My father-in-law, Don Vernon, turns 90 years old this month. Happy birthday, Don! Among many accomplishments, Don was married to his wife Kathleen for over 60 years and had three daughters (a doctor, a lawyer, and, my favorite, an engineer—my wife—Ellen Hatch!). Don also served this country on an aircraft carrier in the Navy and had a brilliant career in the defense sector most recently as an executive with SAIC. In thinking about this birthday, I couldn’t help but be reminded of what's happened in the world during the last 9 to 12 months is not all that dissimilar from the trials and tribulations over the past 90 years. We’ve had political discord, and unfortunately, aggressive regimes and even war. We’ve had recessions, inflation, and also many, many good years, medical breakthroughs, and unprecedented technological innovations. More broadly, over the last 90-year period we've been through difficult times, and yet somehow, always, we come out the other side. Yet today’s uncertain economic climate gives many a pause, a level of hesitancy and concern, that I believe is founded to some extent in both Information Overload and what we call in statistics, Recency Bias.
Pasadena, California is home to California Institute of Technology (CalTech), a world-class educational institution. While mostly known for their scientific expertise, CalTech also has a well-respected humanities department, and I am fortunate enough to be involved in some CalTech programs. One such CalTech program in which I participated during the Covid lockdowns addressed Information Overload—the shear amount of data, images, ideas, and viewpoints we are subjected to, every day of every week. Data and studies, which were presented that day, showed convincing evidence that the human brain is simply not equipped to deal with all the thousands of weekly inputs in this Information Age. So, we adapt and accept only certain information, to the best of our ability, and usually the viewpoints that we form are influenced by the available information we have, our experience to date, what we can comprehend and what we can recall – which is usually the most recent information (hence the term Recency Bias). We all have such limitations and biases, (including me!), as evidenced by the long-standing joke (really it was several studies) whereby 75% or more considered themselves to be above-average drivers; statistically, that would, of course, be impossible, that more than three-quarters of the population are “above average”.
More specifically regarding investments, we have consistently tried to avoid the overconfidence we constantly hear from various media, that this must be the go-to sector at this time, or that is obviously the cause of the latest increase or decrease of a certain stock or other asset. We have also tried to avoid that overload of information by tuning out, as much as we can, the popular news media viewpoints/opinions. Instead, we do our own proprietary research, talk directly to portfolio managers, economists and subject matter experts and then proactively read and digest all we can from a select set of economists and commentators. Jeff Kleintop and Liz Ann Sonders from Charles Schwab, for instance, offer great articles and viewpoints that we appreciate. Brian Wesbury (FirstTrust), Jeff Gundlach (DoubleLine), Ed Yardeni (Yardeni Research), and the economics teams at various other firms also provide us with an excellent set of original thinking and research, just to name a few.
Investing at all times involves a certain amount of risk. The Federal Reserve's rapid rise of interest rates over the last 12-13 months was bound to have some repercussions and unintended consequences, which are mostly being felt now in the banking sector. At the start of this year, we felt the odds of a recession were growing to more than 50%, but given these new headwinds in the financial sector, and the simple fact that obtaining credit will become even more difficult now, those odds of recession are increasing. In fact, a report by the Small Business Administration just released on 3/31/23 showed all ranges of banks reported three consecutive quarters of reduced demand for loans. In addition, the FED Survey of Senior Loan Officers showed that more than 40% of banks had revised their lending standards higher—and this was before the banking “mini-crises” (see Figure I below). The good news is that many, many companies and families took advantage of lower rates over the prior cycle, and refinanced debts that will not require new financing any time soon. Such tighter conditions will do some of the heavy lifting for the FED, without having to directly raise interest rates – thus we are very close to, if not at, the end of the current rate-tightening cycle. Recessions are a normal part of the business cycle, and, in some ways, the market discipline that is instilled in firms and families in an economic contraction is helpful. It reminds us all of good financial practices: low levels of debt are usually better than high; affordable and sustainable spending patterns; an understanding of risks we are taking; lastly, transparency and accountability.
If the global pandemic and resulting shutdown in the economy didn't prove to us that we are tremendously resilient, I'm not sure what would. The things we now face shall pass, and the U.S. and the global economy will march forward. We will continue to strive to help you live your life full of purpose, with a sense of financial security, and an eye on the details that matter for your family. It's a great world that we have out there—so go explore and let us know how we can support you, as you pursue your life’s passions.
Again, Happy Birthday, Don!