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18 Aug 2025

An Off-Broadway Guide to AI

By glen

The explosion of artificial intelligence or AI over the last several years has been extraordinary, and the reality versus the expectation has ranged from jaw dropping wonder to cynical disappointment.  The reality is that AI is with us to stay and will profoundly shape our future in ways you might not have considered.

In this note, I’d like to encourage you to begin using AI if you haven’t already started.  We will consider some of the long term implications for society, because things will change fast in the coming years.  And, of course, we will touch on investing in AI, so a bot doesn’t run off with your money!

Give it a Shot!

If you use the internet, chances are you’re already using AI on a regular basis, whether you realize it or not, since it now underpins even basic searches.  If you haven’t already, I encourage you to try a free popular model such as Claude, ChatGPT, Gemini, or Perplexity.

One fun experiment might be around recipes, ask an AI for a recipe that uses certain ingredients, reflects a certain cuisine or both.  Don’t be afraid to be bold or silly, you won’t break it.  Another fun use is for travel planning, tell it where you might want to go, and ask for itineraries, places of interest, places to stay, where to eat, flights, etc.  Engage in a dialogue about a subject that interests you.  Don’t expect perfection.

Simply engaging with the technology will help you understand how it behaves or “thinks,” how it might be useful, and how it might be limited.  For those of you who are old enough to remember, this is a lot like when the internet started becoming popular.  You might remember the reluctant adopter finally giving into the hype and becoming a heavy user.  It’s at that point that AI technology might seem less mysterious and “scary.”

How big will this get?

To give you a sense of scale, a recent article in The Economist notes Meta’s plans to build an AI data center the size of Manhattan that consumes the same amount of electricity as New Zealand.  The same article notes that Open AI, the creators of ChatGPT, plan to spend $500 billion in the U.S. just to keep up with demand.  Other players in this space are launching similar plans, and this is already happening globally.

To give you a sense of what’s already possible the same article notes: “Earlier this month the Forecasting Research Institute (FRI), another research group, asked both professional forecasters and biologists to estimate when an AI system may be able to match the performance of a top team of human virologists. The median biologist thought it would take until 2030; the median forecaster was more pessimistic, settling on 2034. But when the study’s authors ran the test on OpenAI’s 03 model, they found it was already performing at that level.”

It’s getting so big that promising young programmers are accepting that AI might wipe them out professionally.  Even the most basic models will write computer code for you in whatever popular programming language you select, such as Python.  If you want to get into the “app” business there are companies claiming an ability to take your plain English idea, create the code, and ultimately an app you can launch in an app store, all done by AI.  What if we ran the AI software on a robot?

The military has been using AI and robots for decades in the way of drones and things we probably don’t have the clearance to know about.  We already see AI in the self-driving taxis offered in some cities by companies such as Waymo.  Some restaurants are using robots to prepare and deliver food, and robots are being used in place of traditional security guards for office space.  Humanoid robots are also becoming widely available.

Unitree, a Chinese company, offers impressive humanoid robots.  They already have back orders on these machines.  Amazon has been rapidly expanding its use of robots in warehouses.  Because computers are relatively seamless these days thanks to wireless technology, the integration of AI and very capable robots is not hard to imagine.

Trying not to scare Boomers, but robots are already taking off in elder care in Japan with impressive results.  Japan has been suffering from a shrinking workforce, and the robots are able to fill some of these gaps.

It’s not hard to imagine home humanoid robots running cutting edge AI and doing everything from yard care to cooking and cleaning.  Imagine shopping at the grocery store next to someone else’s robot out running errands.  Yes, we’re on the verge of science fiction becoming reality.

How Can I Invest?

Chances are you’ve already been investing heavily in AI for years.  The largest technology firms have been part of the AI revolution from the start.  If you have an investment account that holds something like the S&P 500, you probably already own names like: Nvidia, Microsoft, Google (Alphabet), Amazon, Meta, and Apple within that portfolio.  The performance of these stocks has been a major driver of recent stock market gains.

If you are looking for smaller firms that will be the next big Google, good luck, it’s a very challenging undertaking for several reasons, such as private equity, acquisitions, and a crowded field.

Small firms typically seek venture capital funding in early stages.  We live in a world where private equity firms may step in prior to or in lieu of a public offering. Large firms, such as Apple, may acquire valuable, small AI firms directly from founders or from venture capital and private equity firms, bypassing public markets.

AI firms that do go public may have astronomical valuations compared to what they may actually be worth because the venture capital and private equity firms are attempting to cash in on their investments with the public providing the cash.  It could also mean a firm was not interesting enough to attract venture capital or private equity, and the founders decided to go it alone.  The reality is that if you slap the letters “AI” on anything right now it’s going to seem sexy to someone.

This is not to say that there are not great opportunities out there in the public markets, but the takeaway is that you must be extremely careful with what you decide to buy.  Buying shares in small, stand-alone AI firms is an exercise in speculation, not investing, and it’s important to always be clear about where you’re investing and where you’re speculating.  With speculation, you should always be prepared for a total loss.

If you are a long term investor holding a portfolio or large, diverse, high quality stocks, there is no need to engage in Fear of Missing Out (FOMO).  You’ve already been investing in AI since the beginning.  As this technology evolves and changes, new companies will rise and become part of these blue chip indexes.

It’s important to accept that not only will things be changing rapidly in the coming years, but that acceleration will accelerate too.  There will be bumps and painful lessons as we learn to live with this powerful new technology, but hopefully it will be tremendously beneficial in the long run.

If you haven’t tried AI, it might be time to dip your toe in the pool.  It will make it less mysterious, and you might even have some fun in the process.

 

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

11 Mar 2025

Market Turbulence and Recession Fears: What You Need to Know

By glen

As stock indexes plummet from record highs, many investors are left wondering what’s next.  US stock indexes have been dropping over the last several weeks, causing investors much pain and consternation.  Suddenly, a possible recession is making headlines too.  Are these related?

Stock Market Decline

The stock market became way overpriced last year.  You can look at how “cheap” or “expensive” stocks are by considering what companies have earned or expect to earn.  This is commonly measured by comparing stock price to profit, which answers the question:  how much profit am I buying for each dollar of stock price?  Looking at the popular S&P 500 at the beginning of February, $22 bought you $1 of earnings.  The ten year average is $18 for $1 of earnings.  Through this lens, stocks were very expensive.

The stock market can gyrate between cheap and expensive regardless of what the overall economy might look like.  It’s normal for stock prices to “correct” after becoming too expensive, and that can happen even when the underlying economy is healthy.

The last several weeks have brought an unfortunate run of bad economic news.  At the beginning of February, the only thing holding up stock prices were “thoughts and prayers” because $22 is simply too much to pay for $1 of profit.  On February 28th a giant crack showed up in the economy, and suddenly the temperature had dropped, the wind picked up, and storm clouds were forming.

Economic Concerns Emerge

How much the US economy grows is measured by this thing called the Gross Domestic Product or GDP.  This measure has nothing to do with stock prices and looks at how much the US economy makes: factories, restaurants, construction, real estate, defense spending, the whole shebang.  The Atlanta Federal Reserve publishes a popular, and typically accurate, model of what the GDP number for the current quarter might be, since we don’t know the actual number until the quarter has long ended.

On February 28th the Atlanta Fed’s GDPNow model unexpectedly swung from a very healthy 2.5% to a negative number.  The fact that it fell off a cliff overnight was staggering and unusual.  The model is currently predicting first quarter GDP will be -2.4%.  This is one of the primary reasons we’re suddenly discussing a recession.

A recession is usually considered two consecutive quarters (six months) of a negative GDP number.  According to the GDPNow model we may already be at the beginning of a recession, and before February 28th this wasn’t on anyone’s radar.  Sometimes the model can be off, some data may not be accurate, there can be noise; however, as new data has been coming in, the model has stayed negative.

This creates a bigger problem for the stock market.  We discussed the value of stocks in terms of what companies are expected to earn.  With the economy suddenly shrinking unexpectedly it’s harder to know what companies might earn this year, which means it’s hard to know if stocks are cheap or expensive.  It will take some time for things to settle down and profit estimates to reflect changes in the economy.

What happened?  Let’s look at some other economic signs.  Inflation was almost back to normal; however, in January some readings stopped dropping and began to tick upward, and some measures of job growth began to slow unexpectedly.

The overall health of the US economy is rooted in inflation and employment staying in healthy territory, both of these appearing to slip at the same time is not a good sign, and the model quickly picked up on these changes.  That was all the stock market needed to “correct” or return prices to a more historically reasonable level.

Policy Uncertainty

While stocks were overpriced, the problems with the economy are rooted in tariffs, threatened and real, introduced by the new administration in Washington, D.C.  It’s important to note that businesses and financial markets (and many humans) hate uncertainty, and tariffs, threatened or real, created a tremendous amount of uncertainty.

It would have been foolish for businesses not to respond to real threats, and these responses caused a chain reaction as US and global companies positioned themselves for a tariff war.

If you owned shares in XYZ Corporation, and XYZ saw the tariffs coming to eat their business model, and management, knowing this, did nothing, you would call for management to be fired.  It’s not hard to see how this spreads.

In today’s world, tariffs are only useful in very specific situations, for example, when a country needs to protect a niche industry. It makes no sense to use tariffs on a large scale when you’re already the biggest and most powerful economy on the planet.

The other issue facing the economy are the large scale terminations of Federal workers.  It appears that little thought has gone into these initiatives, and we’re already seeing unintended consequences as civil servants are terminated.  These efforts will increase unemployment and create further drag as vendors and companies that supported these workers are impacted.  Consider the simple example of a “mom & pop” lunch counter near a shuttered office: now “mom & pop” are out of a job, their employees are out of a job, and they are no longer purchasing the goods and services used to keep their lunch counter going.

What This Means for Investors

The only silver lining for investors at the moment are bonds.  Bond prices have risen as investors seek safety, and bond holdings in portfolios have enjoyed a small boost.  If the Federal Reserve is forced to cut interest rates in the coming months, it will give bond prices another small boost.  In the meantime, investors can enjoy the continuation of elevated yields, which are the result of post pandemic inflation control measures.

It’s still possible for the US to avoid a recession.  The economy could find some lift, leaders could proactively take steps to stop making harmful policy changes, or some combination of factors, but at this point the damage has been done to people who own stocks, and that damage could worsen before we turn the corner.

If your portfolio has taken a beating, you are in good company; however, if you were unclear about how your portfolio is constructed, how it aligns with your goals, or if the answers you’re getting from your financial advisor don’t align with reality, this is a great opportunity to do some housekeeping and realign for the long run.

We’re here to help.

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

29 Aug 2024

Interest Rates Are Coming Down: The Good & The Bad (not too ugly)

By glen

Interest rates have been elevated for over two years now.  This is the result of the Federal Reserve fighting the post pandemic inflationary fire.  Higher rates are the primary way to lower inflation, and this is a time tested remedy, rewarding savers, while punishing borrowers and some investors.

Let’s look at where we are now, where we’re headed, and the anticipated impact of the coming changes.

Where We Are

Higher rates have rewarded cash savers for the first time in a generation. With money market rates exceeding 5%, it’s been a nice return for zero risk.  CD yields have been juicy too.  It’s a boon for those who can’t stomach investment risk, and very nice for those of us who hold some cash in a diversified portfolio.  For others it has been a painful struggle.

Bonds are important to all but the most aggressive investors and bond prices tanked as rates were pushed up.  A bond’s price moves inversely to yield (interest rate).  Yields going up means prices going down, and that’s painful when bonds are supposed to offer safety.

Home prices spiked as the pandemic peaked, and the value of everything went up all at once due to the flood of cash that led to the inflation spike.  This was followed by a painful increase in mortgage rates.  These are the highest mortgage rates in a generation, keeping many people out of the home market.  People with super low mortgages had no incentive to move, and trade up or downsize, which translated to a lack of sellers and homes families and aspiring families could afford.

Lending markets of all types have struggled making it harder for the economy to grow, while higher rates have tamed an economy that was on fire with inflation.  The list goes on regarding the pain of higher rates.  Auto loans have been a burden for many families, and small businesses have struggled with financing because they tend to borrow for shorter terms at rates that are higher even when rates are “normal”.

Where We’re Going

Inflation by all measures is trending back toward pre-pandemic norms, which is around 2.5%.  The job market is finally showing some signs of slowing.  This combination frees the Fed to begin cutting rates, and they’ve made it pretty clear this will begin at their September 18th meeting.

The market anticipates three to four rate cuts, totaling 0.75% to 1%, by the end of 2024, with a potential 2% drop over the next year. However, economic conditions can change rapidly.

The prices of longer term bonds have already begun to rise in anticipation, with people who sell bonds for a living waxing philosophically about the once in a generation opportunity in bonds.  In my humble view, this is just getting back the once in a generation loss we experienced as rates spiked.  Either way, bond prices rebounding is great news, getting us back to a new normal.

Mortgage rates will drop significantly as well.  They are already down more than 1% from highs in many markets.  That trend will continue, and hopefully, the residential real estate market will rapidly thaw as we head into spring.

Car loans will drop, allowing families to make better transportation decisions, and keeping auto workers employed and spending those paychecks further bolstering the economy.

Risk averse savers will have to say goodbye to juicy money market and CD rates.

Wrapping It Up

In many ways, this marks the end of pandemic era financial turbulence.  The ride down in rates will be refreshing for all but the ultra-conservative saver.

The trick for the Federal Reserve will be getting rates down fast enough to prevent a recession, which markets call a soft landing.  While bond prices may move quickly in economics there is a strong belief that it takes six months or more for any rate change to fully play out in the economy.  A September rate cut of ¼% will not be felt in American homes and businesses until March.  If a recession should happen next year, the consensus is that it will be short and shallow, with the headlines being worse than the reality for most.

If you have been enjoying the high money market and CD rates, we’re here to help you build a portfolio that meets a conservative risk tolerance for the long run.

 

 

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

02 Jun 2022

The Hangover: Too Much Money

By glen

The Big Cash Party

As the worst of pandemic fears fade into memory it’s easy to forget the panic of 2020.

A “shutdown” had never been attempted, and amid the fear, uncertainty, and market panic, the Federal Reserve did the only thing it could do to help: print money.

It printed $4 trillion.  While this didn’t involve literally running the printing press, it created that much cash out of thin air.  What they really did was buy bonds on a massive scale.  When the Fed buys a bond from a bank it gives the bank cash for the bond, and that cash is freshly minted on the spot.

The flood of cash was helpful during the worse of the pandemic, it kept the markets lubricated and functioning relatively normally.  The fresh, new cash was the spiked punch in the punchbowl.  Cash in hand, investors bought everything they could.

Bond prices ran up, pushing interest rates down.  Stocks moved to record highs on valuations that made little sense.  We saw crypto currencies move into the spotlight and surge.  We saw home prices take off on cheap mortgages.  We saw new inventions like NFTs spike.  Why were people paying steep prices for things like the exclusive right to an NBA slam dunk video?  The list keeps going.

People were flush with cash, stuck at home, and drinking the Fed’s spiked punch.  To prevent a panic the Fed kept the punch flowing for too long, which they’ve now admitted.

The punch bowl was allowed to run dry in March when the Fed stopped buying bonds, and began increasing interest rates.  The hangover begins.

The Hangover

When lots of new cash is printed, under normal circumstances, the result is a spike in inflation.  Because of the complexities of the pandemic world it took a long time for the inflationary fire to get started.

The Fed was caught off guard, and did the only other thing the Fed can do, destroy money.  It began raising interest rates, told the markets it will keep raising interest rates, and announced a plan to start destroying some of the newly printed cash.

The bottom line: with cash leaving the economy en masse, the tide is going out.  This hangover has two painful symptoms: the inflationary fire caused by the high proof punch, and the Fed’s action of taking away the punchbowl by pulling out that cheap, new money, which puts downward pressure on almost all financial assets and growth.

The economy survived the pandemic, but now we’re in a painful place.  We see costs rising in real time, and our investment portfolios have taken a bruising.

Let’s look at stocks and bonds.

Bonds

Inflation is kryptonite to bonds.  As prices rise the purchasing power of bonds is eroded.  Prices and yields have a seesaw relationship.  When yields go up, prices go down.  Since bonds are expected to compensate for inflation, as inflation has increased, bond yields have increased to keep up, pushing prices down.

This is being exacerbated by a Fed that: stopped buying bonds (printing cash), began increasing the Fed Funds rate, which pushes all rates up, and burning money by letting bonds it owns mature without reinvesting the cash.

We haven’t seen this since the 1980’s, but it’s the same playbook.  The only way to put out an inflationary fire is to make money more expensive.  In the world of bonds what’s happened so far this year is as rare as it is painful.

The good news, the worst may be over for bonds.  The bond market is looking over the horizon, and sees a slowdown coming.  The bond market sees a Fed that could be forced to begin cutting rates in less than a year to combat a recession it helped create.  You read that right.

Stocks

If the bond market was the somewhat reserved partier through all of this, the stock market was like the cast of Animal House.  Stocks spent most of last year exceeding any reasonable valuations, and chanting drinking songs as if the speed of the pandemic recovery would be the speed of growth forever.  It was bizarre.

In January an inebriated stock market looked around and saw the bond crowd piling into Ubers, and realized the party was over.

Stock prices now only look fair in terms of bloated estimates that still haven’t come down.  The hangover could worsen here as prices begin to reflect an economy that is slowing down.

Despite the pain, with a long term perspective, stocks have a better shot at fighting inflation.  As inflation rises, companies charge more for goods and services, which allows earnings to keep up with inflation.  While earnings may drop with an economic slowdown, price increases offset the bite of inflation in the long run.

Wrapping It Up

The hangover has been painful, and the pain is likely to continue, possibly to the point of a recession within the next twelve months.

The Fed did what it had to during the depths of the pandemic to keep the economy from unraveling.  Printing, or destroying money, is always a blunt force that lacks precision.  The system doesn’t turn on a dime, and The Fed waited too long to take the foot off the gas.

Bonds may have turned the corner in that they are now rising as stocks drop, which is the typical relationship as investors seek the shelter of bonds amid uncertainty.  Inflation is close to a peak, and should begin a long road back to “normal.”  Stocks are getting close to reasonable values, but remain rocky.

The good news: we still have a functioning economy, something that shouldn’t be taken for granted.  The bad news: it’s been a wicked hangover that’s probably far from over.

Hopefully, this is the beginning of the final chapter of the pandemic’s impact on the economy.  It was quite a “party.”

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

16 Feb 2022

Removing Life Support: Post Pandemic Challenges

By glen

 

When the pandemic began, the world’s largest economy was put into what can be thought of as a medically induced coma. The Federal Reserve and Congress took steps to ensure the patient would survive a trip to intensive care like no other. The world’s largest economy had never been put to sleep intentionally, and then revived.

Congress passed legislation to support employers, and employees, with things like paycheck protection, PPP loans, direct payments, and supplements to state unemployment benefits.

The Federal Reserve or “Fed” did what it knows how to do. It lowered interest rates, and printed a ton of money. The Fed essentially printed over four trillion dollars, that’s $4,000,000,000,000, for those who like to look at numbers. This flooded the US and global economies with cash.

These actions worked better than many expected. During 2021, the economy rebounded, and is now on a trajectory to pre-pandemic levels. Strong medicines can have strong side effects, and the most fearsome side effect of printing money is inflation.

The Fed had expected the inflation surge to pass quickly; however, supply chain issues caused inflation to become intrenched.

Wage increases became common, and are usually seen as a good thing. Who doesn’t like to make more money? However, as prices rise, wage increases are struggling to keep up. This begins what’s often called a “wage price spiral,” and it’s not a healthy pattern.

Most economists agree that it’s time to wake up the patient, and move out of intensive care. This analogy is important because if you’ve ever known someone who was in intensive care, the journey back to health is long and challenging. The economy became hooked on cheap money, and because of the inflation flare up, the Fed will have to move much faster than expected.

Next month, the Fed will stop buying bonds, which was a way of printing money, and is expected to begin increasing the fed funds rate. The fed funds rate is the overnight rate banks charge each other. It’s like the mother of all rates because it informs and influences everything from corporate bonds to car loans.

The market lives for expectations about what’s going to happen next. Last fall, the expectation was that the fed funds rate would increase 2 or 3 times this year. Each move is generally 0.25%. Inflation has become so wild that the expectation is now five to seven hikes this year.

For reasons I won’t bore you with, higher interest rates are generally the only way to tame inflation. For those of you old enough to remember, this was painfully, and successfully, demonstrated by Fed chair Paul Volcker in the 1980’s.

Now markets face a variety of challenges, which feed on one another. Just to give you a sense, here are a few of them:

• When interest rates go up, the price of bonds fall, hurting the “safer” side of portfolios
• When interest rates go up, stock prices tend to drop because it costs companies more to borrow, and new bonds at higher yields become tempting to investors when compared to stocks
• When interest rates go up, mortgage rates go up, making housing seem more expensive

The list goes on, but those examples really get to the point. It quickly becomes a sticky wicket for the Fed.

Rates will have to go up, and as you may have seen, this is already playing out in bond yields and mortgage rates. The Fed hasn’t actually done anything yet, but it’s ability to influence the markets is so strong that they move in anticipation. This also means the market agrees with the notion that the Fed has no choice other than to increase rates quickly, and begin vacuuming up the money it printed over the last two years.

The risk now: the Fed increases rates quickly to tame inflation, and ends up triggering a recession, or economic contraction. This has happened in the past, so it’s not a theoretical risk, it is very real.

Markets are constantly trying to look around corners, and into the future. While there is no expectation for a recession in 2022, there is now a real risk of one beginning next year.

What does all of this mean for our portfolios? While none of this is what investors want to hear, it’s not all bad news, and it’s a challenge all long term investors face from time to time.

Bond prices have dropped, but if you are: dollar cost averaging, reinvesting dividends, or both, you will be purchasing shares of bond funds at lower prices, and the new bonds in these funds will be issued at higher yields, which is good news for you long term. The other good news is that when a recession does come, and the Fed cuts rates, bond prices will rise, causing bonds to act as good ballast in what will be a storm.

Stocks have been overpriced for some time. While we don’t like to see stocks fall, we do like to see healthy valuations that make sense. Getting back to that point is better in the long run. And again, with dollar cost averaging, and dividend reinvestment you’ll end up purchasing stocks at lower prices, something long term investors love to do.

Those of us who plan to hold stocks for the rest of our lives, and will continue to buy along the way, don’t mind these ebbs and flows of the market. They present opportunities to buy what we love on the cheap, which is really ownership of the world’s largest economy.

If you have been speculating in stocks, day trading, buying what’s popular, and getting into the “meme stock” trend, it’s probably time to reconsider those positions and activities. The best way to invest in stocks for the long run is to purchase diverse, high quality portfolios, such as the S&P 500, with a plan to hold them for a long time.

These storms will come and go during our investing lives, they shouldn’t surprise us. While the pandemic economy was unusual, we’re seeing an economy and market returning to long-term norms in terms of growth, and it’s time for the Fed’s strong medicine to be withdrawn.

Even if there is a recession in the coming year or so, we should be prepared to weather that storm, and continue to grow our portfolios over the long run.

 

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities.

 

09 Jun 2021

Strange Times: Where Do We Go from Here?

By glen

 

We’re at a fascinating crossroads in the world of investing, and in many ways, a truly unique place.  While the adage: “this time it’s different,” always gets burned by the markets, this time, we’ve never been here before.

The best news: we’re almost near the end of the pandemic.  The good news: the economy is screaming thanks to unprecedented monetary (the Fed) and fiscal (Congress) stimulus.  The strange news: things are really out of whack in the markets, and this has quickly become visible in everyday life.

Lumber and building costs have skyrocketed, some things are still hard to find in the grocery store, and there are plenty of job openings, yet a high unemployment rate.  There are also strange things like “meme stocks,” and skyrocketing crypto currencies nobody had heard of until three months ago.  Let’s peel back the onion a bit.

So Much Money

Eight TRILLION dollars is a lot of money, and that’s a rough estimate of what has been dropped on the US economy by the Fed and Congress since the pandemic started.

The US government has sent checks to individuals, boosted unemployment, and supported almost all businesses in a variety of ways.  The Fed has been printing money to the tune of an additional $120 BILLION every month.

While the pandemic raged, the nation attempted to keep everyone and everything flush with cash to minimize economic fallout, but this process set up some strange dynamics.

Inflation

As the economy recovers from the pandemic, shut downs, and lock downs, money is once again flooding into goods and services as life returns to a new normal, and pent-up spending plays out.  The economy is whipsawing from the tremendous drop in output we saw last year to something approaching pre-pandemic right now.  That wave has a tremendous amount of momentum.  Economists were aware this was happening, yet inflation still came in four times higher than predicted last month, raising many eyebrows.

We’re now seeing prices increase in everyday life, coupled with businesses raising wages and offering incentives to attract workers, which also stokes inflation.  What do the financial markets say about this?

The Bond Market

The bond market tends to be intelligent, the smartest money in the room.  The Fed’s message to the bond market has been: this wave of inflation is just a wave, and with the economy getting back to normal, inflation will return to long term averages soon.  The bond market has priced this in as the absolute truth, because it is the absolute truth.

If inflation gets out of hand, the Fed will increase rates quickly, and force inflation back to long term averages.  If you’re old enough to remember double digit mortgage rates from the 1980’s, you’ve seen the Fed do this in real time.

The risk: the Fed doesn’t react quickly enough, is forced to increase rates faster than anticipated, and chokes off the current expansion, possibly creating a recession.

The Stock Market

The stock market is “all in.”

In the world of “blue chip” stocks (think S&P 500 and Dow Jones Industrial Average), the market is behaving as if rates will stay low forever, and the current expansion will never end.  It’s overpriced by most historic measures, and more money is ending up here because it has no other place to go with bond yields so low.

Then we get to strange places like “meme stocks.”  The current example is AMC.  The price of AMC increased by around 400% in one month when nothing really changed in the business of movie theatres.  In the normal investing world this would have meant that AMC figured out some new technology, created a monopoly, or found tons of gold buried under a theatre.  We’ve seen examples of this blind speculation recently with GameStop and others.

We’re at one of those places that feels like the dot com bubble where everyone seems to be trading stocks online, and making a killing because everyone else is buying like mad too.  Remember companies like: Ask Jeeves, eXcite, and Geocities?

Other Strange Things

The crypto currency space is frightening, and this won’t end well.  It’s difficult enough to justify Bitcoin, but these other crypto currencies, spiking almost randomly, make very little sense.  Much like the AMC example, people are dumping their freshly printed money into crypto currencies. What is the long term purpose of these strange coins?  They pay no interest, offer no dividend, and have no real utility.

The list of strange things goes on with things like tokenized art (non-fungible tokens or NFT’s), and SPAC’s, which are “blank check” companies, I give you money, and then you tell me what I bought.

Wrapping It Up

We’ve never been here, but some of these things look oddly familiar, and it’s strange to have them in the same room at the same time.  Inflation may or may not take us back to the 80’s.  Stocks may or may not take us back to the dot com bubble of the 90’s.  Strange things may or may not take us back to Beanie Babies, and Cabbage Patch Kids.

But, we’ve never been in a place where humanity is coming out of a gut wrenching pandemic with so much money to spend, and not enough places to put it.  This will surely end badly for some.

If you’re a regular reader of these blogs, you already know the punch line.  A balanced, diversified portfolio will weather whatever comes as this unprecedented wave in the financial markets passes, and serve you well in the post pandemic new normal on the horizon.

Not as exciting as a Dogecoin, but just as cute, and you’ll sleep well at night.  Please let us know if we can help, we’re here to help answer your questions.

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

18 Dec 2020

A Rocky Road to a Bright New Year

By glen

Despite the pain wrought by the virus, there is finally a light at the end of the tunnel.  The virus forced many of us in the investing world to become armchair epidemiologists since it’s nearly impossible to look at the economy without looking at the virus too.  

When I wrote about the pandemic in the spring, some of the models were showing numbers that seemed impossible, and by September those enormous numbers seemed even more impossible.  Unfortunately, we’re now living in a world where those painful numbers have become reality.  

The good news: we’re on a bright path forward thanks to effective vaccines being rolled out in real time.  A new normal finally seems within reach.     

We’re not looking at a setup for the greatest year the markets have ever seen.  As with the rest of our lives, we’re looking for a new normal, a post virus world that looks more like what we remember.  It will take at least two years for the economy to really move past the virus when you look at interest rates, unemployment, inflation, and volatility. 

Since the recession wasn’t driven by a financial meltdown, the monetary and fiscal stimulus measures were quite potent and effective.  But, these measures come with the price of having to be “unwound” over time.    

The stock market is currently overvalued by almost every measure, which was caused, in part, by irrational exuberance coupled with extremely low interest rates.  We’ll probably see a pull back, and that’s not all bad since we ultimately want assets priced rationally (there really is such a thing).  

As the virus is slowly brought under control, and our lives return to a new normal, there will be an increase in demand for products and services, which will be a source of economic strength.  This demand will push corporate earnings up, and at some point in 2021, stock prices and the underlying corporate earnings will meet closer to long term averages.  

A new normal will take longer in the world of interest rates.  The Fed promised that rates will remain low for years, and history tells us they will make good on that promise.  The downside: we could see real inflation for the first time in decades; however, it should be easy for the Fed to quickly tame any spikes above target.  

From a bond investor’s perspective, it’s important to keep in mind that if inflation goes up 1% and bond yields go up 1%, you’re in the same place, you’re not really enjoying a higher yield.  Inflation will be important to watch given the amount of money “printed” this year.  

After the tragedy of 9/11, things were never quite the same again.  There was a new normal, and with time, the trauma passed, receding into history and memory.  The post-pandemic world is likely to be similar, things will never quite be the same again, but with time we’ll reach a new normal, and this period will fade into memory. 

I wish you happy and boring holidays in the hopes that a subdued holiday season this year will give us many more in the future!  Please follow best practices around all things pandemic, such as avoiding large (or any) gatherings, wearing a mask when you’re out and about, and when the time comes, please get those shots.    

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request.