Between a Rock and a Hard Place - October Allocation

October 03, 2022

I would like to have had better news for you this month, but unfortunately, the economies of the world are all struggling, and the economic situation is terrible.  As I have stated before, the US is already in a recession, the UK and the EU are on the verge of one, and China is looking quite weak with 30% of its economy in a faltering real estate crunch.  To make the situation worse, high inflation is causing stagflation across the globe.  For the US, the Federal Reserve is still trying to fight inflation while also seeing a recession getting worse and worse.  I think they will continue to pick the lessor of two evils-fighting inflation with higher interest rates over stopping a recession with 15% inflation.  Recessions last months to two years, max.  If inflation gets too high, it could take 10 years to fix.  Compounding the Federal Reserve’s troubles is the recent cut in OPEC production which will drive energy prices even higher in the short term, making inflation even harder to control.

The Federal Reserve has spent the better part of 12 years keeping interest rates low and inflating real estate and the stock market.  There was some very good logic to this approach, and the fact that we had a long stretch without a recession is testament to this fact.  However, COVID brought down the entire system-the US spent more on fighting/dealing with COVID than we did on WWII on an inflationary basis.  We injected trillions of dollars into our economy and the fine balance we had achieved over the last 12 years was dramatically upset. 

Where does that put the investor.  As the TSP is a long-term investment vehicle for retirement, I see continued dips in the market with rallies as traders try and guess several things.  Traders will be guessing the bottom, the end to Federal Reserve interest rate hikes, the end of high inflation, or some other obscure technical metric that we often see.  No one can know when the bottom will be reached or when the recovery, economic or stock market, will begin.  I see this downturn as a buying opportunity to buy at levels last seen when President Biden took office (frankly that is not too bad) and will utilize dollar-cost averaging to my benefit.  I will keep my eyes focused on the long-term, which for most of my subscribers is at least 5 years.

BL: Expect the stagflation (recession with inflation) to dominate the economy for the next two years and do not expect a rising stock market over the same period.  I am keeping with my 100% C Fund strategy and will use dollar-cost averaging to my benefit.  Keep investing!