Markets Climb a Wall of Worry - Your Money March 25th 2022

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It was another interesting week in the markets. Notwithstanding the geopolitical events that have investors on edge, central bankers came out swinging for the interest rate fences (implying a 50bp increase in short term interest rates to emphasize their commitment to bringing inflation down to a manageable level). Unfortunately, they are in a no-win situation. Leave interest rates down to stabilize and support the economy and stock markets, and you get a repeat of the 1970’s stagflation scenario that did not end well for stocks and real estate. Raise interest rates too much and the consumer gets hurt not to mention Governments at all levels on both sides of the border. That will likely force a cut in services or a downgrade to bond credit ratings. Not palatable to politicians or the average taxpayer. The alternative will be much higher personal and corporate tax rates. Yikes, is it time to stock up on cannons and canned goods?

Fortunately, there is another scenario. Raise interest rates enough to remove some inflationary pressures, but not enough to kill the economy. Recognize that we are in a new paradigm that looks a bit like the old long forgotten paradigm underscored or supported by the introduction of efficient productivity raising technologies. Supply chain onshoring is the new mantra by both government and corporate executives as businesses secure local raw materials and semi finished goods. We think the announcements made by companies like Intel to create new chip manufacturing facilities directly in the US, are the tip of the iceberg. Yes, the upfront costs will hurt the bottom lines, but once the factories are up and running, robotics and computerization should keep operating costs down to manageable levels and more importantly, corporations will not be subject to foreign led shutdowns due to war, pandemics or ideological differences.

Fortunately, North America has an abundance of raw materials, so we just have to develop and deliver them. That means increased transportation networks like roads and rails and a skilled workforce to man them. A prime example is Tesla’s giga factory in Nevada. Last year, Tesla started investing in lithium mining and extraction operations and likely wants to wean itself off sources coming from Australia and South America. I am not suggesting you buy Tesla, but using its financial strength to secure a steady supply of raw materials is forward thinking in my opinion. Did you know there are lithium deposits in Nevada? Speaking of batteries, think nickel as well folks. And of course, you are going to need a lot of trucks and shovels to get them.

Turning to technological changes, Five G comes to mind. We think it has a long runway. Again, in an ideal world, do you think the North American businesses that need computer chips in their goods and machinery, would prefer to buy them from a factory here or in Taiwan.

Lastly the war in Ukraine is causing human tragedies in Europe not seen in decades. Its also causing a shockwave around the world as it disrupts the exports of crucial food commodities like wheat and corn. Once you remove the exports from both countries, the question is who goes without? You may want to buy an extra bag of flour the next time it goes on sale.

Bottom line, future opportunities abound but we could be in for an even longer bumpy ride before we get there.

Stay safe and Happy Trading.

Cheers Steve and Michele.

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Steve Bokor

Steve Bokor

Portfolio Manager