Busy August, Staying the Course - September Allocation

September 01, 2023

Welcome to September! August was filled with financial and economic news.  As August’s go, the information I had to digest set a record for the usually boring vacation-prone month.  Right out of the gate we had the Jackson Hole conference of leading economists and Central Bankers from across the globe (attendee list can be found here).  During this conference the Federal Reserve Chairman, Jerome Powell, stated “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”  During this “freebie” of an event, where official policy is not made, he is given more latitude to say things he would otherwise not do during a formal Federal Reserve meeting.  His statement above does in no way mean he will raise rates further.  Rather, he is trying to cool lending without raising rates through threats.  From a perspective standpoint, the effect on the economy is the same, but the results in the market are more muted.  As a result, the markets did not react as strongly compared to an actual further raising of rates.  Although the August inflation rate has ticked up a bit, lending across the board has stalled and the jobs reports are not as hot as they once were.  This impact will affect the S Fund, one of the reasons I'm currently not invested in it.

The second piece of data that became available is the ongoing financial crisis in China.  China has for years manipulated its economy to hits it target GDP of 6-7% per year by changing its currency, encouraging investments in real estate (at one point during this boom in the early 2010’s, China consumed more concrete in a few years than the US did during the entire 20^th Century).  Their “wealth” is held in real estate and from that wealth they have become major consumers.  The realization of Evergrande's failures and the looming potential failure of Country Garden (sounding eerily similar to Countrywide) has induced panic within the Chinese economy.  In an effort to stabilize the developers of China's Ghost Cities, mortgage requirements have been lowered a bit, but the damage has been done, and a consumer behemoth with less free capital to spend, will impact the world’s economy, mainly in technology, raw materials, and quite possibly the financial sector, depending on the amount of exposure they have to debts about to enter into default.  On a side note, the US housing market is also facing challenges, primarily due to higher interest rates, in contrast to the systemic risk analysis failures that led to the 2008 crisis.  Impacts will occur, but not on the grand scale we saw in the Great Recession.

While it is often popular to hate the Federal Reserve, I do think they have positioned the US in a good position to respond to a recession.  They have an edict to reduce inflation and maintain full employment (I’ve covered the IS-LM-FE curve before) and right now we have higher than desired inflation and employment that was at max or maybe beyond a few months ago.  When a recession does occur, they can quickly respond.  Other central banks have followed the Federal Reserve's example, positioning themselves in a similarly robust state compared to the era of near-zero interest rates. 

As mentioned earlier, I am not bullish on small caps, yet I maintain a positive outlook on the C Fund and the I Fund, influencing my allocation percentages for September. Keep investing!