2022 1st Quarterly Letter

Inflation: Getting Too Much of What We Need

I hope you and your family members are safe and healthy. Well, as per my previous quarter letter I mentioned that volatility is anticipated and has come back to the equity and bond markets this quarter. The type of volatility cannot be predicted and this past quarter investor reaction to the events I will review below appear to be an overreaction.

There were three major geopolitical events in the first quarter:

  1. Rapid Covid -19 Recovery-increased demand for energy resources which drove up prices.
  2. The Ukrainian/Russian War-reduced supply of oil and food further complicated shipping routes.
  3. Diplomatic Strain with China-slowed logistics in the South China Sea and created supplier uncertainty for companies.

Some economists have mentioned stagflation and/or recession.

A stagflation scenario like the 1970s is improbable. We maintain this view as the three key drivers of the 1970s stagflationary event do not currently exist:

  1. Significant U.S. Dollar (USD) depreciation
  2. Oil embargoes
  3. A lack of central bank inflation-fighting credibility which allowed inflation expectations to become unanchored.

Inflation is omnipresent these days. It dominates market conversation, headlines mainstream media, and is driving higher prices at the gas pump and the dinner table. In fact, according to Google Trends, searches related to the term "inflation" are at all-time highs, using data compiled over nearly twenty years. There are many positives, increased automation has boosted productivity, allowing companies and labor to be more efficient. These innovation-driven productivity gains have reduced costs and therefore prices for the end consumer. The combination of globalization and technological disruption has favored capital at the expense of labor in the means of production.

Demographics have also been a driver of disinflation. Populations around the globe are aging, people are living longer, and the growth rate in the labor force continues to fall. These demographic trends aid in keeping price gains low as workers save more for longer retirements (saving more for later results in consuming less now), and the older population must support themselves for an extended period beyond their income-generating years. These demographics have catalyzed a secular decline in the employment to population ratio as well as potential real GDP growth. The latter is highly correlated to inflation, and the former is highly correlated to the neutral rate. The combination of lower consumption and higher savings reduces price pressures. I have confidence that our central bankers, governments and markets have tools at their disposal to try to avoid this. Since the different tools have different time lags to affect the economy, the process will look more like a feedback loop, with different financial constituents interpreting each other’s actions and reacting in real time. This feedback loop is likely to lead to elevated volatility throughout 2022.

History Does Not Repeat, But It Does Rhyme.

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Elliot Weissmark, CFP®,
CPFA Senior Vice President, Investments

Any opinion are those of Elliot Weissmark, CFP @, CPFA and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise