Its “summer” in Covid times, and every day is still Tuesday…or is it Wednesday?  Although now we have hope that we’ll be able to hang out with more than just immediate family.  I’ve discovered that gardening might be the perfect remedy for an A-type, as no one can control it.  There is always something to do.  

Speaking of “not being able to control things”, I’ve had numerous conversations with you over the past week, to try and figure out what’s happening in the market.  Here is my take…  so far, as always, these are just my thoughts, but nobody knows for certain.  

 

This makes no sense, the market just keeps going up no matter how bad the “future” out comes seems to be.  Why does it keep moving up?

I get it, many people are scratching their heads over why the stock market keeps going up, including professionals, or those seen on TV. They point to the terrible economic numbers and worsening social situation. But maybe we’re missing the point.
In my opinion, the stock market is most likely going up because the value of the US currency, relative to productive assets, is going down. When the Fed prints trillions, and the amount of assets stays the same or declines at a rate lower than the increase in currency, this inflates asset prices. It's not captured in traditional inflation numbers because of the way CPI is calculated and because of how this new supply of currency is distributed. We saw this after the financial crisis – after 10 years, not much inflation in consumer goods, but massive inflation in housing and the stock market.
Therefore, the market should continue to go up as long as the Fed continues to increase the supply of currency faster than the decline in earnings.  Once its removed though who knows.  It may just pop like a really big pimple, messy.  

UGGGG Gross analogy.  Maybe that makes sense to you, but explain it a bit better to me….

OK, let’s start with the traditional definition of inflation, as based on CPI (Consumer Price index), which is a basket of goods and services that we pay for.  CPI does not suggest we are having inflation in the narrow way inflation is measured. When the Fed, for example, buys treasuries, they create new money which is deposited in the bank account of the treasury seller. These treasury sellers tend to be large institutions (most likely banks) and very wealthy people, so they are not spending that money on goods and services (i.e. CPI items) but instead use that money to buy investment assets (corporate bonds, stocks, gold, etc. -- which are NOT CPI items). This is why price for goods and services are not rising as fast as the price of investment assets.

So….  You’re saying because the USD is being devalued the price of assets “Stocks” are going up, but the USD keeps going up? 

This is a huge topic that I can't possibly cover here (nor do you want me too, so call me instead). Basically, the USD, is the dominant reserve currency backed by the “biggest and most stable economy”, and is viewed as a safe haven, so demand for USD increases when risk increases. 
Although the Fed is printing a lot of money, in the short term, demand for USD relative to other currencies still leads to the strengthening of the dollar. Also keep in mind that several other developed countries, for example Japan and Germany, have negative rates. So although the USD strengthens against other currencies, it still weakens relative to investment assets -- hence asset price inflation, hence the market going up.

HUH???  This seems like an economics class.  Explain to me in English.    

Let’s have a look at gold, for example the GLD (a trading ticker for gold). It's going up. It’s not the only commodity, all limited assets are going up because the USD is “losing value”. Since the USD is a key reserve currency with ~ 2/3 share, a lot of foreigner players are subsidizing US asset owners, because they are looking for the safety of the USD.
Also, as you know, I personally don't like gold. Why? Because its value as a currency & store of value has greatly been reduced by innovation in financial technology. What are you going to do, pay with gold? I don't think so. It’s my view that equities of best in class companies, given their liquidity and scarcity, is a better store of value and a better currency than gold.  Controversial, but it’s my opinion.

Ok, That sounds plausible, and it sounds smart enough, but America is actually coming apart at the seams.   That can’t be good for the markets.

Let me first say It’s a terrible thing what happened in Minnesota.   Racism is a terrible thing period. I don’t understand it and I don’t understand why or how someone feels the need to discriminate anyone based on the colour of their skin, religion whatever.  It’s horrible and honestly wish that we could all just get along.  We’re all humans.  We all deserve respect and changes must be made.
So how do riots impact the market? One, it limits the US government's ability to escalate geopolitical issues, which means less messing around with foreign supply chains, which helps large cap stocks, which then drives "the market".
Two, unrest will incentivize the government to stimulate on the monetary and fiscal front.  Also, hopefully it will actually result in a positive change and not just platitudes.

So we should just sit tight for the mean time and call you if there is a need?

Generally, YES. Nobody knows for certain, it’s still messy and this may take a bit more time to play out, but hang in there. Maybe time to tread cautiously…   If there is a change to your circumstance or if you feel uneasy about the portfolio’s “relatively quick recovery”, then please call me.