Shadow Banking
“And as we wind on down the road/Our shadows taller than our souls
There walks a lady we all know/Who shines bright light and wants to show”
Robert Plant/Led Zeppelin
Hopefully, our reference to Led Zeppelin doesn’t go over like a lead balloon with fans who never expected to see their favorite lyrics in a financial newsletter. However, if anyone is to blame for the reference, it is the Federal Reserve and our government. If anyone is the “opaque figure creating shadows taller than their soul”, it is Jerome Powell. Remember, the Federal Reserve told us inflation was transitory and it would probably drop by the end of 2021. Instead, inflation hit four-decade highs just six months later. So much for letting inflation run a little hotter than 2%, per their strategy in late 2020. Now this same group of leaders is telling us they need to keep raising rates while commodity prices have fallen, used car prices have fallen, and new home sales are at levels not seen since 2007. Forgive us for asking if someone can find a bigger spotlight to remove some of the shadows our bureaucrats are casting. Forgive us also for mixing shadow and light metaphors with monetary policy, but we don’t think it is a stretch given the expanse of the Federal Reserve’s reach nor is it a reach given investor fear of what resides in the dark.
All of our government bashing aside, we realize you needed an entity in front of a force of nature in 2020, keeping with the sunlight/shadow theme. COVID was a force that called for artificial intervention to slow the spread and protect the fragile. However, there are always unintended consequences when mankind tries to manipulate nature. When you put 40% more money into the system in 18 months than it has ever seen, then monsters like inflation are prone to rise from the shadows. Now, unfortunately, the same leaders that fostered this environment are pushing “painful” solutions onto everyone, to quote bureaucrats in Jackson Hole. Maybe a pause and a moment to reflect from a group that is supposed to focus on a dual mandate of stable prices and sustainable employment and not make comments such as, “We don’t want to see the markets up 200 points.”? Maybe citizens are wondering if central bankers are scurrying around messing with their investment accounts instead of worrying about inflation and employment. Have they become political appointee’s instead of objective third parties? No one knows for certain, but let’s just say we have lost a great deal of confidence in our current Federal Reserve leadership. We desire a clear “macro” field of view to make decisions and the shadows they created are obscuring true illumination.
On that note, we probably never have a completely clear field of view when it comes to investing, but a Fed jockeying with rates and money printing introduces even more lack of clarity. Hence the reason the market has performed the way it has this year. That being said, oftentimes you set up to make your best returns in a bear market as you are able to buy fantastic franchises at deeply discounted prices. For example, in the year following a 20% market decline, on average the S&P 500 Index return was a robust 23.9% per the Wall Street Journal. Thus, with equities down over 20% in many cases, we think averaging into the market with money one has set aside for rainy days is a prudent step. We realize this is difficult but knowing we have mitigated losses for many with our conservative portfolios that have held up well in this market, it may be easier to find the courage to search for values in the dark recesses of a bear market.
Truly to say we know how the Federal Reserve strategy is going to pan out is to border on soothsaying. However, our conservative strategy has focused on minimizing downside, while the S&P 500 and the Aggregate Bond Indexes were down 23.95% and 14.38% respectively this year, which should allow us the capability to put money back to work while fear is in the market. In a perverse way, experience tells us when uncertainty grips the market, and no one wants to buy, prices are at their best and returns (which are a function of price) are most promising. Please keep this in mind, against the backdrop of a Federal Reserve and government that may have lost their way in the short-term, but long term has had a pretty decent record of not messing things up so much that capitalism couldn’t find its way through the shadows. Keeping with the Led Zeppelin influenced J.R.R. Tolkien theme, “All who wander are not lost” and this market may wander, but it is not lost.
P.S – We are working on a new format for our performance reporting and quarterly that should be unveiled in January. Our in-house quarterly report may become a little shorter in the future, but we will plan on keeping the same spirit and “je ne sais quoi”.
General Compliance Disclosures
Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions. SSI, its affiliates and its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”) and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC and an SEC Registered Investment Advisor. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.
Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.