June 23, 2021 | Over The Top

It’s almost half-past 2021, so let’s review.

First, your portfolio. If it’s B&D©, carefully-weighted and globally-exposed you should be up so far this year by high single-digits. Completely ignore the cowboys, swaggering stock jockeys and anon Internet braggarts who come here to make you feel inadequate. Investing isn’t a race or a contest. It’s not about scoring a 15% return. Instead it’s a path of steady, predictable, low-vol returns which will get you to the goals that matter. Retirement. A house. Educating your kid. Starting a business. Or, in the case of many in the steerage section, a personality transplant.

Some people worry we’re in an Everything Bubble. Stock markets are at record highs, they say, so surely it cannot last. Were it not for central bank money-printing, profligate politicians and the distorting effects of the pandemic, there’d be a reckoning. And it’s coming, anyway, they yell. This is the bread-&-butter of doomer bears like Toronto’s David Rosenberg, the crusty Harry Dent or debunked prophets like Gerald Celeste. These guys are just, well, nuts. Consistent, but nuts…

The reality is this: after 16 months of pandemic, the economy is reopening with a vengeance. GDP growth of 6% is just the start. Romping bank profits are but an inkling of what’s to come. Unemployment levels will sink to 2019 levels or below. Oil could be on its way to a hundred bucks a barrel. The S&P 500 is seeing 90% of member companies advancing at the same time. Bay Street has jumped 15% this year. Estimates are for corporate bottom lines to swell between 40% and 50% over year-ago levels.

Last year delivered an historic, global, holy-crap recession of Biblical proportions as we battled the slimy little pathogen from Hell. Governments spent $20 trillion in response. Hundreds of millions of people lost their work. But we got over it. Vaccines were developed at record speed and now 70% of Canadians have been jabbed. Large parts of the economy went online and flourished. Technology has allowed us to break back into the sunlight.

There is now record demand for cars, houses, boats, RVs and anything you can nail, saw or glue. That demand is about to extend to travel, tourism, entertainment and personal services as new cases of Covid crash 80%. There is a mountain of personal savings in the US and Canada being unleashed. Plus the wealth effect from a real estate boom nobody expected a pandemic could produce. Consumer spending in the next year will be epic.

Meanwhile history tells us that periods of expansion following severe contractions are not short. They average about six years. If we’re just starting on this path that suggests it’ll be later in the decade before the next correction arrives. Yes. The Roaring Twenties. If you’ve been sitting in cash, holding David Rosenberg’s paw and trembling, prepare to see a lot of positivity pass you by.

What could go wrong?

Lots, of course. For sure we’ll have more inflation so prices of everything will stay elevated, even when the supply chain gets fixed.  And interest rates will not stay where they are, despite what everybody thinks. The average tightening cycle for the Fed is a little over 800 days and involves about 10 rate increases. This will begin in the next year or so, and our CB will follow. Higher rates have proven in the past not to affect stock markets much, but they can kick real estate where it hurts.

But wait. What if Covid comes back? The Delta version?

Could happen, but more quarantines, lockdowns and restrictions are unlikely to be the response. Besides, by the autumn 75% of North Americans will be fully dosed so even a Fourth Wave would have far less impact on the health care system. In short, it’s over.

How about debt?

Yup, tons of it around. Higher rates will make it more costly to service. But by far the greatest debt is in the hands of governments, which have tools to deal with it. Like printing money (more inflation, more rate hikes). Or tax increases – look at the Biden agenda, for example. And soon (after the election, if he wins) you’ll see what T2 has in store.

So more inflation, more interest, more tax, but this will be balanced by rampant growth, rising financial markets, more jobs and profits. Suddenly the bubble in equities looks not so frothy at all. “This is the greatest re-opening trade EVER,” says stock veteran Ed Pennock.

There’s more money available than ever before. Should we invest in Growth or Value? The answer is YES. The landscape has changed. Shortages have transferred power to the workers. Between stimulus payments and the savings from work from home, personal balance sheets look better than we can ever recall. Prices are up but so are wages. Housing costs are up. A negative, yes. However, there’s also the “Wealth Effect” of housing prices. We have changed the basic way we consume goods and services. Think Amazon, Etsy and Shopify. In its totality, we think this is a perfect setup for the “Roaring Twenties”.

Wow. But nothing’s perfect, of course. China could disrupt trade. Biden could keel over. Jag could become prime minister. The virus could trick us. The lesson of the pandemic is that bad things can happen really fast.

And, yes, that’s exactly why you should be B&D©. It’s like having four-season tires. Or marrying a plumber. You can never be too sure.

Garth Turner June 23rd, 2021

Posted In: The Greater Fool

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