Inflationary fears vs. the wind in our backs

By Morgan Christen, CEO, Spinnaker Investment Group

Since our inception, clients have asked us, what is a Spinnaker? To get technical, it is a large, usually triangular sail flown by a boat as a headsail when running before the wind. In other words, a sail to use when the wind is at your back. After a bit of choppy weather a few weeks ago when Chairman Powell admitted the Fed may need to move rates a year sooner, seas have calmed, and the market is flying the spinnaker proudly.   

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Courtesy of Spinnaker Investment Group

Morgan Christen, CEO, Spinnaker Investment Group

The powerful wind at our back includes strong economic growth, solid earnings, low interest rates and a bond market that is not reacting to the “threats” of inflation. We are currently in the inflation is “transitory” camp. Meaning, we do not think the high levels will persist. Already we are seeing a pullback in commodities as the chart below illustrates. 

Charts courtesy of Spinnaker Investment Group

Futures performance chart shows two-month and two-year returns

There are areas such as wages that will not be transitory; once those move up, they will not move down. There is a bit of push and pull regarding wages as we saw a record high number of job openings at the end of April, sitting at 9.3 million. Companies are offering higher wages and additional compensation to lure in employees, but with all the stimulus, many are not taking the bait (as indicated in the job opening numbers). Additionally, more Americans quit in April than any other month on record. Many quit for higher wages, while some quit for flexible work hours (office vs. home). 

We are not ready for higher prices and companies know that, so they resort to trickery. Welcome to more shrinkflation, when companies reduce the size or quantity of their products while charging the same price or even more. 

Q2 price changes chart

There have been many negatives to wash crypto currency’s gains away. Bitcoin has been touted as a “store of value” – we are not sure if that is true as there are now thousands of coins and they are extremely volatile. 

As the chart below may show, Bitcoin has been pulling funds from gold investors for some time. Gold usually spikes when investors are concerned with inflation, but it has not moved, until recently. 

Chart shows three-month comparison of Bitcoin versus Gold

Are investors realizing Bitcoin is not a store of value? Are they realizing that gold, while boring, may be the best store of value if you are concerned with inflation? Not sure of the answer yet, but it is a developing story. Could it be time to initiate a gold hedge? Maybe, but as the chart below shows, stocks perform quite well in a low to rising interest rate world with commodities coming in a strong third. 

Fighting inflation chart

Bond yields dropped modestly, as most market participants are not concerned with inflation at the present time. After flirting with 2 percent on the 10-year note, the quarter saw rates drop roughly 28 basis points, from 1.74 percent to 1.46 percent. Rates were still higher than they stood a year ago June.  As of this writing, interest rates have continued their move downward. 

While we enjoy the wind at our back, it could get “nautical.” As we head into the final quarter of the year, we will see the moratorium on mortgages and rent lifted along with all the unemployment stimuli. Time to go back to work and fill the nine million open positions! If the Fed talks of tapering (stopping their bond buying), supply chain bottlenecks continue or the Delta variant shuts things down, the wind at our backs could die.

Interest rates in the bond markets continue to move lower, implying the bond market not only believes inflation is transitory, but maybe some of the recent economic growth is transitory. 

In summary, this is more like a game of poker than a game of chess. We highly recommend that you and your financial adviser develop a plan that is based on your needs and your risk tolerance and stick to the plan. 

Morgan Christen is CEO, CIO, Co-Founder of Spinnaker Investment Group which serves a broad customer base throughout Southern California, as well as many clients based across the United States. An independent firm that does not represent a specific company, bank or Wall Street institution, Spinnaker confidently and autonomously advises clients with individually tailored financial strategies designed to achieve financial independence. The firm’s services include Financial Planning, Wealth Planning, Retirement Planning, Asset Management, Securities and Insurance. For more information, visit www.SpinnInvest.com.