Q3 Letter - 2021
Over the last quarter, inflation has been the primary point of concern for financial markets. What was initially viewed as temporary price increases from re-opening, has now morphed into fears of prolonged stagflation (slow economic growth with high inflation). Worryingly, even the Federal Reserve has begun backtracking on its inflation is ‘transitory’ stance, stating the current level is “frustrating” and could persist for longer than anticipated. But how worried should investors actually be?
In the short term, inflation is likely to persist, especially as we enter the holiday season and retailers continue to place new orders at a record pace to keep up with the demand they are seeing. Although as we look beyond the next few quarters, there are good reasons to believe that these pressures may subside.
1. The consumer’s response to inflation this cycle has been different than what it has been in the past. In the 1970s, consumers responded by accelerating large purchases in an attempt to get ahead of future price increases. This, unfortunately, fueled a self-fulfilling cycle which actually caused prices to rise. In contrast, today's surveys show that consumers have been deferring large purchases in hopes that prices will eventually return to lower levels. As long as consumers continue to act in this manner, it will act as a natural headwind to the market's ability to support higher prices.
2. We are beginning to see early signs that inflationary pressures are abating. 1 – Despite the horrible weather this year, US farms were surprisingly resilient and recently reported a record level of soy and corn reserves. This should come as a relief to commodity prices and the risk of rising food prices. 2 – Freight costs, although still at multiples of pre-pandemic, may be easing. Container quotes out of Chinese ports reportedly dropped 50% in just the past week, and while there is still a labor gap in the trucking industry, this gap is more likely to shrink than widen over the next few months, given the roll-off of unemployment benefits coupled with the higher wages offered. 3 – Mortgage applications have stabilized at a lower level over the past few months. Historically the change in mortgage applications has correlated nicely with the change in home prices. As fewer buyers enter the market, we can expect to see relative stability in the secondary and tertiary housing markets.
3. Federal unemployment benefit programs under the CARES Act ended in September, and there are currently no plans for additional stimulus checks beyond the third that went out in March (coincidentally, vehicle sales peaked in April and have contracted every single month since then). Despite incremental improvements on the employment front, money won (or given) always goes twice as fast as money earned. Household savings rates are already back to pre-pandemic lows, and with less disposable income to spend, buying patterns should contract accordingly.
The point is, trying to predict the direction of inflation at this point is challenging. The early move has already happened and by now investors are well aware of the primary risk factors, making them largely priced in. Fortunately, we benefited from the early move in our flagship strategy MLS by positioning more heavily into the energy sector at the beginning of the year. Going forward, our various strategies are intentionally designed to react differently to different inflation regimes. Value-oriented strategies like the Mirador Income Opportunity Strategy (MIOS) are more likely to outperform in an inflationary environment, while growth-oriented strategies like the Mirador Aggressive Growth Strategy (MAGS) are more likely to outperform if deflation returns. As always, taking a balanced approach is prudent.
As we enter Q4, our focus will be more on the upcoming earnings season than inflation. With peak growth and rising costs in mind, we will be watching closely for margin weakness and early signs of any slowdown in consumer demand. Our belief is that current earnings estimates at the index level will turn out to be naïve extrapolations of a stimulus subsidized from the prior 12 months, and CEOs/analysts will need to downgrade their projections either this quarter or the next. Add to that a Federal Reserve on the brink of tapering, and we think a growth scare is likely, causing major indices to trade range-bound for the remainder of the year. Although this may imply a bumpy ride, it will present opportunities for us to capitalize on, and, assuming earnings continue to make incremental progress, it will paint a positive backdrop for the markets into 2022.
As always, we appreciate the trust you’ve placed in us to manage your capital. If you have any questions, feel free to reach out.
I want to receive Mirador’s research and market updates!
Information presented reflects the personal opinions, viewpoints and analyses of the employees of Mirador Capital Partners, LP, an SEC-registered Investment Adviser. The views reflected in the commentary are subject to change at any time without notice. Nothing herein constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Mirador Capital Partners, LP manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Visit us at miradorcp.com for more information.