To our Clients and Friends –
As we wrote about in our February missive, we find ourselves squarely in a world of high inflation, rising interest rates and slowing growth...aka Stagflation. It may be too early for professional economists to call it that, but we are likely there. The only variable missing from a formal declaration is high unemployment, but new unemployment insurance claims are starting to tick up while the Fed and the Administration try to slow the economy, so it could be just a matter of time. When we add to this looming threat of Stagflation (a) the ongoing Russian conflict, (b) a 30+ day lockdown of Shanghai (the mass producer of many of the world’s products), and now (c) an apparent lockdown of Beijing (22 reported Covid cases), the market is not in a great mood. Friday's 950 point sell-off represents the largest decline since March of 2020 when the Rona came to stay.
As we process this data to determine where to pivot next, we believe the best option is our current positioning favoring value over growth stocks, an overweight to commodity-exposed equities, higher levels of cash, and public and private assets producing streams of income. This portfolio structure will likely last through the next few quarters and perhaps for years. Our posture comes from the observation that, unlike when the Fed rescued the economy and down markets with massive injections of liquidity — recall March 2020 when the world shut down due to Coronavirus, markets fell 20%, and the Fed made it all right (in terms of market performance) by July 2020 – the Fed will likely behave differently in future. Specifically it is working to reverse the rapid inflation generated by the flood of liquidity which significantly pushed up demand for assets even as supply chains tightened with COVID shutdowns, disruption in energy supplies due to the Ukraine conflict, and de-globalization. This process of quantitative tightening will take some time because the Fed is starting 12 months late, there is a long lag time for the real economy to slow as liquidity is drawn down, and there remains excess cash in most consumer bank accounts due to the various stimulus programs.
The Market on the other hand is not waiting around to see the final credits of this movie. Since January 1st, the markets have been on edge, exhibiting garden-variety bear market rallies between sell-offs. This past Friday was perhaps the extreme and, based on the way certain issues are trading, we do not believe the higher rates of selling and volatility are over. Witness the bizarre activity in the commodity complex this past week. Cleveland Cliffs (CLF) crushed analyst expectations and is on the verge of being debt free, but the market punished the company driving shares down 10%. Freeport McMoran (FCX), one of our holdings, also had great quarterly numbers but the stock is down 15% on the week. The rapidly electrifying world has not stopped using copper, and yet FCX traded hard down. Look too at the traditional source of portfolio diversification, government bonds, which through mid-week are down more than US or international equities. These trading patterns, the events recited above and other less-quantifiable risks (Presidential misstatements and policy mistakes, political unrest in other countries, more Covid variants, etc.) indicate to us that there is downward pressure on all parts of public securities markets which could continue for months.
That said, we do not anticipate a market crash. Travel is strongly up (we recommend getting to the airport much earlier than in the recent past, even if you don’t have to wear a mask) and consumer spending remains remarkably strong. We therefore expect an additional 5-10% downward move in the indices over the next few months. Accordingly, on Friday, we raised cash by selling our entire position in the Altegris Opportunistic Real Estate Fund (RAAIX), a profitable position in most accounts but less attractive due to its lack of dividend, and by selling about 1/3rd of our Flexshares Global Upstream Natural Resources Fund (GUNR), a highly profitable position which pays a nice dividend but exposed to selling pressures on the commodities complex. We will hold higher levels of cash awaiting opportunities to add back to growth and small cap US stocks as markets stabilize, and we will continue to look for private and public real estate and other opportunities that are cash flow positive and rate/inflation-resistant. The watchword for this time is Patience. With sufficient cash in our accounts and ongoing cash flow from our investments to fund our lives, we can wait for the market to recover.
As always, we appreciate your trust in CrossGrain Family Investments and welcome the opportunity to work with and invest alongside each of you. We will continue to have both hands firmly on the wheel as we navigate this newly complex world and the unexpected curves on the roadway ahead.
Warmest Springtime regards,
Jeff & Biff
CrossGrain Family Investments, LLC is a federally-Registered Investment Adviser. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at 804.217.2561 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from CrossGrainFI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on the SEC website, https://adviserinfo.sec.gov. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.