Gill Capital Partners Fourth of July 2021 Update
“ Inflation is like alcoholism, the good effects come first” ~ Milton Friedman
Happy Fourth of July to our clients, friends and partners. Independence is something near and dear to our hearts at Gill Capital Partners. We are grateful and proud of our ability to offer our clients independent thinking, investment products, and advice. We wanted to send a brief update on recent market and economic events, including inflation and The Federal Reserve, before the long holiday weekend. First, some interesting Fourth of July facts…
Most unusual Fourth of July traditions from across the nation:
Marshmallow Wars – Since the mid-1980s, the residents of Ocean Beach, CA have enjoyed a unique Fourth of July tradition: a marshmallow fight after the evening fireworks. Hundreds, if not thousands, participate in the sticky battle.
Computer Trap Shooting – Only in Kentucky can you find the great Fourth of July tradition of shooting obsolete electronic devices. Participants donate their old computers and Kentuckians blow them apart.
Lobster Racing – The city of Bar Harbor, Maine brings out their finest “stallions” to race against each other.
Nathan’s Famous Fourth of July Hot Dog Eating Contest – Probably the best known of all competitive eating challenges, Nathan’s draws world class eaters and is even broadcast on ESPN. The current record holder for the men is Joey Chestnut with 74 hot dogs, and, for the women, Sonya Thomas with 45 hot dogs…and yes, that includes the buns!
Inflation, Interest Rates & the Federal Reserve
Our Investment Committee has been talking a lot about inflation and interest rates lately, and we have some new data points to share, along with an update from the recent Federal Reserve meeting. Below are updated data points from the inflation front and our views on them:
Lumber Prices – Remember that lumber prices tripled recently? Well, lumber prices have collapsed over the past month as mills have been able to resume supply and buyers have said no thanks to soaring prices. Easy come easy go….
Housing Sales & Prices – The housing market seems to be cooling off slightly. The recent weaker-than-expected existing home sales report showed a decline in new home sales as prices continue to soar. On the back of this news, the economists at Goldman Sachs lowered their Q2 GDP estimate lower.
Oil Prices – Oil prices have not yet showed any signs of cooling and now sit at just above $70/barrel, the highest price since 2018.
Federal Reserve – At its June 16th meeting, the Federal Reserve raised expectations for inflation by a full percentage point to 3.4%, but stood by its position that inflation pressures are “transitory.” The Fed also revised the time frame for when it will raise interest rates, indicating that rate hikes could come as early as 2023. However, and possibly most importantly, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting. Remember, the massive purchase program that the Federal Reserve has undertaken has created artificially high demand, thereby lowering interest rates.
Our view – We continue to generally share the Fed’s view that inflationary pressures, while significant and unwelcomed, are likely to be largely temporary in nature, and should be expected given the recent reopening of the economy and an accomodative Federal Reserve. We do not know how long prices and supply issues will remain an issue, but we are already seeing the powers of supply and demand begin to fix the inflationary pressures in certain areas, as we pointed to above. Furthermore, and possibly more importantly, we agree with Goldman Sachs’ view that the inflationary spike will slow the economic rebound as people defer or even cancel purchases due to high prices. We do not see this leading to a recession, but perhaps a moderation of the growth rates that many anticipated earlier in the year. This too will help bring inflation back into check naturally. The Federal Reserve has stated clearly that they have no interest in aggressively fighting inflation. We will continue to approach this with an open mind while we watch the data and listen to what the Federal Reserve has to say.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.