THEME: Chapter 2, a much more complex narrative — mixed messages, supply in chains, private credit, Putin, labor, Paramount, meta-mouse,…
February 21, 2022
Michael’s CIO (Check It Out) Report on the weeks just past — events, sarcasm, and global macro reflections
THEME: Chapter 2, a much more complex narrative — mixed messages, supply in chains, private credit, Putin, labor, Paramount, meta-mouse, labor, housing, sustainability, and Starlight
- Chapter 1, 2020 to 2021, was a relatively straightforward story about a pandemic halted economy fueled by government largesse (massive monetary and fiscal spending); either COVID would win, or society would win. We bet on society! Our long-term Roaring 20s theme of economic growth on the back of stimulative capital, new technology, and rampant consumer demand remains intact
- Chapter 2, 2022, which at the beginning of the year we titled The Terrible Twos is a more complex narrative. We have a recently recovering economy with roaring job growth, but it’s showing the signs of a late stage economy with many economic indicators above 2019 levels, strong demand and supply pressures, and the fastest price growth (inflation) in 40 years. Thus, government officials have signaled that they will tamp down on their Chapter 1 stimulus by raising interest rates and unwinding trillions of stimulus dollars [see Fed’s Garage Sale below]. Other major central banks are doing similar. Additionally, Russian military forces threaten Ukraine (and with it the stability of all Europe and all investment markets) — Numerous forces are shoving in different directions🔁
- Private credit: Private debt funds raised $191.2 billion in 2021, the second-highest amount on record as an increasingly puzzling macroeconomic environment caused investors to seek equity like returns from investments that often have better downside protection. Private debt is the third-largest private market strategy, trailing only private equity and venture capital, according to Pitchbook
- Fed’s Garage Sale: Quantitative tightening, the opposite of QE (quantitative easing), is now part of the Fed’s plan: The Fed plans to significantly reduce assets on its balance sheet, and eventually eliminate its $2.66 trillion of mortgage-backed securities (MBS). Past rhetoric focused on letting maturing securities roll off the balance sheet without replacement, but the Fed may sell securities outright in order to steepen the yield curve and get rid of MBS entirely
- Supply chained: A concern hardly mentioned yet is that once transportation bottlenecks are fixed — i.e., ships are unloaded, ports are not backed up, and trucks run smoothly — there may still not be enough supply manufactured to satiate demand🙁
- Wages & Labor: Higher wages are pulling people back into the labor force yet the U.S. remains 2.5MM people below pre-pandemic employment levels. While policy has been accommodative for two years, and still is accommodative, there are risks over the next 18 months of overly restrictive government monetary policy and an inflationary wage-price spiral (Note: empirically, wages follow prices). Additionally, it seems that higher prices have reduced demand as judged by decade low consumer sentiment and cooling retail sales😏i.e., the cure for high prices is high prices
- Great to good: Economy is going from great to good. Inflation should moderate but won’t disappear (our StayFlation scenario). Expect government policy to go from very stimulative to neutral, but not restrictive; however, policy mistakes are the norm and play out over the long term while market sentiment is short-term, highly reactionary😳and can turn on a dime
- Daytona: Putin is in pole position. As previously stated, regardless of what happens in Ukraine, it seems that Russia has already won recognition of its renewed power and ambition💪🏽and Europe and the U.S. have lost global status as well as a measure of security. Big picture, global instability is a negative for investment markets. However the conflict with Russia ends, the West will look weaker! — In other Daytona 500 news, Austin Cindric won and Bubba Wallace placed 2nd by 0.036 seconds🤦♂️
- Via gone: ViacomCBS rebranded as Paramount to focus on streaming; but let’s face it, Viacom was not much of a “brand name” — more importantly, “Baby Shark” will get a full-length movie, “doo, doo, doo, doo, doo, doo”
- Meta-Mouse🐭 Disney has a metaverse strategy, an NFT push, a “virtual-world simulator” patent, and a new lead person to oversee it all
- Star Trek: Epirus, based in Torrance, California, announced a $200MM Series C raise and hit unicorn status; they make high-power microwave systems (energy weapons) — for the U.S. Army and DARPA — that can shoot down drones (and Klingon starships)
- Subscribe to mine: Subscription-based business models have gone viral😳as businesses strive to increase margins and maintain relevance with reliable revenue streams and add-on sales. Subscriptions are not just for software as a service (SaaS) companies, streaming services, and Uber addicts anymore! Alaska Air has a subscription service for $49 and $199 a month. TikTok is testing paid subscriptions for its content creators. Auto makers are exploring subscription services for car use and autonomous driving. Taco Bell expanded its Taco Lovers Pass (a taco a day for 30 days). Panera’s has unlimited coffee/tea for $9 per month and Sweetgreen’s has its $10 Sweetpass (which is more like a loyalty program) 🧐
- Stove Wars: Climate change activists desire to eliminate natural gas from people’s kitchens and homes has had success in Seattle, New York, and several other cities, but the effort has lit tensions amongst those concerned about global warming🌱
- Sustainability: Environmental and social challenges are defining issues for investments and businesses — authentic sustainability of environment, revenues, employment, customer, and company are key — we continue to access opportunities through involved leaders and thinkers — Running Point signed on to the FAIRR initiative nearly two years ago😊
- Hot house: Over $12B of institutional capital is targeted to acquire single family homes to rent🏡 Additionally, Blackstone increased its exposure to the U.S. housing market with a $5.8 billion bid for Preferred Apartment Communities
- Starlight: Much as they have done for years in Japan, Coca-Cola has started experimenting with new flavors in the U.S. — Starlight flavor is the latest limited addition to launch🚀
Best wishes for the week ahead😃,
Michael
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Michael Ashley Schulman, CFA
Partner / Chief Investment Officer
“We deliver bespoke investment solutions, innovations, and unique perspectives to you and your family.”
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Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-22–03
Originally published on LinkedIn.com.
