Welcome to Summer! Traditionally Wall Street has said “sell in May and go away,” and Markets may well see that come to pass in the next week or so. However, we disagree with this sentiment believing there is more to do than sink into hot weather doldrums. Indeed, as we finish this letter, the markets fell out of bed notwithstanding a hot NVDA earning report with growing concern over Fed action in light of persistent inflation, possibly slowing employment and economic growth, and upcoming election considerations. We are generally bullish on market performance this year and hope for more dips to buy at better valuations.
Around this time last year (2023), we made the prediction that the Federal Reserve ("The Fed") will have to adjust its inflation target of 2% to a new range of 2.5% - 3%. This was a relatively bold assertion as Wall Street was generally following along with the Fed speak of 2%. However, about a month ago, we started to hear about the need for a higher long term target. What changed? Why, nothing, nothing at all.
The Fed was and remains in a box where, after 10 years of cheap money and money printing, inflation finally caught up and in a big way. The Fed’s only, very blunt instrument to combat inflation (while ensuring full employment) is rate and money supply manipulation. A massive 500 basis point move appears to have brought the rate of inflation down to the 2.5%-3% range, but prices for everything have reset higher and now we’re seeing evidence that the economy is slowing with inflation persisting in this general range rather than tailing off to the 2% “target.”
More importantly, the US and the world cannot afford higher interest rates...literally cannot afford. During COVID, every government around the world that could blew out their budgets to support their economies through the “pandemic.” After, notwithstanding the economic boom from first goods then services “revenge spending” and renewed work, the Biden Administration continued to spend like we were in wartime conditions, blowing budget deficits and national debts to tremendous levels. This year according to the Congressional Budget Office, the US will pay more in interest expense on its debt than on national defense. Consequently, for national survival, the US and other central banks will have to drive interest rates back below 2% to pay for all of this wasteful spending without destroying their social spending agendas.
What then will happen here in the US? This year is, as you may have heard, an election year and we expect to see more liquidity coming from the Federal government. This will take the form of
lower interest rates from the Fed,
reduced selling of US Treasuries by the central bank, thereby keeping more cash in the system,
broad spending on Administration priorities by the US Treasury using the $1 Trillion in tax receipts now in the Treasury General Account, and
renewed, disguised form of quantitative easing. Yes, QE may be coming back.
Liquidity has been the great driver of investment returns. More dollars pursuing assets – financial assets like public stocks and equity in private companies, real assets like real estate and oil, consumer assets like cars - drives valuations up. Cryptocurrencies in particular flex up with increased liquidity. Portfolio values rise, and investor wealth expands.
We are positioned to take advantage of this situation with our continued allocation to an Exponential Age portfolio of technology companies focused on AI (which we believe to be a very real and important driver of future performance) as well as small Bitcoin positions. We remain overweight to US equities, but our international and emerging funds are doing quite well. Private credit remains the best risk adjusted return at the moment taking advantage of the banks inability/unwillingness to lend and the continued growth of the US economy. And we hope that our private equity and venture funds will resume distributions this year when/if M&A and IPO activity picks up.
We are keeping this letter short and to the point, and don’t want to create anxiety as you approach a season of relaxation, but we remain mindful of other issues of import such as:
· Geopolitics – the Ukraine conflict may expand with permission given to hit Russian interior; Middle East hotter; China/US great power competition plus tariffs, defense spending, and multi-lateral containment compacts; and continuing deglobalization as US retreats from world stage as enforcer of capitalism and rule of law.
· Election Year –societal disruption, social and traditional media dis/mis-information, increase in spending to capture wallets of voters and overall uncertainty around domestic and foreign affairs. Oh, not to mention a former President now running for a second term with a full slate of guilty verdicts and a hearing on incarceration a few weeks before the GOP Convention, nor for that matter a sitting President who refuses to give spontaneous interviews or answer non-scripted questions due to his questionable physical and mental abilities.
· Immigration – US needs fresh blood to offset declining population, but continued disorderly/ mass influx not helpful and potentially very dangerous.
· Drugs – fentanyl production and import from Mexico funded and supplied by China fueling a rise in addiction and deaths, complicated by legalization of gateway drugs.
Other updates:
We are in regular contact with our friends at Blackhawk, manager of the Agilis mobile home park Funds I and II. The sale of the parks in these funds is under weigh and, though a closing date has not been set, it is our understanding that both buyers and sellers are prepared to close subject to some lingering administrative issues. We are hopeful for a mid-to-late June closing. We will keep you posted.
Any day now, our new website will launch at www.crossgrainfi.com. It will have the standard pretty pictures of boats and people, passable photos of Jeff and Biff, salient information on the services we provide, convenient links to our client and Schwab portals, and best of all a collection of our client letters. All of these missives are written painstakingly with human mind power alone and no AI assistance...which may be good or bad, we’ll let you decide.
Our co-investment program continues apace. We’re seeing really interesting opportunities in AI, early stage technology, energy transition and ownership of equity in private asset management firms. An update addressing these opportunities will go out shortly to all on our list.
We hope you will enjoy a lovely and relaxed Summer leaving the investment and other kerfuffles to us to manage for you. Please do not hesitate to call or write to us. And let us know if you have time to join us for a meal, coffee or drink (perhaps with a season-celebrating umbrella)!
Warmest regards,
Jeff & Biff
5.31.2024