One of my biggest fears heading into 2021, as I wrote in My Gut Feeling For 2021 was economic stagflation. Furthermore, I was fearful of surging energy prices from 1) cancellation of the Keystone XL pipeline project and 2) an exogenous energy event such on one from Iran or a terrorist attack.
It appears that my worst fears are materializing. By extension, I now fear that we are fast returning to the Carter Years of the mid-1970s. I lived during those years and learned under the tutelage of several traders and money managers who had to navigate the low growth hyper inflationary markets of the Peanut Farmer’s Stagflation. It was not pleasant, and it was not easy, but I am confident that I can do it for our investors.
Then again I recall how scary it was to live in New York City in the 1970s – crime, drugs, hookers, filth – especially for a 13 year-old taking the subway round trip to Stuyvesant High School in Manhattan. That is coming back also, but I digress.
Let us start with energy prices. The shuttering of the Keystone XL pipeline sent crude oil surging, 22% alone in the 1st quarter. Of course, on a second order basis, gasoline prices rose dramatically as well. When my wife and I made our last westward drive in September 2019, we paid, on average, for Super grade gasoline, no more than $2.00/gallon. On the eastbound return trip last month, we paid close to, but not quite, $4.00/gallon. I filled up as much as possible in Texas and Oklahoma, the lowest cost states. Parenthetically, the increased cost of the one-way trip, about $200 does not rationalize paying significantly more for an electric vehicle. I am not alone in my thinking. By the way, in Texas we saw the windmill graveyard of the heaps of junked windmills from the winter freeze.
Last week, well after we returned east, a ransomware cyber-attack hit the Colonial Pipeline which supplies most of the gasoline from New York to Texas. This set-in motion a shortage of gasoline along the east coast and gasoline station lines reminiscent of the oil embargo in 1973. The cybersecurity risk aside, what was exposed in this episode was the lack of pipelines across this nation. Cancellation of new pipeline projects is part of the problem, not the solution. In a few months, the US went from energy independence to energy incompetence.
Now I turn to inflation. For years, inflation in this nation was at or below the critical 2% level which the Federal Reserve considers a natural rate of inflation. One risk to inflation is of course commodity prices. Another contributing factor is labor’s demand for wages. Finally, a big factor is fiscal stimulus which overwhelms supply with demand.
Yesterday we got whacked between the eyes with a 2×4 (did I mention that lumber prices are escalating at an incredible rate?) with a report of consumer price increases for the month of April at a rate of 4.2%; the most since 2008. Be aware that not included in the inflation figure are many costs such as those for food and energy. Include those and inflation would be significantly higher.
Now let us turn to labor. Last Friday’s the Bureau of Labor statistics reported an increase of 266,000 non-farm jobs with an unemployment rate of 6.1%. Analysts expected 1 million new jobs with a jobless rate of 5.8%. Hey, economists’ estimates are famously inaccurate, but not by 734,000 jobs. Adding insult to injury was a downward revision in March jobs from 916,000 to 770,000. What is occurring is that people are choosing not to go back to work because the Biden Government is offering $300/wk. in additional unemployment benefits through Labor Day. So, he is paying people not to return to work and watch Netflix (NFLX) at home. Some states are rejecting the additional play at home benefits. Guess which ones those are! The Biden Administration’s solution is for companies to pay people more money as an enticement to reject the additional unemployment benefits. This is a de facto method of forcing up the minimum wage without legislation (kinda smart if you ask me). Going back to the 1970s, one of the worst contributors to the hyper-inflationary times was labor wage push inflation. We are now getting that in spades, and it will eventually trickle its way into the consumer price index.
All told, we have the worst economic management by an administration since the Carter Years.
Of course, all that I just discussed is greatly affecting the growth sector of the market. While growth stocks took a rest in the first quarter, I am now convinced that it is necessary to restructure my approach to managing the LakeView growth portfolio for the foreseeable future. Hence, I began to shed many technology holdings, added non-tech growth opportunities, and threw in for good measure some hedges. There is more than one way to skin a growth cat and I plan on doing so. I do not want to be catching falling knives, I want to be throwing them. During a portfolio restructuring there tends to be some transitional dislocations (as was the case last year) but once the changes are (or were in the case of 2020) accomplished, performance will shine once again. Rallies in tech are now to be sold not bought.
Another cause of concern, recent IPOs in the tech sector are breaking down. This is not a good sign.
As for the dividend and value-oriented stocks, they have performed well and are better inoculated from the risks facing technology and growth stocks, so little if any adjustments are required in those portfolios.Some of those stocks in fact now qualify for inclusion in the Growth Portfolio.
The next shoe to drop will be the housing market. That market was one of the shining lights of the COVID Pandemic. Massive relocation of people from high tax to low tax states and exodus from big cities to suburbs drove housing prices higher (except from where they were fleeing from). Want to destroy the housing market – increase input costs like lumber and copper and jack up interest rates. The housing boom is over. That being said, expect the Federal Government to once again bail out people who overpaid for homes and over leveraged once again.
Good news from Las Vegas, MGM (MGM) properties will be operating at 100% capacity with no social distancing. Masks, at least for the meantime will still be required, but I expect that will end by the fall.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long MGM – although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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