Capital Ideas Newsletters


Pandemics, Politics, Pandemonium, and Printing

November-December 2021

As Thanksgiving came and went, the stock market paused to reflect on higher interest rates and the arrival of the Omicron variant…and sneezed.

The Federal Reserve has maintained asset purchases of $120 billion per month until their recent taper program. These purchases and the enormous federal deficit continue to pump up the volume of dollars available thereby lifting asset prices of all kinds while keeping interest rates artificially low.

The press continues to discuss the notion that inflation is a temporary phenomenon. We disagree and are beginning to hear others agree with our conclusion. We believe inflation is here to stay.

As 2021 draws to a close, the one big question is when will the party end? Almost every asset price is up with the exception of gold. Traditionally, gold and silver have been considered inflation hedges. These time-tested metals have historically been kind to investors when inflation rears its ugly head. It’s very possible that these will outperform in the year ahead.

Oddly enough, the three best performing sectors in periods of high inflation are “small cap value,” “energy” and “large cap value.” Additionally, in this environment, we also favor residential real estate, triple net lease real estate, and specialized direct lending.

In the institutional world, the big news is that insurance companies continue to invest in more of their capital in illiquid investments. In fact, 35% of insurer’s $4.04 trillion in investments as of December 31, 2020, were illiquid.

If low interest rates continue, all investors, both public and private, will need to commit higher levels of capital to private equity investments in order to keep up with inflation. Unfortunately, because the sponsors of private equity are in the driver seat, they are commanding longer lockups and other less investor friendly provisions.

Supply constrained inflation should abate as the backlog of ships in ports around the country eases as consumer demand slows after the holiday rush. Even so inflation, in our view, will remain problematic.

Politics makes strange bedfellows. In the coming year, political positioning should shape legislation. The issues of capital gains taxes, estate taxes, exemptions, and many other tax related issues will be bantered around as the political fulcrum. No doubt the accountants and lawyers will be kept busy. It is important to contact your tax advisors to discuss potential ramifications of different scenarios.

We often hear excitement from our friends and clients about things they hear regarding the newest idea, the hottest stock, or a tip from a friend.

As we enter 2022 (who can believe that?!), I am reminded of a famous Warren Buffett quote, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”

Our New Year’s resolution is to make sure that we keep our investors on track. each and every day.

Blessings to all for the Holidays.

As always,

Seymour W. Zises



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