The Beginning Of The End?

Aug 28, 2021 | Economy, Free Resources, Investing

On this week’s podcast, Karl Eggerss welcomes Justin Pawl, CIO of Covenant, to discuss the change the Fed made this week that could impact your portfolio.

Karl Eggerss:

Hey, everybody. Welcome to the podcast. Thanks for joining us. This is Creating Richer Lives. Creatingricherlives.com is the website, creatingricherlives.com. Our telephone number 210-526-0057. And this show is sponsored by Covenant Lifestyle. Legacy. Philanthropy. We’ve got a special guest today and we’re not going to waste any time. This is hot off the press. So I’ve asked Justin Pawl, our Chief Investment Officer at Covenant to come back on the podcast. It’s been a while. Justin. Welcome back.

Justin Pawl:

Thank you, Karl. Great to be here as always.

Karl Eggerss:

Yeah. And so what we’re going to talk about today is it’s no secret that people are seeing prices go up. We’ve talked about inflation on here, I think you and I have talked about inflation on here, but we’re getting a little more clarity on, is this going to last longer? Is it going to stay as high as it’s been? We’re starting to get a little more clarity. And we had an investment committee meeting this past week at Covenant, which we do every six weeks, and we were able to really hone in on some really good real time data to try to figure out what does this mean for you guys listening, in terms of your prices that you’re paying and not only that, but the impact it could have on portfolios. And so why it’s timely is because the Federal Reserve just came out and had some really big news, which maybe it wasn’t big news, but the market’s looking at it as some new news.

Karl Eggerss:

And we’re going to talk about why some of it may be baked in to the markets already. So with that introduction, Justin, you probably get it asked to you everywhere you go. It’s man, these prices of things going up are crazy. And I think let’s first level set how we got here and then I want to talk about what inflation really is because people think it’s just what they pay at the store and there’s a lot that goes into it. But let’s really figure out how we got here, because we know this has been a big talk really the last, what, 12 or 13 years since the financial crisis?

Justin Pawl:

Yeah. The idea that prices are going up, it’s real. We see real prices going up at a variety of different products and services that we purchase, but some of it is just price reflation, meaning that prices are going back to where they were prior to the pandemic and the lockdown that we all endured. But there’s some real price increases taking place as well. And so we continue to believe that we’re not going into another type of 1970s inflationary scare where prices are going up 12, 13% or whatever it is on a year over year basis, but we have seen recently that prices have gone up 5.4% year over year, 5% year over year and in specific sectors, even higher. But I think, let’s zoom out for a moment and just level set to better understand how we got here.

Justin Pawl:

Obviously, this all began with COVID 19 and the ensuing lockdown and the recession that that caused. And looking back now, we now know because we had the official declaration from the National Bureau of Economic Research, NBER for those of you keeping score at home, that told us that we’ve just lived through the shortest recession in history. The recession lasted for two months, March and April of 2020, which is remarkable in and of itself. Now we’ve also lived through the fastest recovery in terms of a doubling of the S&P 500 coming out of that. Now, how did that happen?

Karl Eggerss:

Well, wasn’t it also the deepest recession in history.

Justin Pawl:

It was the deepest recession. And for the first time, the Federal Reserve and the U.S. government got together in operating concert really, and they applied the economy with money, which resulted in ultimately, a very quick recovery. But when I say a quick recovery, it’s been a quick recovery at the top level, meaning everything in aggregate. But beneath the surface, it’s been extremely uneven in terms of which sectors have recovered, which sectors continue to lag. And so while gross domestic product, which is the measure of the total economic output of our economy, has fully recovered to pre-pandemic levels, the labor market hasn’t and that disparity between how much demand there is for product versus the supply to fulfill it, that’s why we’re seeing higher prices or what economists call inflation.

Karl Eggerss:

So, yeah, because you got the bottlenecks that we all hear about. We hear the Port of LA. We hear in China due to COVID that there’s literally ships sitting out there with stuff on them and they can’t get where they need to be, because maybe there’s not enough truckers, maybe there’s bottlenecks at some facilities, but it’s not just supply. I think it’s the ramping up of demand, how quickly it’s happened, because everybody was anticipating probably a multi-year recession or least a multi-month. And to have a two month recession, people were caught off guard by needing products and needing rental cars and all these things needed to be bought back. So isn’t it a combination of quick demand recovery and supply bottlenecks at the same time?

Justin Pawl:

Absolutely. And I’m sorry if that wasn’t clear in my description of this, because-

Karl Eggerss:

It probably was. I just wasn’t listening. No, I’m just…

Justin Pawl:

Tough crowd here.

Karl Eggerss:

You’re so eloquent that it just went right over my head, so you probably did say that. I was just reiterating for the audience. How about that?

Justin Pawl:

Let me put in terms that you can understand, Karl. The economy was locked down. We were told to stay at home. But at the same time, the government was sending money to us. And by us, I mean, collectively us. And so people received a lot of money for just staying at home and they were bored. And what do they do? They couldn’t go out and go to restaurants. They couldn’t go out and go to movies. They couldn’t go to concerts or ball games or whatever. It became very much of a goods demand economy. And they spent money. That’s what Americans do when they have money, they spend it. That’s why our economy has made up 70% of consumption.

Karl Eggerss:

So it was more like a substitution effect.

Justin Pawl:

It was a substitution effect, but remember because people were at home, they weren’t in factories. They weren’t producing goods. And so inventories got drawn down very quickly, which created this scarcity of goods and led to higher prices. Economics 101, when you have excess demand versus supply, prices rise to clear the market.

Karl Eggerss:

What fixes that, number one? And when does that happen? Is that something that’s a multi-year issue that’s going to be resolved or should we expect something by year end to get back to equilibrium we’ll call it?

Justin Pawl:

Inflation is one of the most mysterious forces in economics and the trends obviously crosses over into real lives, in terms of the prices that we pay. So when we think about what is going to cure this, certainly more production is going to cure it, in terms of more people back at work, more people producing goods, more waiters and waitresses in restaurants, so that restaurants can actually not to have to raise their prices in order to be able to pay their bills. These are all things that we’re seeing every single day, but I don’t think it’s going to go away anytime soon. And by soon, I mean, right now I mentioned before, we’re seeing kind of five-ish percent inflation and just to be real clear, I’m talking about core consumer price index inflation, and that is the rise of prices year over year, excluding energy and food.

Justin Pawl:

I know we all spend money on energy and food, but the government takes those values or those prices out of the core CPI index calculation, because they tend to be very volatile. And so they’re looking for a more stable pricing measurement and so that’s why they take that out. But right now, we’re seeing, for example, at the Institute for Supply Management, or ISM, the prices paid surveys. So this is the direction of prices managers are paying for inputs into their business. In both the services and the manufacturing sectors, 80% of companies are paying higher prices for the inputs that come into their business. Now, this doesn’t tell us how much more they’re paying, but it does indicate the breadth of companies that are impacted by these higher prices. The other thing that you mentioned it before is supply bottlenecks. Delivery times in these ISM indices are way higher than usual. 60% or more of the manufacturing and services businesses are reporting rising delivery times. And this reflects both bottlenecks in the production of the input component and in the shipping of these products to those companies.

Karl Eggerss:

So when you think about prices rising for producers, people paying for this stuff and putting it together, and then they see can they pass it on, meaning to the consumers. But that’s one component of inflation, but what about the part about paying their employees? Because we’re seeing that part as well, right?

Justin Pawl:

Yeah. We’re seeing I wouldn’t call it widespread price increase or wage increases, but you are starting to see companies incentivize new employees to stick onto the company and pay them signing bonuses. We heard of one case where a company was willing to pay $1,500 too, and this is for a relatively low paying job, pay them $1,500 if they stuck around for six months. And they’d give them $500 upfront and the rest after six months. That’s how hungry some of these businesses are for labor. And so that’s actually a nice segue to talk about the labor market. Because right now, there’s lots of job openings. Those are near record levels. And there’s also lots of available labor, or what I should call potential labor. Because depending on which metric you look at, there’s between eight and ten million fewer people working now than prior to the pandemic.

Karl Eggerss:

Well, that’s the confusing thing is there seems to be this mismatch, right? Where you go into a restaurant, there’s a bunch of empty tables and they say, “We just don’t have enough help. Or the wait’s really long.” And so you go, “Oh, okay. Well, they need help.” Right? They need help. And then you see people saying, “Well, I need a job.” But how do we get the two together? And is it more a function of the type of job isn’t necessarily matching the demand or the skillset of that person? And I guess that just takes a lot of several months to work itself out. But there’s also this big elephant in the room, which is, and you mentioned it earlier, the government, tremendous amount of stimulus, like we’ve never seen before, the last year. Some of that’s going to roll off pretty quickly. So we may see a big chunk of people come back into the workforce that haven’t needed to thus far.

Justin Pawl:

Yeah. We fully expect that to happen. I mean, there’s about 13 million people right now that are collecting some form of unemployment, either that’s regular unemployment benefits, that’s Pandemic Emergency Unemployment Assistance, or what’s called PEUC, or Pandemic Unemployment Assistance or PUA. Now between today and Labor Day, which is going to only be… It’s only about a week away. The pandemic related unemployment assistance is going to end for about nine million of these would be laborers. So within a week, you’re going to have nine million people that either need to get a job or they’re going to have to live off their savings for some period of time. And my bet is a lot of them are going to be looking for work.

Karl Eggerss:

Yeah. So hopefully again, it resolves some of these issues. But some of the bottlenecks and those types of things, it’s going to be here awhile. I mean, you’re still having ports with… I mean, you go order anything, there’s delays and that just doesn’t fix itself overnight. So that’s going to continue for awhile.

Justin Pawl:

It will. It will continue for a while. And part of it is, I will say, a little bit out of our control and that’s the impact of Delta. China has a zero tolerance for COVID, period. So if at a shipping port, if one of the buildings, someone comes down with COVID, they shut down the entire building. Could be shut down for a week, could be shut down for a month. But those type of events that are taking place overseas are having a dramatic impact on the supply chain.

Karl Eggerss:

Yeah. And certainly things like FDA approval for Pfizer and potentially rolling over, starting to roll over a little bit in the south, do we start… Are we getting to peak? So it is a variable. It’s clearly not having the impact it did before because we’re learning to live with it, but it’s still an unknown. And that brings me to the next point, which is the Federal Reserve. Because we know about the fiscal stimulus, right? Helicopter money. And then we have the monetary, which is the Fed dropped interest rates to zero. But in addition, they said, “We’re going to go out and buy bonds. We’re buying bonds to keep rates low, long-term, short-term.”

Karl Eggerss:

So everybody refinanced. Everybody was borrowing money to do all sorts of things. And they’ve kept their foot on the gas pedal for well over a year now. And so if this recovery’s so great, the question is, what’s the Fed doing? Why are interest rates still where they are? And there seems to be a little, not going to say dissension, but certainly some disagreements inside the Federal Reserve on what the path is forward, at least the timing of the path.

Justin Pawl:

Yeah. Well, let’s take a step back and just understand that there is a significant change in the Federal Reserve’s monetary policy framework that took place last year. And that was they were no longer going to rely on their forecast for inflation and unemployment to make changes to monetary policy. They were going to instead rely on the data actually showing up in the various surveys that they take, and then make monetary policy based off of that. So they essentially went from a proactive policy stance to a reactive policy stance. And the two things that they’re most focused on are reaching maximum employment and maintaining stable prices.

Justin Pawl:

And a lot of the Federal Reserve Open Market Committee members have come out over the last week or so and said, “Look, we’ve made tremendous progress towards our inflation target. But unemployment, we’re still not there yet.” That’s Powell’s position as well. Powell’s position is that, “Look, the economy’s come back.” We’re really happy about that. But it’s still, as I said before, a very uneven recovery and we have a lot of people out of work. Now, some of that has been, I would say, aided and abetted by the federal government in terms of the unemployment benefits. But like we talked about, those are rolling off now. But you have these eight or nine million people that need to find work. The thing is, labor is not fungible.

Justin Pawl:

So there could be a lot of jobs out there, but maybe they’re not where there are a bunch of unemployed people. Or maybe the jobs that are available in one area doesn’t also have the laborers that have the same set of skills that are required to fulfill that job. So it’s going to take awhile for people to find these jobs. And then additionally, companies have hiring processes. Typically, you’re not just opening your doors and hiring the first person that walks in. You interview people, run background checks. So it’s going to take awhile for all these people to find jobs and to get employed. And that’s why we think that unemployment isn’t going to drop as quickly as a lot of people believe it may out there.

Karl Eggerss:

So let’s talk about the two main components. One is called quantitative easing, and the opposite of that is tapering, where they start to back off of that a little bit, where they’re buying bonds in these assets. The other side of that is just them setting short-term interest rates, which are essentially zero right now. Those two things aren’t the same. So the order of this, and you’ve been hearing about it and they’ve been telegraphing it, is at some point, we’re going to think about tapering. Well, this past week, they essentially said it’s probably prudent to start tapering in 2021. That is what we talked about, our investment committee.

Karl Eggerss:

We agreed that that’s what they would do. But as you and I were talking about off mic, tapering doesn’t mean we stop purchases and we’re shrinking the Fed’s balance sheet. They have an enormous balance sheet. It’s still very supportive. It’s just going from 50 miles an hour down to 40, down to 30. You’re still moving forward, right? You’re still moving forward. We use that analogy with the economy as well, but it works so well here. So they’re just slowing down the purchases is what they’re talking about. First, raising interest rates, that’s still a long ways off. I mean, we could be talking about a whole another year and a half or so before they even did that.

Justin Pawl:

Yeah. The Federal Reserve is purchasing $120 billion of assets every single month. It’s a mixture-

Karl Eggerss:

Now when you say that, I mean, for the person listening, what does that mean specifically? What types of things are they buying?

Justin Pawl:

Yeah. So they’re buying US treasuries, and they’re buying mortgage backed securities. And approximately 40 billion of the mortgage backed securities, which are mortgages that we all get on our homes that are then packaged and sold as a security in the marketplace. And $80 billion of US treasuries, which are issued by our government to fund the deficits that they’re racking up from all of the spending that’s going on is. Because as we know, we don’t have a balanced budget here in the United States.

Karl Eggerss:

Right. And so is it fair to say if the Federal Reserve was not in the picture, long-term interest rates, 10-year treasury, which is 1.3%, 1.25%, would it be much, much higher without the Fed supporting that?

Justin Pawl:

I think that’s challenging to really opine on right now because their interest rates are so low across the globe. Negative interest rates are the norm,

Justin Pawl:

When, especially when you look at Japan, you look at Europe and because of that, US treasuries are attractive, even though the rates are really, really low, they’re still positive. And that’s not-

Karl Eggerss:

It’s a relative game.

Justin Pawl:

It’s a relative game. And positive interest rates aren’t available in much of the world right now.

Karl Eggerss:

Yeah. And we talked about this yesterday, when you think about where interest rates are going and the ups and downs, and people say, “Who on earth would buy bonds at this level? How [inaudible 00:18:28] not go up?” Pension funds have to buy bonds. Foreign governments may have to buy bonds. People may have to rebalance a pension fund, for example. May have a little too much equities versus their bonds. And they have a mandate to own so much. And so they have to buy bonds periodically. So, there’s a lot of natural buyers that are always going to be there regardless. And so when you put all that together, our thesis is that rates could certainly spike up. But don’t believe we’re on that rate environment that they’re just destined to go higher tomorrow no matter what.

Justin Pawl:

No, I think that’s right. And I think that that’s a reason that you should still have some form of traditional fixed income in your portfolio. Because there is no guarantee that rates are going to move higher. There’s still a lot of deflationary forces that existed prior to the pandemic that are around today and could actually force rates to go lower. That’s not a prediction. That’s just saying that you have to identify the risks and balance your portfolio accordingly.

Karl Eggerss:

Yeah. It fits a role. People ask all the time, “Why would I do that?” Well, liquidity, source of funds to buy their things. And again, how many people were wrong this past year, rates started falling. Everybody thought, “Well, surely they’re going to rise because the economy is getting better,” and they actually fell. So a lot of people got that wrong. So it is a diversifier. How much you should have, of course, between you and your advisor and your personal situation. But they do play a role in almost everybody’s portfolio to some extent for sure.

Justin Pawl:

No. They do. And I just want to take a step back. A couple of minutes ago, you mentioned the fed quantitative easing, and shifting from quantitative easing to tapering, and then ultimately to quantitative tightening, and ultimately, ultimately, ultimately to raising interest rates. If you think about the feds got really, really it’s got one big lever to affect monetary policy. And that is, raising and lowering interest rates. That’s the federal target funds rate that affects the rates that we all pay when we borrow money or corporations borrow money, et cetera. Now, after the financial crisis, and by financial crisis, I mean, two financial crisis ago, not the COVID financial crisis, but the mortgage crisis, they slammed rates down to zero and it still wasn’t having the desired impact.

Justin Pawl:

So that’s when they began these various quantitative easing programs and began buying securities in the open market. And that was a departure from the way that they had behaved in the past. And so, as you go forward today, once again, we’re in this period of time where interest rates are low, or zero essentially, and their only other, not their only other tool, but their primary other tool that they’re using is quantitative easing to try and juice the economy. Yes, it does help keep interest rates down, theoretically, which could engender greater credit demand, but we’re not seeing huge amount of credit demand right now.

Karl Eggerss:

I was going to say, I think the biggest, we know this, the biggest driver of this recovery, frankly, has been the fiscal side and the helicopter money coming from Washington in terms of the extra unemployment, the stimulus programs, all of that, that’s been a huge contributor dropping interest rates down so people were getting less on their money markets and even long-term rates coming down to refinance. Lots of people had already done those things. But it was said we used to pay people to go to war, right? And we were having to pay people to stay inside and to stay indoors. And they did that.

Karl Eggerss:

And then, of course, as things recovered, they continued to do it. And it went on for a very long time. And so I think you’re seeing this kind of rubber band effect. As you said, I mean, retail sales performed very well and as much higher than it was prior to the pandemic. And then you throw on the stimulus and including, don’t forget, PPP. Companies were getting stimulus, a lot of stimulus as well. So that was a big, big driver. The federal reserve was in concert with that. But dropping interest rates was not the big part of this. It was all those government stimulus programs.

Justin Pawl:

You could very well make the argument that the federal government is responsible for the higher prices that we’re all paying right now. If the fed raises interest rates, it’s not going to cure the bottlenecks that we’re facing in our economy right now. It’s not going to force people back to work. It’s not going to clear shipping lanes or the ports that are in wait, or people who are waiting to offload product and ship it around the United States. Raising rates isn’t going to do that. However, that being said, the federal reserve is primed to begin reducing their quantitative easing, which everybody calls taper. We’re probably all tired of hearing that. That T word, and transitory is the other T word people are probably tired of hearing. I think-

Karl Eggerss:

Yeah. Chris Lowe out of FHN had the quote of the week last week when he said, “You keep hearing about transitory, right? And this inflation we’re seeing is temporary.” He said, “Well, yeah, it was temporary in the 70s too. It just happened to last 10 years.” And that’s the thing, is we’re looking at it now in saying, the inflation’s probably going to stay higher for longer. It may not be like the 70s, but transitory was supposed to be just a few months and here we are, it’s continuing. So, going back to this inflation and the impact for our listeners. The idea that this recovery is still happening but the economy to us looks like it’s slowing because we had this really V bottom bounce. So that has to slow just from the very nature of how it’s bouncing. But it’s slowing, but at the same time, these costs are persisting. These higher costs, the bottlenecks are still persisting. So, our forecast is that we do see higher inflation for longer, not to say it’s a 70s style, but it’s going to be there for a while.

Justin Pawl:

It is going to be there for a while. But keep in mind, you have to differentiate between the year over year comparisons and the month over month comparisons. Because year over year, all of the depressed pricing that took place because of the lockdown and because we were all stuck at home last year is still in the data. So when you’re comparing today’s prices versus last year’s prices, last year’s prices were extremely depressed. And so even if inflation drops down to, let’s just say an annualized rate of 3% over the next six months, you’re still going to see that core CPI on a year over year basis, running 5% into 2022 before it declines. And that it seems that it falls right down to 3% right now, and it’s not there, and there’s no guarantee that it will be, and Delta’s going to have a lot to say about that.

Karl Eggerss:

Yeah. I think the thing, if you’re listening, you’re figuring out what’s the to do here? The to do is really not any different than most of 2021, which is, if you’re somebody, if you’re a saver sitting in very liquid short-term assets, you’re not getting a raise anytime soon from the federal reserve. Your money markets and CDs are still going to pay very, very little. But because costs are going up, if you’re in that situation, you continue to literally fall behind. So owning real assets, and again, that can be different things for different people. It could be commodities, stocks, mutual funds, things that own equities, real estate, real assets to participate in inflation as opposed to falling behind is the key.

Karl Eggerss:

And again, we’re not going to give out specific advice on what to do for your situation. But the point is that, there’s a lot of people who feel like, “Well, costs are going up and there’s all this geopolitical risk. Therefore, I’m going to sit and hunker down in the money market and be safe.” And you’re literally falling behind because the costs of things around you are going up, and you can see it, and you’re falling behind. And so, you really have to examine your specific situation and making sure you own enough assets to keep up with inflation and hopefully beat inflation.

Justin Pawl:

That’s right. We haven’t really laid out this timeline, but if the fed goes ahead and announces that they’re going to taper, maybe at their September meeting, maybe at the October meeting, in all likelihood, they’re going to begin tapering some time in the fourth quarter, late in the fourth quarter. Well, they’ve been very clear in communicating that they intend to announce tapering at least 12 months in advance of actually raising interest rates. And ideally, they want to conclude tapering, meaning they will no longer be expanding their balance sheet, before they begin raising interest rates. So that puts interest rate increases up to late 2022 at the earliest, potentially into 2023. When you start looking out that far, the telescope lens gets pretty cloudy in terms of trying to make predictions about what might transpire between now and then. So waiting for the fed to raise rates to save your savings account is not a good strategy.

Karl Eggerss:

Exactly. And you know, again, we’re trying not to overthink this in terms of, it’s easy to see prices going up on commodities and at the grocery store and say, “I’ve got to do a bunch of things.” But lumber’s been a great example of how volatile commodities can be when you saw this dramatic rise in lumber prices. And we’ve seen a dramatic drop, about 75% as we’re recording this, from its highs just recently. So commodities are going to be volatile. But we do believe that the price increases we’re seeing, and some of the higher prices and inflation in general, is going to be higher going forward than what we’ve been used to in the last several years. Is that a fair statement?

Justin Pawl:

Yeah, that’s definitely a fair statement. And I would just add that a lot of people think that if inflation comes it’s really bad for equities. That’s not necessarily the case. Equities can do well, and oftentimes do do well in an environment where you have higher than what I’ll call historical average inflation. What kills equities is when the Federal Reserve begins jacking interest rates up to levels that begin to really constrain the economy and economic growth. We seem to be a long way from that, and so the message here isn’t to abandon equities by any stretch of the imagination.

Justin Pawl:

In fact, equities can be a great tool for keeping up with or exceeding inflation. What we get concerned about a bit when it comes to equities is just the overall valuation of the equity markets. So there’s sectors that we would likely have the underweight relative to the benchmark and other sectors that we would be overweight just where we think there’s better value and where more of the future returns are going to be realized in those particular sectors or those particular types of companies.

Karl Eggerss:

I mean you’ve seen on days where interest rates spike a little bit, you will see technology stocks or the growth trade really come off and the value trade come on, and so that’s something again for you guys to think about. If rates stay in this ballpark in the market, there’s no reason why the market wouldn’t potentially continue to do what it’s doing other than somebody just decides one day that the stock’s too expensive and they start selling it. But generally speaking, those tech stocks have been very sensitive to interest rates, and the fact that we’re so low, you can see why they’ve done so well.

Karl Eggerss:

So if you expect rates to go up a lot, and that’s not our consensus view, but if you do listening, then you really do need to look at how many tech stocks or how many growth stocks you do own because, again, valuation matters. It always matters. And to your point, Justin, we just want to have a balanced portfolio and lean in certain directions. I think people get into trouble when they overdo it one way or the other. If you know that interest rates are going to go up and you own no bonds, and then 2021 comes and interest rates start to fall, that’s a problem. So that’s why you have to stay diversified and it’s okay to lean one way or the other and have a view. But just be careful. You need to be hitting it down the middle of the fairway most of you.

Justin Pawl:

Wasn’t it Mark Twain that said, “It’s not what you don’t know that kills you. It’s what you know you know that just isn’t so that kills you.” Something to that effect.

Karl Eggerss:

Yeah, I think that was … Yeah. We’ll say something to that effect.

Justin Pawl:

I didn’t look it up.

Karl Eggerss:

No it is. People do that all the time. They go, “Well, I walked in this store, and they’re doing really, really well, so therefore the stock is going to continue to go higher.” Well, that’s baked into the stock probably. It’s the unexpected going forward, the change in that or their expectations beating that’s going to help that go higher or lower. Is there anything we missed in terms of … I really wanted to focus in on the idea of inflation and the Federal Reserve because to me this may be the beginning of the end.

Karl Eggerss:

And I think we should all be hopeful. What I mean by that is, the beginning of the Fed stepping back a little bit. Hopefully this is the start of that by starting to taper in 2021, and then like you said, quantitative tightening, and then eventually raising rates. We do want what would be considered more of a normal environment. So is that fair to say that this is potentially the beginning of the end in a good way?

Justin Pawl:

Yeah, I think that optimistically that is the case. Now, I think we’ve all been head-faked into thinking that was the case in other times as well. But you know, hope springs eternal, and there is definitely a strong economic growth that’s taking place right now that should enable the Fed to be able to back off of quantitative easing, ultimately raise interest rates. Because remember what I said before, raising and lowering interest rates is a much more powerful tool than quantitative easing. Quantitative easing in terms of stimulating economic growth isn’t really a proven transmission system, because all it does is keep interest rates low.

Justin Pawl:

And if there’s not demand for credit, borrowing money, corporations borrowing money and investing it into productive means, then you’re just kind of spinning your wheels and the balance sheet of the Fed is growing over time, which nobody really understands the long-term implications of what that may be. So I am optimistic that this is the beginning of the end of quantitative easing, and that we are on a path now towards a normalization, but it’s going to take a long time to get there.

Karl Eggerss:

Yeah, it is. I mean that’s the hardest thing. It is an experiment, and we don’t know the long-term repercussions, and everybody assumes they’re really bad. You know. But we shouldn’t assume that either. We would just like to start to normalize a little bit, because it’s been a lot. I mean when you start tossing trillions around and acting like it’s no big deal, there’s got to be some consequences. They may be a good one. Who knows?

Justin Pawl:

[crosstalk 00:32:38].

Karl Eggerss:

But probably not for probably not for our grandkids.

Justin Pawl:

Yeah. A trillion here, a trillion there. Pretty soon it’s real money.

Karl Eggerss:

That’s right. Justin Pawl, Chief Investment Officer at Covenant. Thanks for joining us. Appreciate it. Very timely. I’m glad that I asked you to come on, and really no preparation at all, and said, “I need you to regurgitate kind of what we discussed at our investment committee meeting,” so thanks for doing that.

Justin Pawl:

Well, thanks for having me Karl. It’s always a pleasure.

Speaker 2:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multi-Family Offices, LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful.

Speaker 2:

Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for, personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at creatingricherlives.com.

 

 

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