Market Musings Blog

Covid and the Economy, Mid 2021

While Covid cases are picking up, and the Delta virus is changing the calculus around how efficacious vaccines are, the economy continues to slowly improve. Data shows that previous spikes in cases have resulted in less and less economic disruption as time wears on, a testament to the human ability to adjust. That said, problems could still crop up in specific areas, including travel and entertainment (including restaurants) industries, and if school closures become common again, we’ll see suppressed employment numbers.

More pertinent to the Fall/Winter economy in the US may be the fiscal and monetary support that we’ve enjoyed as a result of the pandemic. Many programs are ending, and some are experiencing court challenges. These impacts on top of higher inflation could put the skids on what has been a brisk recovery thus far. A glance at the bond market shows a heavy bet on a slowdown later this year, and we’re going to take that prognosis to heart. Our expectation is a tougher stock market will take hold for a few months, so fasten your seat belts.

When and How to Talk to Your Advisor About Changing Your Investment Objective

Every once in a while, life throws a curve ball. You’ve set up your investment portfolio in partnership with your advisor, and suddenly, it doesn’t seem like it works for you any longer. Maybe the value is declining even when the market goes up, or maybe it’s behaving well from year to year but giving you fits from month to month. Maybe you received an inheritance, or you lost a job.

These can all be reasons to change your investment mix. Here are several other perfectly legitimate reasons to make a change:

  1. You decide to help support family members
  2. You have inherited money and want to pass along more to your own heirs
  3. The market tanks and you lose sleep
  4. The market rises a lot and you’ve reached your monetary goals, so you can afford to give up return and make your portfolio less risky
  5. You go back to work

On the other hand, here are some reasons that are usually not sufficient to prompt a change in asset mix or holdings, given historical data:

  1. Political trends
  2. Tax law changes
  3. Lawsuits at a company that you own stock in

Reasons for changing your portfolio generally fall into two categories: either the return burden on your portfolio increases or declines (ie, if you want to support family, that may require more return; but if you inherit funds, each dollar can work a little less hard) – or, the way you FEEL about your circumstances changes.

Investment managers prefer to keep portfolios positioned as consistently as possible. Making large changes frequently is a good way to damage your return. Missing one large upward move in stocks can permanently impair your lifestyle, forcing you to save more and sacrifice more. It’s one thing if you are prepared for that sacrifice and understand its implications. It’s another thing if you incur the damage, then decide you can’t stand the consequences and want another shift. That’s a sign that either you or your advisor hasn’t done the work to establish your goals and the path to achieving them.

Approach your advisor with the reasons you want a shift. Understand that your advisor is always working to translate your circumstances into a risk/return profile that will fit you, so when you say, “This market drives me nuts, I can’t sleep!”, he is thinking “less risk” or if you say “I just received an inheritance and I think I want to keep some of it in cash” he is thinking “maybe the remaining portfolio can be more risky?”

Once you decide on a change, try to stick to the resulting portfolio for a few years – let it work for your new goals. If the market moves against you – seeming to invalidate your new direction – remember the reasons you shifted in the first place. Are those things still true? If so, stand your ground and don’t be afraid to ask for assurance from your advisor. That’s what he’s there for.



ESG Part II: Why it’s So Hard

Finally, with Covid fading, and the markets settling, we can return to our ESG series. The last installment in this series was over a year ago, when we introduced the topic and mentioned that we would be looking at specific companies to help define the topic and discuss ESG philosophies. The long time frame between that last post and this one has allowed the market for ESG products to develop further. We have also seen new regulations both in the US and abroad that affect the space, and more data is available regarding performance of such strategies. We will touch on all these items as this series continues.

But today we are going to focus on plant based “meatless meat” company Impossible Foods. Impossible is not public (yet) but its business model is proving very competitive against a company that is public – Beyond Meat (ticker BYND). A major difference between the two is the use of genetically modified ingredients over at Impossible. Beyond Meat eschews such behavior, and is GMO-free. However, taste tests almost consistently reveal that Impossible burgers taste more like meat due to a genetically modified yeast molecule. Scientists working at Impossible tell us that GMO is the wave of the future, and that we cannot reasonably feed the new few billions of people that will be born in the coming years without completely wrecking our environment through the misuse of land.

We have a few clients who are opposed to investing in companies that promote GMO in any way. But what if, when Impossible Foods comes public finally, it becomes apparent that the market much prefers that company’s products to those of Beyond Meat? Then we are looking at an eroding value for BYND and an increasing value for the sinner, Impossible. This is an example of the complexity that investors will navigate while pursuing their individual versions of ESG: is GMO an acceptable tradeoff when considering the “E” portion of ESG?

In fact, this tradeoff is a reminder of a complaint that has surfaced more consistently among ESG practitioners, and that is: there are no standards that define ESG. The concept is up for interpretation. In a clear violation of what I, at least, believe to be a reasonable ESG claim, I read a missive from a mining company claiming that since its product aids the production of electric vehicles, its stock therefore scores well on ESG criteria. However you want to look at it, mining is environmentally destructive, no matter what the product is. We can claim to like lithium better than coal, but the extraction of either one is bad for the environment.

Next up in our series we will explore this last topic further: what companies want you to believe about their ESG credentials, versus what is actually true.

And Now, Let’s Hear from the Bond Market

Last week’s market action was dominated by a sharp increase in interest rates, particularly in the five year, ten year, and thirty year Treasury maturities. Underlying the action was an unusual circumstance in the short term money markets – the difference between the yield on the two year Treasury and a key bank rate shrank to as low as it has been since the depths of the pandemic panic last spring. This time the declining spread is driven by a distaste for the massive amount of debt that the US is pumping out -not a disruption in liquidity. In other words, because the markets need to absorb huge Treasury issuance as we cover costs for the pandemic and other needs, traders are saying ‘no way’ to all that debt. Instead, for the time being, they are parking assets in cash and short term bonds. In an ominous sign, the Treasury auctions last week did not go well, with tepid demand at best.

Too, the Fed has been planning to jettison cash off its balance sheet – an event that could cause short term rates in the US to go negative, particularly given the preference for investors to stay short right now. All that demand stands to drive yields down even more.

This is the first time since 2008 that we’ve felt that rates might continue rising for a time. Huge budget deficits might be coming home to roost, causing investors to demand more yield to finance our government. What remains to be seen is whether this trend has staying power. In the past, higher rates have caused the economy to slow, which then reins in activity and puts the brakes on the rising trend. This time, though, we intend to pump a lot of money into the economy, which could swamp the effect of higher rates for a while.

In the meantime, investors with income appetites should pay attention. We might have an opportunity to lock in higher yields shortly.


What to Do about Robo Phone Calls

Spam calls are epidemic these days. Not even being on a ‘do not call’ list helps any longer. So what are some of the common scams and what can you do about them?

Common spam calls include:

  1. You are entitled to a two week vacation with Marriott, in return for being a loyal customer
  2. Due to the pandemic, your credit card company is reducing your interest rate to 0%
  3. You forgot to extend your extended car warranty, but we can take care of that for you

How do you know you’re getting a spam call? Here are some tips:

  1. They start with a recording that then promises to hook you up with a ‘representative’
  2. The person you speak to has a heavy accent and is obviously in a room with a lot of other callers
  3. They claim to be with some vague company like ‘credit division of Visa/Mastercard’ and when you ask exactly what company they are with, they can’t answer
  4. If you ask for a website, you will find that they do have a website! So be wary of that one
  5. You ask to call back and they claim to have no phone number
  6. They impose urgency on the action they want you to take
  7. The call may be from your area code, but your phone will not identify the “business” on the other end

What to do about these annoying calls? Unfortunately, nothing will stop them as yet, which is a bit amazing to me. We can fly to the moon at will but we can’t stop this? First on the list should be a letter to your Congressional representative and your phone company complaining about the situation. Making yourself heard can’t hurt. This is something the phone companies could fix; they choose not to because it’s expensive.

After you mail your letters, you can employ several other tactics:

  1. You can use one of several apps to filter spam. I use HiYa which at least filters out some callers, but certainly not all
  2. Use your phone’s call blocking feature. This isn’t of much use since spammers typically change numbers constantly
  3. Restrict your phone so it will accept calls only from your contact list. However that’s going to prevent you from getting a call from the delivery guy who is trying to figure out which driveway is yours
  4. If you are with Verizon, here is some help:
  5. If you are with AT&T, use Call Protect. Information is here:

Then there are the non traditional ways of dealing with scammers. Remembering that none of these tactics will stop robocallers, perhaps you should have some fun. In one recent “two week vacation” call, I kept my robocaller on the line for a good 20 minutes while I was on my exercise walk. I claimed to dislike islands, then I didn’t like the sun at all, then I wasn’t sure I could be gone for two weeks, then I couldn’t remember what my location choices were, then I needed a two bedroom unit because my husband snores, then I wasn’t sure what he said about airfare again? then I asked if this was a timeshare, then I asked if I could take the vacation next year instead, then I asked him to repeat the terms again, and finally I asked him to send all the information through the mail because it was my husband who actually would make this decision. Of course that was a “no go”, and I hung up laughing.

Another fun tactic is to play deaf. “Ma’am, Marriott would like to offer you your choice of locations for a two week vacation!” “This is a great nation? Yes indeedy it is! Thank you, yes!” “No, ma’am, a two week VACATION!” “Oh so sorry I don’t hear so well, did you want to talk to me about the Haitians?” “NO! VACATION, VACATION!” “Oh yes, I had a nice vacation, thank you for asking! Now what is it you wanted?” Click.