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Quarterly Letter to Clients

October, 2020

Indices at quarter-end (September 30, 2020):

Dow Jones Industrials: 27,781.70 3Q'20 +7.63% YTD -2.65%

Standard & Poor's 500: 3,363.00 3Q'20 +8.47% YTD +4.09%

September and October are historically the worst months for stocks, and true to form, September’s arrival brought with it a stumble in the market’s steady and perhaps overly-ebullient advance. I wasn’t surprised, as, in my opinion, valuations had become a bit stretched. But my opinion didn’t count for much, as stocks began to recover near the end of the month.

The quarter finished a little higher, in what has been a steady, six-month amble upward from the mid-March lows caused by the pandemic, leaving the market about flat for the year-to-date.

It is my belief that the trillions of dollars that were shoveled into the economy because of the virus is the reason that the markets are at the levels upon which they now perch. It is a program that was disparaged as “helicopter money,” implying cash being dropped from helicopters onto the populace waiting below. A good part of that money has apparently found its way into stocks.

We have to recognize that it was precisely that money that kept many businesses and households afloat. If you have any empathy for your fellow man, it is hard to disagree with the program.

Thus, stocks are at these lofty levels not because business is particularly good (it’s not), or because earnings are on the rise (they’re not), but rather because there is too much cash looking for a place to call home, and that cash has landed on stocks. Given the level of interest rates today, the acronym TINA—There Is No Alternative—seems appropriate.

I am acutely aware that our budget deficit will be in the area of $3 trillion this year, and that our federal debt will run to more than our Gross Domestic Product (GDP). That puts us into elite company, as we join countries like Greece, Egypt, Portugal, Belgium, Singapore and Japan. It is a club that we think of as being populated by small, under-developed states like the Congo, Yemen, Cyprus, Eritrea, and Gambia. It is not a group that anyone desires to join, and it is a bit embarrassing that we, generally considered the strongest nation in the world, should sit with such company.

If I had confidence that our nation’s leaders would take action to reduce our debt load, perhaps I would not be thinking about this nearly as much as I do. I worry that our currency will inflate; that the dollar will lose it’s standing as the currency that is used to settle global transactions; that more fiscally responsible nations will replace us as world leaders.

But our politicians do not have the stomach to institute the painful measures needed to control our debt. I have used this line before: “…in the history of mankind, never has a government been able to resist the temptation of debasing its currency.” They will try to inflate their way out. It is the only politically palatable solution. You may have noticed the recent rise in prices at the grocer, or in housing.

In modern history (let’s take the last 100 years) the dollar has experienced several bouts of very high inflation: during and after WWII as we were paying for the war; in the early 1970’s following the end of the gold standard; and in the late 1970s-early 1980s, during what we then called stagflation, stagnant growth and an inflating currency.

Inflation hasn’t been above 3.5% in any given year for the last 30 years.

A small amount of inflation is generally viewed as desirable. The government targets the 2% area, and that seems a reasonable level. We have been below that number for 7 of the last 10 years, so why worry? It’s not something that we, as individuals, can control, after all. But we can prepare and plan, which seems prudent now, given what I view as our fiscal irresponsibility.

If your money is going to lose its value, what should you do with it? The classic answer is gold, but gold presents unique problems, and is useless if you desire income from your portfolio. We can say with certainty that bonds will not be a favorable asset in an inflationary cycle, especially given todays extraordinarily low interest rates. Stocks seem to be our best bet, and given that stocks today are yielding more than pretty much anything else, it seems a logical choice. TINA. I would not, though, expect smooth sailing.

There are things that we cannot control in life; we must accept them and move along. But there are other things that we can control, that we can plan for, and we should maximize our lives by managing those things to the best of our ability. On any sharp break in the market I will look to be a buyer of stocks, and as our bond holdings mature or are called, I will look to replace them with high-quality dividend-paying stocks. I see no other appealing option.

Jim Pappas