Our notes on the economy
That was quick. As we have been writing, we felt that the economy was slowing down but
holy cow, that escalated quickly. Last week the US Unemployment rate moved up to 4.3%
marking the highest level of unemployment since October of 2021. Keep in mind that the
historical average is close to 6%. It certainly was a bigger jump than economists were
expecting, which set off a chain reaction across all markets. The S&P 500 had its biggest
correction of the year, and the bond market also became extremely volatile. Almost
immediately, people began to postulate that the FED should lower rates not by the
expected .25% but a double lower of .50%. Jeremy Siegel went as far as stating the FED
should institute a 75 basis point cut. Seems extreme to us. But then again, Wall Street
loves to be extreme. What everyone keeps thinking is simply that the US might be headed
to a recession. Our clients have been hearing us say this for a long time now. But how bad
would that be? Would the markets implode? We doubt that. Inflation is now down to an
expected rate of 2.33% for the next three years. In case you missed it, that’s the lowest
level on record dating back to 2013.
T
Our discussion on the bond markets
Last month we stated how glad we are that we have been buying more fixed income for our
investors. The news just last week alone created a roughly 2% gain on bond prices. For the
year, the US Bond Aggregate Index is up over 3%. That is just plain nuts. Remember that is
not your yield. This is the price of the bond itself! Granted, the shock and awe campaign
that took place in the bond markets has calmed and yields have gone up a little, but it goes
to show you why we emphasize this side of the investment ledger as much as we do.
Our discussion on the equity markets
The all-time high party for the S&P 500 took a breather finally as the S&P 500 experienced a
decline of –9.7% from July 16-August 5. Most of that damage took place last Monday
August 5th with the market opening down 4%. Jump forward to Friday the 9th and the S&P
ended the week down only .04%. Let’s put that in perspective. Since May of 2009 there
have been 29 corrections over 5%, if you include this one. So, is it shocking? Hardly. The
market never has or ever will move in a straight line anywhere. The market is made up of
moves, sometimes drastic, both up and down. Volatility is normal. How we act as investors
doesn’t have to be. We take it in stride. We know that the median intra year drawdown is –
13% since 1928. Nothing new to see here folks. The amazing thing is that by the end of the
week, most of the losses were completely made back up!
From the MailBOX and Ryan Krueger
Un-Crowded Opportunities
We have not made any prediction about the Stock Market this year, a humble tradition that
now spans three decades of professionally managing money. We invest all of our time
working inside the market with a rules-based and evidence-tested actively managed
portfolio. Our repeatable stock selection process relies on buy and sell disciplines, not
opinions.
But for fun, we’ll hazard a guess that the rest of the world is about to unleash a circus of
predictions and opinions, between arguments, about an election and the direction of the
economy.
What could be fun about that?! If you read this short note, you will never again be able to
hear another example about ‘how awful it is that...’ without thinking about these two
people too busy working to have time for predictions.
Let me tell you about my favorite circus workers of all time.
Doc and Amelia Farmer were married and worked together in a circus, until they both got
fired during the Great Depression almost 100 years ago. They had nothing. Many
businesses were forced to close for the next several years, there were no jobs for them. So
they made their own jobs, collecting dirty rags that factories had thrown away in the trash.
The Farmers cleaned the rags the best they could and brought them back to different
shops for a couple bucks.
Then they started cleaning the uniforms for factory workers also. Today, they get $1.50
from each uniform they rent to businesses all over the United States. The Farmer family
has continued to operate the business and remain the largest stakeholders, but now they
have 45k employees working at this business, named Cintas. They have grown from those
first few dirty rags to now $10 billion in annual sales. Their average customer has been with
them more than 25 years.
Let the circus of predictions of come and go, while you own the antidote to any poison of
distraction – simple time-tested truths and hard work. Beautifully boring businesses like
Cintas are often overlooked by circus crowds chasing the next great game-changing
technology. Your antidote for the doomsayers comes with surprising upside the other
crowds predicting new areas for booms can also overlook. That rag & uniform cleaner
ignores all the scary or exciting predictions because it’s too busy outworking them.
Interesting thoughts we discussed
The US National Debt has crossed over the $35 trillion (about $110,000 per person in the
US) mark for the first time. This is $13 trillion more than where it was just five years ago.
This jump happened during an economic expansion! What do you think will happen to the
debt in a recession!
Olympians who stood on the podium for many countries get a bonus cash payout. This was
news to me. US athletes received $38k for a gold, $23k for a silver, and $15k for a bronze.
This payout ranks the US tenth. Who is the leader? That would be China. In US dollar
equivalent, they receive $768k for gold, $384k for silver, and a paltry $192k for bronze. The
rumor around here is that our CFP Robert, who wrestled in high school, has been hitting
the gym and looking at apartments in Beijing.
Finally, 17% of 25–35-year-olds in the US now reside at home with their parents. This is the
highest level since the time following the Great Depression.
Allocation suggestions
Taking in all the above and we continue to maintain that our portfolios have a base
allocation that is comprised of:
50% Stocks
30% Fixed Income
10-20% Private Investments or Alternatives
All investors and their plans are created differently, and every investor should have an
allocation that fits their needs. The above allocation is what we call our “base” which
primarily is for people looking to grow their assets. The percentages will change depending
on where clients are in their lifecycle and plans.
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states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investme nt
adviser does not constitute an endorsement of the firm by the SEC, nor does it indicate that the adviser has attained a particular
level of skill or ability.
The content presented is developed from sources believed to be accurate and should not be regarded as a complete analysis of
the subjects discussed. All expressions of opinion reflect the judgment of the author and are subject to change. The information
in this material is not intended as tax or legal advice. A legal or tax professional should be consulted for specific inform ation
regarding your individual situation.
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