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Core Comments Quarterly Newsletter, 4th Quarter, 2021

October 11, 2021

The Delta variant brought with it a return to masking and social distancing as hospitals filled up and deaths due to Covid rose. In late summer both hospitalizations and deaths began to decline marking the end of the Delta surge. One benefit of the surge is that just under 90% of the population has been vaccinated, or vaccinated and infected, or infected only giving a large segment our population some level of immunity. The largest segment of the population without any immunity is children but the oldest among they have been approved for vaccination and the next youngest group is expected to be cleared for vaccination later this quarter. Much of the rest of the world is rapidly gaining immunity via vaccines as well. COVID may be running out of potential victims unless another harmful variant arises. Assuming no new variant we should be able to move back to a more normal existence.

Despite COVID, US Consumers are strong given rising asset markets since the 08/09 Financial Crisis. Just prior to the crisis in the Third Quarter 2007, US households had about $71trillion in Net Worth and that grew to about $145 trillion at the end of the third quarter of 2021. This was driven by rising home prices, rising stock prices and a lot of cheap money. The Fed Funds rate was 5% through 2007 and then plunged to the Zero Bound in early 2009. Later, in 2016 through 2019 it moved up to just over 2% before COVID forced the Fed to cut it to Zero once again where it remains today. This along with the COVID lockdown gave US households the opportunity and incentive to repay or refinance debt which we did aggressively cutting the portion of Personal Income that went to Debt Service by 35% from the end of 2007 to the end of the third Quarter 2021. This act freed up significant cash flow for additional investment in Stocks, Real Estate, Crypto and anything else you can imagine, driving all markets upward.

The Federal supplemental unemployment benefits ended in September and the CDC eviction moratoriums are coming to an end as well so perhaps October will see a surge in workers rejoining the labor force. Employers are desperate for more help. The JOLTS Job openings at the end of the quarter totaled 10.9 million while the total unemployed totaled 8 million. So, employers need 2.9 million people to rejoin the labor force to cover the shortfall. The shortage of labor has already accelerated wage growth to 4.9% over the last year versus a CPI of 5.2% so wages are beginning to keep up with inflation. This may be helpful in drawing people back to the workforce.

Inflation could still be transitory, but the time frame may be elongated and there are other complicating factors beyond wages. Inflation can also come from goods and services, now we are experiencing rising prices and limited supply in many markets. Some of this stems from COVID related shutdowns in industry and disruptions in the transport industry. The Global PMI (Purchasing Managers Index) has an index that tracks suppliers’ delivery times which are very long now and still getting longer. This is consistent with reports of low or no inventory at retailers and auto dealers. We have all heard that auto dealers have few cars available for very high prices. Also used cars are priced at extreme levels due to the shortage of new cars. Some say this will end quickly as the shortage of computer chips will rapidly come to an end while others report that it will take another year. No one really knows.

China is another source of supply disruption as the government is trying to contain their Real Estate bubble, become more climate friendly and increase equality among its people. These goals have constrained energy use which helps the environment but reduces industrial output possibly creating shortages of goods available here for the Holiday season. So, we could see additional price increases while the world sees China’s GDP slow. We live in interesting times.

The US stock market was mixed this quarter with the Large Cap stocks gaining 0.6% for the S&P 500, while Mid Cap and Small Cap stocks fell 1.8% and 4.4% respectively, also Growth beat value for a second quarter. Most of the unpleasantness occurred in September as interest rates rose and the news from China caused concern. The Aggregate Bond Index was up 0.1% for the quarter despite the loss in September and it is still negative for the year due to the large loss sustained in the first quarter.

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