I’ll Have The Cash Cow, Medium Rare
Thursday, June 30th, 2022
As the old saying goes, ‘‘Cash is King!’’, and these days those words are ringing true for the US
dollar. The greenback has been on a surge, strengthening against other major currencies
despite the gaping hole in our trade deficit (US imports exceed exports). The dollar has
benefitted from the ongoing war in Ukraine, as it is perceived as a safe haven, and further
outperformance can be attributed to our relatively high interest rates when compared with
the rest of the world (Japanese 10-year yields are 0.25%). Unfortunately, while it may feel
comforting to have some Benjamin Franklins tucked under the mattress for a rainy day;
with inflation running at 8.6% (year over year CPI reading for May), you aren’t doing
yourself any favors as each day that stack of bills feels a little bit smaller.
Consumers are feeling the pain at the pump and the grocery store, as fuel feeds into
everything from fertilizer to packaging, not to mention the 18-wheelers that ship everything
from farm to plate and your local Amazon warehouse. Retailers are also feeling the squeeze
as patrons have scaled back on pandemic athleisure wear purchases, leaving them with an
oversupply of useless inventory combined with margin compression from higher wages and
input costs. All of this on top of gyrating markets, and it’s enough to make you feel green!
The Fed, however, is not taking this inflation game sitting down and has taken an aggressive
stance combatting rising prices with multiple interest rate hikes. The Fed surprised some
with a 75 basis point (0.75%) bump at their June meeting. While these moves have resulted
in a ‘‘balanced’’ bear market (a period when both stocks and bonds fall in price), one should
benefit from slightly higher interest on bank accounts. That is, bank deposits with a true
FDIC regulated institution.
On the other end of the ‘‘currency’’ spectrum, cryptos have taken it on the chin. The beloved
Bitcoin has fallen 70% from its peak, trading around $18,000 at quarter end (leaving Elon
Musk a little thin on his Twitter purchase), and it’s cousin Ether has lost 77%. Overall, the
total token market has lost $2 Trillion of value since last November, cutting the size of the
market by more than 2/3rds. Even so-called stable coins like Terra, which were created to
maintain a constant value, have broken the buck or completely disappeared. A lot of digital
wallets have gone cold, and I don’t mean offline.
Crypto banks such as Celsius and other unregulated Defi lenders are finding themselves
overleveraged with loans backed by crypto collateral that is plummeting in price, resulting in
margin calls and George Bailey-esque runs on digital banks. If all this seems quite
confusing…not to worry. Just wait until the first bank in the ephemeral Meta world goes
insolvent, and they send out the Meta Feds to unwind the Meta mess. What was that other
saying? Oh yeah, always carry cash!
What 2021 hath giveth, 2022 hath taketh away. All major indices are in or have touched bear
market territory (-20%). Why you ask? Because markets hate uncertainty and that is what
we have a great deal of, currently. There is war, food shortages contributing to civil unrest in
parts of Africa and the Middle East (spurring talks of another Arab Spring), ongoing supply
chain issues, rampant inflation, upcoming mid-term elections and let’s not forget hurricane
season; all of which will be sure to cause continued volatility for some time. It is in times like
these that bad news can be good news, as sagging economic indicators may force us into a
recession sooner rather than later, meaning the Fed may have to pause or reverse course. The
yield curve has already inverted several times (a leading indicator of recession), bond spreads
have gapped out and consumer sentiment is at its lowest levels since the great financial crisis,
all signaling the inevitable.
Unemployment should also be on the rise as many tech companies, and the more recently
wounded crypto/defi firms, have all announced layoffs. In addition, participation rates are
still below pre-Covid levels due to the many people who have yet to return to the job market.
Rising rates are already starting to cool the housing market, and higher gas prices are
dampening demand as people return to their ‘‘work from home’’ ritual to save money.
The economy is slowing. The question is, will it be slow enough for a soft landing or will there
be rug burns? Already, the market is pricing in rate forecasts below the FOMC forward dot
plot, meaning they believe the Fed will have to reverse course and start lowering rates again
(the 10-year dipped back below 3.0%, signaling market sentiment). Furthermore, there are
signs that inflation is abating (the Bloomberg commodity index is down 18% since its June 9th
high), with copper, wheat, corn and even oil on the decline. While supply driven issues are
still in effect, these cannot be corrected by the Fed, but instead by long-term investment and
restructuring to take control over supply chains. In the short run, we will lose out on the
deflationary effects of globalization; however, long-term technology should counteract
inflation and increase productivity.
Our view is that a recession is most likely unavoidable; however, it does not spell disaster and
will most likely be short and shallow in nature. Generally, stock markets begin recovering
prior to the end of a recession, so a recession in itself isn’t necessarily an indicator of poor stock
market performance. Whatever does transpire, hard or soft, shallow or deep; over the longrun stocks do rise and bonds pay income. The key is staying rational while the markets are
acting irrational and committing to a long-term strategic allocation to successfully ride out
the ebbs and flows.
John P. Ulrich, CFP®
President Chief Investment Officer