“Value Is A Lot Like Character”
By Julien B. Booth
I hope this note finds you and your families doing well.
In late January we wrote a note: https://www.brcwm.com/2022/01/26/protecting-capital-in-a-codependent-relationship/
|“Protecting Capital in a Codependent Relationship” – Wealth Management
“Protecting Capital in a Codependent Relationship” By Julien B. Booth January 26, 2022 The Federal Reserve became increasingly active after the dot.com crisis of 2000. Today they have pure celebrity status, speaking tours, and lucrative post-retirement jobs. The widening inequality gap, recent departures of three Federal Reserve Governors for insider trading, and unnecessary market volatility […]
We are known for being conservative in our approach. Rarely does the timing of a note and a market response sync up so well.
The Federal Reserve is embarking on a rate hike cycle (it will be short) in a slowing growth environment:
- Expiration of US Stimulus programs;
- Slowing US consumer/business sector growth;
- Inflation peaking in Q2 2022;
- Chinese stock market collapse; and
- WAR in Europe.
In time, these factors will perpetuate lower interest rates, not higher.
By raising short term rates the Federal Reserve is flattening the yield curve (see below caption) and drawing investor capital from highly speculative sectors, to those with higher quality.
This process is not without pain – many a reckless investor owns these “growth” sectors. See Gamestop, TSLA, FaceBook, Crypto, SPACs, et al.
It is breathtaking how quickly $100 Billion of market value can be wiped out!
I cannot help mention the irony that Robinhood (HOOD) is down 85% from its peak, and 71% from its IPO price.
I believe investment Value is much like Character – it is often obscured by the Fear of Missing Out (FOMO) cycle perpetuated by so many.
The individual companies we own: Berkshire, Visa, Duke Energy, Goldmoney and the closed end positions (quality bonds) have underlying durability – the durability of value, the durability of balance sheet quality, and the durability of operational consistency.
This historic hype cycle (https://www.multpl.com/shiller-pe) is ending – Value is returning and all will be well in due course.
|Shiller PE Ratio – multpl.com
Shiller PE ratio for the S&P 500. Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 — FAQ. Data courtesy of Robert Shiller from his book, Irrational Exuberance.
Thank you for your interest.
Julien B. Booth
Chief Investment Officer – Fixed Income & Real Assets
BRC Wealth Management