The DOW ended the 3^rd quarter down 5.3%, down 25% YTD. The Nasdaq down 30%. The drop in the market is the result of the Federal Reserve’s decision to bring inflation in the US down from 8.6% to 2%.  The FED has a tough fight on its hands.  Inflation is the result of too much cash chasing too few goods.  The goal is to seek a balance between supply and demand but the tools available to the FED to fight inflation are directly aimed at crushing demand by raising interest rates and reducing liquidity.  Those tools do nothing to correct the problem with the supply side of the equation.

Demand in the US was fueled by pent up buying following the Covid lockdown, and lots of cash handed out by Washington, state and local governments to fund the buying spree.

The supply side problem began with the Biden administration decision the first day in office to stifle energy production in the US.  Fuel prices immediately went up.  The US economy runs on fossil fuel.  Whether it’s used for gasoline or in the production of almost everything, not enough of it is a problem.

Not enough houses but plenty of potential buyers and low mortgage rates led to inflated home prices.  The FED let mortgage rates go up and the demand went down.  But there is still a shortage of houses and the higher interest rates make it more difficult to build more, so prices remain high.

There are 10.1 million job openings in the US and about 300,000 missing workers.  Another supply side issue.  Rising interest rates don’t create more workers.  The FED’s intention is to force about 1 million current workers into unemployment.  That would decrease demand.  Employers for the most part are not going along with the FED’s plan, so the pain (higher rates) will continue until they do. The FED is expected to hike rates again by .75% in November and .50% in December.

The FED hopes to raise interest rates to a point higher than the inflation rate.  Comments that inflation has peaked are happy talk.  The primary driver of inflation is the war on fossil fuel.  The Biden administration was able to hold down gas prices for a time by depleting the US Strategic Petroleum Reserve.  That has reduced the emergency supply of oil in the reserve to record low levels.  But gas prices are now going back up.  OPEC announced it would cut oil production by 2 million barrels a day.  The White House called that a short-sighted decision.  But US production remains 2 million barrels below 2019 levels. 

Economies around the world came out of the pandemic at different times.  That meant the supply chains in place prior to COVID were not all up and running.  US supply chain issues remain in place and will potentially worsen after the mid-term elections.  US railroad workers and west coast longshoremen unions are likely to go out on strike. Globally, China continues to enforce its zero COVID policy which has locked 300 million people in their homes and shut down industrial production around that country.  Europe is moving into recession and is facing an upcoming winter without fuel supplies necessary to continue industrial production, heat homes and keep the lights on.  There is panic buying of firewood.

Rising interest rates in the US have pushed the dollar up to new highs against all other world currencies.  The higher dollar is creating inflation across the globe.  The current financial and energy crises will reduce the standard of living around the world

There is growing concern that the FED, which came to the fight with inflation 15-months late, will now overreact and force the US into a serious recession.  I see this as a high probability.

The FED printed approximately 9-trillion dollars to buy US government debt.  Quantitative easing.  The FED is now pulling about 90-billion dollars a month out of the credit market. Quantitative tightening.  The result will be credit defaults. 

Here is what I think will happen.  Inflation will continue to go up along with interest rates.  Credit issues will begin to spread around the world with some countries forced into financial collapse. 

Our Oak Springs portfolio contains no government bonds, no emerging market exposure and a diminished exposure to European stocks.

The portfolio will remain overweighted to energy, utilities, commodities, financials and cash.  We will continue to have a reduced exposure to technology.  Tech companies are negatively impacted by higher interest rates and a strong dollar.

There is a threat that the war between Russia and Ukraine will expand.  China is facing serious economic issues and may attempt to divert attention from those problems by moving on Taiwan. Both Russia and China are in serious economic decline.   

On average there are 17 days a year in which stock market gains determine a portfolio’s performance for that year.  So, we stay invested in the stock market.  This type of market pull back is what leads to opportunity for creation of generational wealth.

I enjoy spending time with each one of you and look forward to answering any questions you have.  Thank you for trusting me with your money.  My cell (865) 368-1917