By Justin Pawl, CFA, CAIA, CFP®
A belated Memorial Day “thank you” to all the servicemen and women, past and present, and their families for sacrificing so much for the freedoms we often take for granted. Although imperfect, America would not be the greatest country in the world in the absence of the strength of our military. And our military would not command global respect without the heroic dedication of our brave men and women. Thank you.
Coming off a long weekend, this week’s “Huddle” is a little different. It still covers important economic data from last week. But to mark the beginning of summer and the end of, what I hope will be, the most challenging school year that children and teachers ever face, I want to share a letter. Charlie Smith wrote this letter to his graduating 10th-grade students, and it struck a chord with me.
The pandemic lockdown forced changes in our lives. Teachers’ jobs were less impacted than some but worse than others as they were suddenly thrust into dual roles developing contemporaneous curriculums for in-person instruction and remote learning students. Many students, at least the lucky ones with access, stared at computer screens from their homes for much of the school year, losing the physical connection to the classroom. This letter captures some of that struggle. But it also demonstrates the foundational principle of what it means to be a great teacher. It isn’t providing answers—instead, great teachers train their students how to learn, and in so doing equip them with tools for a lifetime of intellectual exploration and discovery.
Last Week Today. April data on income, consumption, and inflation showed the economy is expanding rapidly and, while the rate may be peaking, the runway for above-trend growth extends through 2022. Personal income declined by 13.1% year-over-year, which doesn’t seem positive, but consider that one year ago, the first round of direct household stimulus began artificially inflating last year’s baseline. Indeed, wages increased by ~1% for the second consecutive month, reflecting strength in hiring and average hourly earnings. Consumption, overall, rose by 0.5%, which included a 1.25% decline in durable goods spending (from a very high level) and a 1.1% rise in services (fewer social distancing restrictions). Consumption has now recovered to its pre-pandemic trend level. The savings rate declined but remains well above the average (7% – 8%) pace at 17.5%. The chart below shows the remarkable impact of reduced spending and generous government stimulus on the household savings rate. While all of the excess savings may not immediately make its way into the economy, household balance sheets (on average) are very healthy which bodes well for future consumption (~70% of GDP).
April’s Personal Consumption Expenditure price gauge (the Fed’s preferred inflation metric) rose about as expected, but the year-on-year numbers were above forecasts. Core PCE came in at 3.06%, the highest since the early 1990s (Gulf War). The combination of reflation in many products/services (prices returning to pre-pandemic levels) and inflation in some products/services (prices exceeding pre-pandemic levels due to high demand and supply bottlenecks) will buoy Core PCE for several quarters. Unless something dramatically changes (e.g., another round of government stimulus), we expect Core PCE to track back toward 2% by early 2022. Market-based indicators aren’t indicating a high risk of runaway inflation either, including US Treasury Yields, the 5-year TIPS/Treasury Breakeven Rate, and 5-year/5-year Forward Inflation Expectations (see chart below), which have all come off their recent highs.
For a look at asset class performance trends, please click here.
Learning Through Uncertainty.
Dear Class of 2023,
Congratulations on completing your Sophomore year of Humane Letters! By this point you have almost completed half of your high school journey. You will no doubt look back on this year as a strange one. It certainly has been a difficult year for us all. In the midst of these struggles, the study of European literature, philosophy, and history can appear quite irrelevant. However, I promise you it is not.
C.S. Lewis once wrote an article entitled “Learning in War Time.” Writing as Europe was overcome with the Second World War and his own country on the brink of collapse, he wrestles with the question of why students should devote themselves to the study of literature, art, and mathematics when the world is collapsing around them. He reminds us that a crisis “creates no absolutely new situation; it simply aggravates the permanent human situation so that we can no longer ignore it. Human life has always been lived on the edge of a precipice. Human culture has always had to exist under the shadow of something infinitely more important than itself. If men had postponed the search for knowledge and beauty until they were secure, the search would never have begun…Life has never been normal.”
When we read Locke, Rousseau, and Marx, we open a window to understanding where our own thoughts come from. When we read Shakespeare, Dickens, and Dostoevsky, we see in their characters a distant mirror of ourselves. Such a perspective is always valuable. But it is especially valuable when we are confronted with trials such as those we have experienced together this year. Of course at some level you don’t need to learn all these things. But more often than not, the things in life that carry the most weight are the things we don’t need. I hope throughout this year you have discovered that what makes the history, philosophy, and literature of Europe important is that they are not merely someone else’s story. They are, in a very real sense, your story.
Shakespeare and Dickens seem very foreign to us. But do not be fooled. Despite the odd language or unfamiliar circumstances, these stories talk about us. Which one of us have not felt looked down upon or sensed that others thought us unworthy like Henry V did? Who has not been blinded by speedy judgment like Elizabeth Bennett? Who hasn’t feared that they were doomed to insignificance like Sydney Carton? And who doesn’t sympathize with Raskolnikov’s struggle to admit his own moral failures? The treasure of each of these stories is their ability to transcend time and place to teach us about ourselves.
I wish I could say that you won’t experience struggles like these again. But I cannot. I can say with confidence that any struggle whatsoever is not the final word. Learn from the men and women we have studied this year – their successes and their failures. Don’t let pride or prejudice cloud your judgment too soon like Elizabeth and Mr. Darcy. Don’t give into despair like Svidrigailov. Like Sydney Carton, keep walking until you see the sun rise on a new day.
I earnestly hope that no difficulties you have faced this year and no shortcomings on my part would ever dissuade you from reading these books again in the future. Not only will you discover things you did not see before. You will also discover that these books change your vision of the world. By revisiting these works, you will see yourselves, others, and the whole universe differently. If you are thoughtful and, most importantly, humble, you will be able to cut through the cloud of temporality and see things as they really are.
For now, I hope you saw that Europe’s story, your story, is a profoundly beautiful one, but also a deeply complex one filled with human failure. Next year, you will travel back to an even more alien time – that of the Ancients. You will no doubt discover they too tell our story. See if they have any answers to the unanswered questions from this year.
You all are about the most fun group of students that I have had the pleasure of teaching. Your kindness and hard work have made a difficult year not only bearable, but an absolute joy.
With my deepest gratitude,
Mr. Charlie Smith
Dean, Great Hearts Northern Oaks