Market and Economy

• Investors need to be aware that inflation damage compounds over time. We have undergone a secular change, and inflation will continue to move up over the medium term.
• Inflation has slowed from its 9.1% high in June 2022, but it has reaccelerated to 3.5% from the 3.0% low in June 2023.
• If you had $1,000,000 in cash in March 2021, the purchasing power of that would only be $848,445.
• Federal government spending is out of control, which has continued to fuel inflation. Driven by increasing interest expenses and spending, we expect a $2 trillion deficit for 2024.
• The Fed has been complicit. The balance sheet ballooned from $872 billion before the 2008 financial crisis to $8.9 trillion in April 2022. QT has made a dent, but it still sits at $7.4 trillion.
• Nominal GDP, 10-year and 30-year Treasury yield generally move in tandem. Currently, interest rates are below what we would expect.
• Own assets that will do well in an inflationary environment.
• Stocks should do well. We like oil and gold stocks in particular, as they are well-positioned from a supply-and-demand perspective and are undervalued by the market.
• We are avoiding any bond over 5 years in maturity. Inflation eats away at the value over time, and as rates go up, the nominal price of the bond is destroyed.
• Cash-like instruments like CDs and T-Bills with under 1-year maturity are also a good choice.

· Deficit accelerated to $500 billion in the December quarter, on pace for $2 trillion in the 2024 fiscal year ending September.
· Anticipated government debt of $36 trillion by December 2024, excluding significant unfunded Social Security and Medicare liabilities.
· An aging population will transition millions from taxpayers to net Social Security and Medicare beneficiaries, contributing to the looming financial strain (Current Liabilities of $26 trillion for Social Security and $40 trillion for Medicare).
· International central banks are reducing dollar asset holdings due to the weaponization of the dollar with SWIFT sanctions and dollar asset freezes and possible confiscation.
· Responses to the fiscal crisis are challenging. Resuming Quantitative Easing (QE) and debt monetization might lead to hyperinflation and discourage private investment.
· Options to mitigate the fiscal crisis, like cutting services or increasing taxes, are widely unpopular and politically unfeasible.
· Compounding Interest Expense requires the issuance of more bonds to cover higher interest expenses, driving rates even higher.
· This will directly lead to crowding out of the private sector, as higher returns in treasuries pull money out of productive investment. This is already seen with quickly increasing consumer interest rates.
· If the crisis leads to a default, commodities and stocks may become unfavorable.
· If QE resumes, gold and stocks might benefit, although rapid QE and rising interest rates could initially depress stock price-to-earnings ratios before nominal prices recover.
· We are avoiding the long end of the yield curve, as the real purchasing power of long-term bonds will erode from persistent inflation even if nominal values are maintained.
· Short-term treasuries and cash look attractive as well as diversifying assets like reinsurance.

• We are avoiding retail stocks like Amazon (AMZN), Target (TGT), Lowe’s (LOW) and Wayfair (W).
• Also avoiding consumer discretionary stocks like Tesla (TSLA), Carvana (CVNA) and consumer finance stocks like Capital One (COF), Discover (DFS) and Affirm (AFRM).
• Over 51% of Americans now carry a balance on their credit cards each month, a 27% increase since 2018.
• As of October, 28.9% of banks reported tightening standards for consumer lending, a leading indicator of potential recession.
• Delinquency rates across all non-mortgages have surpassed pre-pandemic levels, with a sharp increase observed in the September quarter, particularly among younger consumers.
• Student loan pause added $260 billion in consumption, accounting for up to 0.8% of monthly consumer spending. The pause ended on September 1.
• The average interest rate on credit cards has soared to 20.72%, with rejections for scores under 700 hitting over 50%.

• We are avoiding retail stocks like Amazon (AMZN), Target (TGT), Lowe’s (LOW) and Wayfair (W).
• Also avoiding consumer discretionary stocks like Tesla (TSLA), Carvana (CVNA) and consumer finance stocks like Capital One (COF), Discover (DFS) and Affirm (AFRM).
• Over 51% of Americans now carry a balance on their credit cards each month, a 27% increase since 2018.
• As of October, 28.9% of banks reported tightening standards for consumer lending, a leading indicator of potential recession.
• Delinquency rates across all non-mortgages have surpassed pre-pandemic levels, with a sharp increase observed in the September quarter, particularly among younger consumers.
• Student loan pause added $260 billion in consumption, accounting for up to 0.8% of monthly consumer spending. The pause ended on September 1.
• The average interest rate on credit cards has soared to 20.72%, with rejections for scores under 700 hitting over 50%.

• Core CPI has slowed to 4.0% year-over-year.
• Unexpected inflation is somewhat beneficial for the federal deficit, which is critical given the nearly $1.7-2 trillion deficit and the $34 trillion existing debt.
• Consumers face challenges with rising credit card delinquency and upcoming student loan payments, potentially leading to a weaker 4Q23 in GDP terms
• In the September quarter, government spending was a major component of economic expansion.