May 2023 Market Update

EVERYTHING IS FINE, THEY SAID . . . . 

I listen to newscasters and government officials reassure the public that everything is fine. Then I look at the data and circumstances we find ourselves in, and it seems to look a bit like this beautiful oil painting of a stormy shipwreck. I wonder about Warren Buffet’s famous statement, “When the tide goes out, we will see who is wearing a bathing suit.”

A Little History: 

When the Federal Open Market Committee (FOMC) raised rates to 19% in 1981 to combat inflation, the big difference between now and then was that rates were at 11%, which means that the FOMC did not even double rates. The current FOMC did not double, triple, or even quadruple rates. 

They have raised rates nineteen times what they were when they started. It is difficult to describe how much difference in force. It is like standing in the surf of Lake Michigan versus the surf of the roughest part of the North Shore of Oahu, Hawaii.

While it is easy for the press to play armchair quarterback and blame bank management for their failure, one might more easily point the blame finger directly at the FOMC. Regional banks do not have the resources or ability to diversify risk that the large banks have, and in some cases, they were forced to watch in horror as the tsunami washed over them and then fight to survive as best they could. At the same time, others with more diversification could pull profits from other areas and capitalize on the flight of capital from the regional banks along with a bit of federal support to do quite well. While the banking indices are down substantially, several bank stocks are trading down very little, or in the case of JPM, trading higher than before the first regionals collapsed. Once again, we can see the potential downfall of blindly following an index.  

Are we finally done with the banking issues? I doubt it. Early in 2022 and during 2021, subprime auto loans were all the rage, ultra-low mortgage rates were being issued right and left, and floating-rate second mortgages financed all sorts of spending, now looking expensive. Meanwhile, wages have not kept up with inflation, and we have yet to begin to see the impact of the announced layoffs from early this year.  

As I mentioned, 1981 was not nearly the shock wave we have experienced. However, we can, I believe, look to that time and extrapolate what could happen next in this cycle. If history is any guide, we will see an unemployment spike, a recession, and sharp declines in Gross Domestic Product (GDP) followed by significant periods of recovery and prosperity.  

While the shock was much more severe this time from the FOMC, we now have more advanced tools and technology than in the early 80s. Advancements in Robotics and Artificial Intelligence (AI) may help us recover faster by using 3D printing for manufacturing and increasing productivity much faster, offsetting the increased rate shock. The counterargument may be that these same tools will eliminate more jobs. Still, history provides some guidance there, and we look back to automated manufacturing, which eventually led to more, albeit different, positions.  

Meanwhile, the geopolitical environment we currently live in is inducing a productivity and innovation race in which the entire outcome is difficult to predict. 

The fear is that there could be severe unintended consequences of innovation happening too fast to comprehend fully. Recently the AI and robotics division of GOOG found that their AI had taught itself something that it was not instructed to teach itself, and yet, no one can explain why. 

Adults understand electricity, its uses, and the consequences of misuse. My grandson does not, but he does like to experiment, so the adults must be vigilant. In the innovation space, particularly in AI, are adults the toddlers with no adult to supervise? Yet, what could be the consequences of slowing AI down while others plow full speed ahead? These questions are too big for me.  

Once again, I find myself at the end of this note finding ways to position yourself to profit potential.  

The number one investment mistake I have seen repeated for 30 years is timing the overall market, selling at the wrong time based on fear, or simply not investing as the market declines out of fear and then missing the later upside gains. The abandonment of carefully laid out plans is due to the fear of loss or missing out (FOMO). 

The second most common mistake I continue to see (and this one can take longer to realize.) is that of following the crowd. Blindly buying and indexing because it is what everyone else is doing or because it is simpler has been the trend for many years. Buying the hottest thing on the news channel last night or this morning because it sounds exciting and new, and the newscasters make it seem like everyone else is piling in, and the prophecy self-fulfills.   

This note is not investment guidance for you; it is simply information and opinion. The best you can do is read these words and find someone who thinks and researches these things daily and has done so for many years to help you use the raw material you call money to build what you define as your best life.  

Define your outcome and allow a skillful artisan to help you create it.

Please remember that this note is our opinion from a broad perspective based on over three decades of money management experience and is not personal investment advice.

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Talk soon,

John

Phone: (561-) 327-4646

Email: JBROWNING@ADVOCACYINVESTING.COM

John Browning, MBA, and CSA®

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