Chairman’s Letter Q1 2021: Goldilocks & The Three Bears

There are many approaches to today's economy




April 1, 2021

The Just-Right Bear

Investors continue to sing an opportunistic tune as evidenced by the continuation of positive results reported on your statement. Generally, equity investors are heartened by continued robust earnings growth, powered by a rapidly recovering economy, fueled by massive dollops of money, dropped upon the populous by eager governments emboldened by their ability to borrow for next to zero percent interest rates. What’s not to like with free money?

All the money that we have collectively been hoarding while locked away from having fun, has piled up to a mountain of idle cash. Once we are all vaccinated, estimates are that 3 trillion dollars are expected to gush forth in a spending frenzy that we have never experienced. It’s like investors can sense that we all have our collective foot on the gas pedal, but the virus has its foot on the brake. The engine is roaring, the tires are smoking but no movement – yet.

The Too-Hot Bear 

Investing is about thinking about the future. Some worry that all the money being printed and added to the already large pile of savings (augmented by a stock market at record highs) will unleash a torrent of consumption so strong that price increases will spiral out of control, causing inflation. This will lead to the need for higher interest rates to restrain the party. Already, interest rates have increased sharply in anticipation of the need for a return to normalcy. While broad stock market indices have appreciated 4% year to date, broad measures of bond market returns have fallen 5%. The bottom line is that bond investors are demanding higher returns for the risks of too-hot growth and stock investors don’t like that. The conundrum for equity investors is ‘How hot can the economy get before it’s too hot and burns our collective fingers?’

The Too-Cold Bear

Central banks have played the role of setting the table for investors for the past 40 years. They crushed rampant inflation in the ‘80s. Mostly, they have guided the world toward modest growth with the occasional global crisis requiring ever larger interventions to save the world from collapse. These bankers have become almost mythical financial Gods, and the world has come to rely upon their words and deeds as the oxygen for survival. Lately, the U.S. central bank has taken upon itself to pooh-pooh (pun intended) the Too-Hot Bear. The Too-Cold Bear dismisses the concerns that too much honey is a bad thing. She points to statistics (like still high unemployment and income inequality) to make her case that cheap money is good, and more is needed. When pressed if her confidence is mistaken, she swats away the doubting bees with the promise of tools, not yet contemplated by mere investment mortals, that can be pulled from the honey pot to keep the world from spinning out of control. 

A Goldilocks Economy

Presently, we live in a state of suspended animation as we bear (pun intended) witness to mighty forces buttressing the world, awakening from its winter slumber. The world is stirring from a near death experience stung by a lethal bug. The patient has been administered an antidote. The global financial system is also being administered stimulants to accelerate the recovery. The debate is about the quantity and need for additional stimulation. So far, investors are sitting at the table with Just-Right Bear enjoying the honey left on the table by Too-Cold Bear.

In many respects, the debate amongst the Bears is a moot point for the investments in your portfolio. The companies you own have weathered the storm well and can be expected to do so for many years into the future. The value of the companies will fluctuate as the Three Bears all jockey for position at the table, but they will always be valuable pots of honey.