it is the loss of the value of the paper money we are using to purchase those assets with? In other words, perhaps
the true source of the inflation we are observing may be an effect not so much of the rise in the price of what we are
purchasing but the decline in the value of what we are purchasing it with. And if this is true, then how should this
affect our perception of the future as investors if we are now experiencing a shift in “the balance of power” between
“paper” assets and those which are perceived as possessing real intrinsic value?

First, it may be wise to assume that the issuance of accelerating volumes of money is not likely to be reversed in the
next several years and so the sunny weather overhanging the current landscape of the financial markets may well
continue to exhibit a relative absence of storm clouds for some time. Second, it may also be wise to take note of the
relative sizes of those markets that may prosper in this future possibly unfolding scenario and those that may not. The
bond market is $130 trillion, the equity market $65 trillion, the gold market $14 trillion and bitcoin $1.4 trillion. Indeed,
it may well be the variance in size of the gold and bitcoin markets that explain the variance in bitcoin’s 100% return
the past three years and gold’s 24 1/4%. Perhaps though there is also an element of confirmation of the ever-present
relationship between risk and return.

60/40 portfolios returned 3 ¼% for the month erasing April’s decline and increasing year to date portfolio values to
their year-to-date highest level of 8 ¾%. The 60% equity share returned 4.7% with all sectors positive but with large
cap growth’s return of 6.4% notably outperforming value’s 3%. The 40% fixed income share returned 1% with modest
interest rate declines creating modest increases in the market value of those securities.

Mark H. Tekamp/June 6, 2024

“Genius abhors consensus because when consensus is reached, thinking stops. Stop nodding your head.”
–Albert Einstein

CNBC headlined on April 12th “Dow tumbles 475 points, S&P 500 suffers worst day since January as inflation woes
erupt.” Three days later UBS advised investors to prepare not for Fed rate cuts but quite the opposite suggesting
“Fed hiking rates to 6.5% is a real risk”. The financial markets had stepped into 2024 with 65% of market participants
expecting three or more rate cuts during the year. By April 18th that share had fallen to 20%, exceeded by the 30%
expecting none or actual rate hikes. The S&P 500, which started the month sporting a handsome 10.3% return, saw
that gain cut by more than half by April 19th though recovering modestly by months end with a decline of 4% for the
month but still +6% for the year.

The financial markets are doing their best this year to act in the role of Pinocchio to the Federal Reserve’s Geppetto.
Investors with memories reaching back to the start of 2023 may recall that virtually the entire fraternity of economic
forecasters was predicting the onset of an economic recession during the year. Instead, the US economy became the
focus of much admiring commentary with US economic growth rates of 2.7% for the year inhabiting a separate
universe from Canada’s ½% and Germany’s -0.3%. Let us occupy most of this commentary with thoughts on why this
was and, perhaps more importantly, the likelihood of its continuance.

It would be very difficult to discuss the current state of the US economy without focusing attention upon the federal
government’s fiscal response to the shuttering of much of our national economy in 2020. Looking at a chart of federal
spending reveals two massive increases, the 2nd quarter of 2020 and the 1st quarter of 2021. From that point federal
spending fell sharply remaining relatively stable until 2023 when it began to rise again, albeit at a more modest rate,
powered higher by the inflation-based adjustment in federal benefits payments (think Social Security). Those
increased benefits were paid for by higher levels of borrowing by the federal government with those increased
benefits then circulating through the US economy. This likely explains a great deal of our higher rate of economic
growth last year.

A bit more history but with this part measured in increments spanning decades. In the 1970’s and 1980’s the inflation
adjusted economy grew at an average annual rate of 3%. The 1990’s were a decade of transition and in the 21st
century to date we’ve seen that rate decline to 2%. There is much in economics that isn’t simple but explaining the
source of economic growth is. There are two factors that are the sources of that growth; the numbers of people
working and the level of their productivity. In the three years ending in 2023 our population grew .845% and
productivity .602% at an annual rate. That gets us to 1.447%. That is the rate we are likely migrating back to and any
notable variances to that rate of growth are likely to be temporary in nature.

A misfortune being experienced by those of our fellow citizens making their living in the real economy is their having
to pay higher prices for the goods and services they consume without an offsetting increase in their income to pay
those higher prices due to lagging growth in wages. The result will likely be lower levels of consumption, declining
rates of economic growth and falling levels of inflation. Those higher rates of growth for federal transfer payments are
now behind us so we’re likely to find the economic climate a good deal chillier than what we’ve been experiencing.
This is not necessarily a forecast of economic recession but growth rates starting with “1” likely will soon be upon us.
So, what about the financial markets? Intermediate to longer term interest rates may decline though possibly not by a
great deal. Think mortgage rates starting with a 6 and possibly 5. Prepare to say goodbye to 6% six-month certificate
of deposit rate “specials.” As unemployment rates begin to rise the fed will likely cut interest rates by 2% and possibly
more. The stock market, which is only just now starting to catch up with the future state of this reality, could rise by
another 15%. This is the world that investors inhabited from the time of the Global Financial Crisis of 2007-2009 to
the pandemic of 2020. Nothing has really changed as the final rippling effects of the pandemic subside and so this
may well be our future. For investors these are prospects they may well find pleasing in the experience.

60/40 portfolios which returned 7.8% in the first quarter gave back 2.35% of that return in April, ending the month with
year-to-date returns of +5.4%. The negativity was sourced almost solely by the previously discussed decline in the
equity markets with the slightly superior performance of foreign markets offset by the 6% decline in the small cap
space. Fixed income was slightly positive thereby protecting portfolios from experiencing more pronounced declines.

Mark H. Tekamp/May 8, 2024

“There are three kinds of lies; lies, damned lies and statistics.”
Mark Twain; North American Review; 1907

S&P Dow Jones Indices, in its commentary for March 2024, headlined “Despite uncertainty surrounding potential Fed
rate cuts, economic strength and diminishing recession fears led to the best Q1 U.S. market performance since 2019,
with the S&P 500 up 11%.” The S&P 500 returned 3.2% for the month but the equity markets revealed some
evidence of a rising tide lifting all ships. The Value share of that index returned 4.6%, twice that of Growth’s 2.1%.
Energy stocks powered higher 10.6% versus Info Tech’s 2%. Foreign Developed Markets and Mid Cap stocks
outperformed the S&P 500 rising 3.8% and 5.6% respectively.

Lawrence H. “Larry” Summers has a resume to impress even the least impressionable. Secretary of the Treasury
from 1999 to 2001 under President Clinton, Former President of Harvard from 2001 to 2006 and Director of the
National Economic Council under President Obama from 2009 to 2010. In other words, a fellow citizen viewed as
accomplished, very wise, and with opinions worth respecting. So, on March 23rd when the former Treasury Secretary
sent out the following tweet, it became a subject of much discussion.

“I don’t know why the Federal Reserve is in such a hurry to be talking about moving towards the accelerator (cutting
interest rates). We’ve got unemployment, if anything, below what they think is full capacity. We’ve got inflation, even
in their forecast, for the next two years above target. We’ve got GDP growth rising if anything faster than potential.
We have financial conditions, the holistic measure of monetary policy, at a very loose level.”

With all due respect to the former secretary, I would like to suggest that he could scarcely be more wrong and why
the Fed should start aggressively lowering interest rates very soon if they don’t want to push the US economy into an
economic problem largely of its own creation.

First, unemployment. The report that commentators tend to focus upon is the Bureau of Labor Statistics (BLS’s)
household employment survey. It has indeed been reporting robust increases in employment. Prior to the pandemic
ADP, the nation’s largest payroll predecessor(s), household employment survey, Challenger & Gray’s number of
businesses reporting job cuts, and the ISM manufacturing and non-manufacturing employment indices all tended to
align with one another. Post pandemic that is no longer the case. Of the five cited here four indicate an economy now
growing slowly with ADP’s household survey showing employment growth in the past year of 642,000 in contrast to
the BLS’s 2.93 million. The ISM’s and Challenger & Gray align with the ADP data. It is the BLS data that is the outlier.
This is seemingly confirmed by financial markets no longer responding meaningfully to BLS’s monthly reports.

Second, inflation. The most hotly debated of all current economic topics, let’s see if we can bring a measure of clarity
to this noisy subject. Goods represent 40% of what we consume. Year over year goods inflation is 1.1% so the issue
resides on the 60% services side which employs 70% of US workers so wage rates are the crux of the inflation bears
arguments. On a quarter over quarter basis, as measured by the Bureau of Labor Statistics (BLS) Employment Cost
Index for Private Wages & Salaries, that index peaked at 6% at the end of Q3 2021. It was just over 5% at the end of
2022 and is now at 3 ½%. At its current rate of descent, it may well be at 2% by year’s end. It correlates with a lag of
approximately three months, the Fed’s preferred inflation measure, Core PCE Services ex Rent. That would lead that
measure, currently at 2 ½%, to fall below 2% later this year.

Three. The economy is growing above its potential. Another statistical anomaly. As measured by production (GDP)
the US economy is indeed growing but as measured by growth of income (GDI) there isn’t any. US retail sales growth
has mostly disappeared, growing 2.4% from June of September 2023 but 0.2% From October 2023 through February
2024. Mortgage rates are near 7%, existing home sales are down 33% from their best levels of the past five years
and with interest rate on auto loan rates reaching 10% vehicle sales are off 14% from their best levels in five years.

Four. Financial conditions are at a very loose level. He must be talking about the stock market. The interest rate on
small business loans is at 10%. Small companies need bank credit to grow, and the supply of that credit is 1% below
its level of a year ago. For our economy to grow the supply of money must be rising and it isn’t. As measured by M2,
that level has fallen by 4.3% in the past two years. Increasingly it’s looking like deflation that should be concerning us.

60/40 portfolio investors can celebrate 7.8% returns for the quarter with 8.2% returns on the 60% equity side and
7.2% on the 40% fixed income. For the month portfolio returns were 3% with equal contributions from equity and fixed
income. The fixed income side was aided notably by the 6%+ rise this quarter in commercial backed security values.

Mark H. Tekamp/April 6, 2024

That’s the American Dream, Can only be seen behind closed eyes;
Allowed to touch but can’t touch the prize; that’s the hook,
The bait and switch of hand is no surprise – “Sleight of Hand” ; Jeremy Betts

The February stock market couldn’t find its way to the front page of the March 1st edition of The Wall Street Journal
having to settle for a headline on the front of that day’s Business & Finance section “Nasdaq Notches a Record
Close”. Barrons, choosing to deflate talk about lighter than air objects, headlined “The Stock Market Looks Like a
Bubble. What Is It Really?” Perhaps the publication was mocking that week’s Economist’s cover of a bull being lifted
airborne by a bouquet of balloons though livestock’s 12% rise in prices is one of the few assets to outperform the
S&P 500’s two month return of 7.1%, its best start to a year since 2019 with 5.3% of that total coming in February.
Most investors would welcome signs of inflation in their portfolio returns but with 60/40 portfolios still down 5.7% over
three years many investors are not only not airborne but actually underwater.

A year ago, 99% of economic forecasters were predicting a recession in 2023. Of course, in the contrarian nature of
such things, the inflation adjusted rate of growth last year was 3.10%, above its 2.20% average annual rate of growth
in the prior ten years. Properly chastened, 76% of the forecasting fraternity believe the possibility of a recession this
year is 50% or less. Of course, the opinion that matters most, that of the Federal Reserve, is either more nuanced or,
if you prefer, confused. While expecting a 50% reduction in the US economic growth rate this year to 1.5% and with it
expecting inflation to decline further to 2.4% the Fed’s chairman has also stated publicly “…we have a strong
economy. The labor market is strong…with the economy strong like that, we feel that we can approach the question
of when to begin to reduce interest rates carefully.” Careful may be the chairman’s view of his approach to matters
but the previous two times this century the Fed had its Funds Rate at a level more than 2% above the rate of inflation
was 2001 and 2007 and our experience of the economy in the following year was, shall we say, interesting.

Four numbers, -0.38%, -0.64%, +1.93% and 3.1%. The first is M2, the most commonly used measure of money in our
economy. It is declining. The second is the extension of credit by the US commercial banking system. It is also
declining. The third number, the actual value of loans and leases extended by our banking system, is positive but it is
less than the fourth number, 3.1%, which is the most recent year-over-year rise in the consumer price index aka
inflation. Small business depends upon the banking system to extend credit and that supply of credit is declining. As
the source of 50% of the jobs and 43.5% of our economy how can small business be expected to grow in a declining
credit environment and how can the US economy be expected to grow if half of it isn’t?

Could our nation’s central bank profess to doing one thing while preparing to do something else? Certainly, no
certainty here but just supposing. The Fed, responding to the inflation resulting from the federal government’s public
policy response to the pandemic, began raising its Fed Fund’s Rate in March 2022 with its final increase occurring in
July of 2023. The inflation and those higher interest rates resulted in the market value of outstanding US Treasury
debt declining by 31%. (Lower bond prices are the source of negative portfolio returns these past three years.) Now
for a little history. Prior to the Global Financial Crisis commercial banks held very little in reserves at the Federal
Reserves. After it the Fed adopted an “ample reserves” policy and commercial banks now hold $3.5 TRILLION at the
Fed for which they are earning 5.4% and which is costing the Fed close to $200 billion in interest payments per year.
From October 1, 2023, through January 31, 2024, the US Treasury issued $9.6 trillion in new debt, 92% of which was
used to provide the necessary funds to pay off its maturing debt. The public currently holds $27 trillion of US Treasury
debt, 16 ½% in Treasury bonds with an average interest rate of 3.1%, 52 ¼% in Treasury notes with an interest rate
average of 2.3% and almost 22% in Treasury bills with an interest rate of 5.4% and maturity dates of up to one year.

The US Treasury is now paying $870 billion on its debt exceeding the $822 billion defense budget. What if the Fed
were to lower interest rates to say 3%, stop paying interest on commercial bank reserves forcing much of that $3.5
trillion into the US Treasury bill market allowing it to notably lower its interest payments on those securities while
having something left over to buy up some of that treasury debt now trading at 69 cents on the dollar? Perhaps that
equity bull might be looking for something with a bit more of a charge in it than lighter than air balloons!

Over the span of a year, it continues to look like the S&P 500 starring as Snow White with almost everything else
looking like dwarfs. Roughly stated, “the 500” is +30% with mid-cap stocks up half that much, foreign developed
markets looking like mid-caps, small caps up half as much as mid-caps and foreign emerging markets splitting the
difference between small and mid. Dare one say it? Mid-caps outperformed “the 500” in February and it is starting to
“feel” like a party to which more are invited. In February 60/40 portfolios returned 2.9% and are now +4.5% year to
date with equities contributing 4.6% to February’s return and fixed income 1.6%.

March 3, 2024/Mark H Tekamp

”There comes a time in the affairs of man when he must take the bull by the tail and face the situation.”
WC Fields

Providing substance to the thesis that many investment prognosticators would rather be right than rich, the financial press’s take on 2023 was surprisingly curmudgeonly. The Wall Street Journal, in its December 30 edition, headlined “What Did Wall Street Get Right About Markets This Year? Not Much”. Barrons, in its January 1st edition, bemoaned the S&P 500’s inability to close at an all-time high headlining “The Stock Market Saved Its Biggest Disappointment for the Last Day of the Year” taking a rather grinch like view of the indices 24.2% return for the year while reminding readers that 2023 was the first year since 2012 that the index had failed to make at least one record high during the year.

Stock market investors new best friend, Federal Reserve Chairman Jay Powell, was having none of the punditry’s proclivity towards negativity as he offered the promise of what every investor had at the top of their shopping list, lower interest rates! At the chairman’s press conference on December 13th, he spoke words that got stocks hot ‘round the world “if the economy evolves as projected, the …appropriate level of the federal funds rate will be 4.6% at the end of 2024…” There! He said it! Rate reductions of ¾ of a percent next year! From the moment those words left the chairman’s mouth at 2 pm that day to the market close two hours later the Russell 2000, an index of small US companies, rose 4%.

Could it be that markets are starting to “sniff out” something missed by almost all of those ophthalmologically challenged market commentators? A perusal of the data the Fed releases at the conclusion of its meetings reveals that the Fed expects US economic growth to decline from 2.6% in 2023 to next year’s 1.4%, a near 50% deceleration of expected growth in the economy and materially below the 2% rate widely considered “normal”. Those numbers also reveal the Fed expects inflation levels to decline further next year to 2.4%, very close to the Fed’s inflation target. Economists dispute the exact level of interest rate which neither contributes to nor detracts from economic growth rates, but opinions tend to gravitate towards ½% above the rate of inflation. Simple arithmetic is the 2.4% expected rate of inflation + ½% neutral rate of interest equals 2.9%, versus the current Fed Funds rate of 5.5%, offers the prospect of 2.6% possible rate reductions next year. This may be the true source of the sweet aroma wafting upwards past the nostrils of stock market bulls. It may also be that the truly contrarian call for 2024 is for investors to ask themselves “as bullish as you are, are you bullish enough?”.

As we prepare to cast this fed rate tightening cycle into history let’s take a look at an explanation for it resting on the possible existence of ulterior motives, while acknowledging the reality of the near to total misalignment of its cited cause and actual effect. We’re not cynics but are fond of the phrase “cui bono” (who benefits). If the objective that exceeds all others in order of importance is the maintenance of the solvency of the United States government, and if the key measure of that solvency is the outstanding market value of US Federal debt in relation to the nominal (non-inflation adjusted) value of the US economy, then perhaps we have a useful starting point. In the ten years ending 2019 US nominal GDP grew at a 4.1% annual rate. In the three years from Q3 2020 through Q3 2023, due to the higher rate of inflation, that rate rose to 6.3%. With the rise of interest rates the market value of previously issued Federal debt declined in value. On January 1, 2022, the outstanding market value of US Treasury debt was $23.4 trillion. From January 1, 2022, through November 30, 2023, the US Treasury issued $3.9 trillion of additional debt but as of November 30, 2023, the market value of that debt had risen by “only” $765 billion meaning that 80% of the value of the “new” debt was offset by the losses experienced by the holders of the “old” debt. Whether this confluence of circumstances was coincidental or not, it did allow the United States Treasury to issue trillions of dollars of new debt while achieving the remarkable outcome of the outstanding balance of US Treasury debt remaining stable as a share of US GDP from 2019 through Q3 2023. Cui bono?
S&P Dow Jones Indices, in their recapitulation of the 2023 market, remained focused on the Magnificent Seven stocks, AI and info tech but that is starting to acquire the feel of yesterday’s story as small cap stocks 12.8% returns for December notably outperformed the 4.5% return of the 500, value outperformed growth, real estate’s 8.7% exceeding info tech’s 3.8% and even foreign developed markets 6% outperforming. The fixed income tortoise finally caught up with the equity hare as 60/40 portfolios returned 13.8% for the year with the equity share returning 22.35% for the year and fixed income eking out a miserly 1% but the tortoise did awaken returning 6.875% versus equities 11.5% for the quarter and 4.875% versus equities 5.50% for the month with the portfolio providing overall returns of 8.75% for the quarter and 5.25% for the month. 60/40 portfolio investors longing for the day when they recapture the remainder of their 2022 losses may not have to wait very much longer as they are now but a modest 4 ½% away.

December 30, 2023/Mark H. Tekamp

”I found a dollar the other day, it lay there on the ground; I wondered who had dropped it, and I had to look around…”
The Value of a Dollar Poem; Janice M. Pickett

CNBC headlined its story of the stock market’s final trading day of November “Dow jumps 500 points to new 2023 high Thursday capping 8% November rally”. Though only separated by a single month, October seemed recast as an occupant of an alternative reality as that month’s unwelcome tricks were thankfully subsumed by November’s treats. The S&P 500 returned 9.1% for the month and is now up 20.8% for the year. Unlike every other month since February this was a party to which all sectors of the financial markets were invited as mid-cap stocks were up 8.5%, small cap stocks 8.3% and foreign developed markets 9.6%. Even the previously woebegone bond market participated as ten-year treasury rates declined by half a percent to 4.4% allowing the majority of fixed income securities to migrate from negative to positive returns year to date albeit with most sectors of that universe providing modest returns in the low single digits.

The source of the sudden turn in fortune for the financial markets is to be found where it almost always is these days, in the words from arguably one of the most famous men on the planet, US Federal Reserve Chairman Jerome Powell. At the press conference on November 1st, following the fed’s two day meeting, it wasn’t so much what he said, that the fed had opted not to raise interest rates which was not really news since no one expected that to happen anyway, but rather that the fed had chosen to hold interest rates at current levels to allow it to determine whether rates had risen to a sufficient level to permit it to claim the accomplishment of its mission of pushing inflation back down to its 2% target. Attempting to square the circle of the sizzling 5.2% annualized inflation adjusted economic growth rate for the 3rd quarter with a rapidly declining inflation rate, the chairman essentially said that since he didn’t know what to do, he would opt to do nothing.

Like so much of our current perceived state of reality, the proper correlation of causes and effects appears to be a form of art increasingly served rarely. Let it be offered as a suggestion that the market that is the most important one is that which establishes the value of the US dollar. The reason why is the existence of the two numbers that matter most; global debt which is $300 trillion and the size of the global economy which is $100 trillion. As global debt has grown at a rate notably faster than that of the global economy for the past several decades, the world has lost its ability to retire that debt and therefore must continually refinance it. In other words, to “roll it over” in a fashion much like the extending of the terms of the maturity on an interest only mortgage. Since the Global Financial Crisis of 2008, the money that is borrowed to pay off current debt through the issuance of new debt is required to be collateralized; the borrowers’ use of securities as a means of guaranteeing their ability to repay their debt. Though the US represents only a quarter of the world’s economy, 70% of global debt is financed using the US dollar and the preferred form of collateral to support the issuance of that debt is US Treasury securities. The global financial system has become a debt-based system dependent upon the ever-increasing supply of US Treasury debt and that, dear reader, is the reason why the US dollar has assumed the role of the financial market dog wagging the equity market tail.

As the US Federal Reserve has raised interest rates from ¼ % in March 2022 to 5 ¼% currently, the result has been to increase the flow of foreign capital into US dollar-based assets resulting in an increase in demand for dollars and an increase in its value. This matters because a more expensive dollar makes it more expensive to “roll over” the global debt mountain. From March 1, 2022, to September 27, 2022, the US dollar rose 17.3% and the S&P 500’s declined 14.5%. From October 5, 2022, through August 1, 2023, the US dollar declined 8.2% and the S&P 500’s rose 22.6%. Since October 28th the US dollar has declined 3.2% and the S&P 500 has risen 11.8%. So, what should investors now expect from these markets? The growth of US budget deficits, which has been the source of much of the US economy’s surprising strength this past year, is now starting to wane. US inflation levels may quite possibly undershoot the fed’s 2% target. This is what the financial markets rally in November is starting to “sniff out”. US equity markets, excluding the mega cap tech stocks, haven’t done particularly well the past two years leaving midcap stocks currently valued at 13.6 and small cap stocks 13 times 2024’s expected earnings. Even the equally weighted version of the S&P 500 is trading at 15 ½ times this year’s earnings. With reasonable valuations, falling inflation and declining interest rates we may quite possibly be setting ourselves up for some very interesting times.

For 60% equity and 40% fixed income investors the onset of the year through the end of Octobers was all about a great deal of motion with little in the way of forward progress. November’s portfolio returns of 6% received contributions of 9% from the equity share with fixed income contributing 1.5%. The equity contributions were relatively evenly distributed with large cap and small cap US and foreign returning between 8% and 9%. Year to date portfolio returns are now at 8.2%.

Mark H. Tekamp/December 6, 2023