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Turn On, Tune In, Drop out

Updated: Jul 20, 2023

I just spent a week without any cell service up at Lake Shasta, and it was amazing.

An investor’s greatest challenge is tuning out static. There are a lot of talking heads on The Street these days, and most of them deserve to be drowned out by their own voices. It just so happens that tuning them out is really easy when you’re floating around on a houseboat out in the middle of nowhere.


Back toward the end of February, we noted that hyperinflation had become the financial story du jour. Of course, it was just that, a story of the day; the reality has belied most of the static generated by financial pundits ever since.

Statements from Fed officials continue to stress that the current surge in inflation metrics is “transitory,” and I reckon that’s a reasonable way of couching it. I keep hearing how expensive it’s going to be to remodel my kitchen because of the soaring cost of plywood, yet lumber futures for July delivery dropped last Monday to $996.20 per thousand board feet, down 42% from the record of $1,711.20 reached in early May. While I was sunburned, sore from 800 different kinds of water sports, and completely phoneless, lumber futures posted their biggest-ever weekly loss, extending a tumble from all-time highs reached last month.

In other words, lumber costs the exact same as it did the first week of April. I could have spent two and a half months up at the lake and not missed a thing.

Lumber’s high prices in May were exactly as the Fed heads describe-- transitory. Sawmills are catching up with the rampant homebuilding demand that fueled a months-long rally, bringing some relief to a market beset by supply shortages and price surges. Buyers like me have been balking at still historically elevated prices and awaiting additional supplies, and that has served as a catalyst for the recent cascading sell-off.

Just watch. Used cars will be next, then hotel rooms, then new cars and trucks, and then, if I get my way, fishing gear.


Of course, there are elements of our economy that will experience inflation that is not transitory. For example, wage growth is likely to stick, especially at the lowest end of the income distribution where, quite frankly, it should stick.

Some of these wage increases are being affected by the inability to hire enough workers due to generous unemployment benefits, coronavirus safety concerns and inadequate childcare, but let’s not forget that unemployment before the pandemic was at its lowest level since the 1960s. As a result, average hourly earnings were up almost 3.5% in the second half of 2019 as wage pressures started to build, and those wage pressures are only going to increase as global economies open up and we head towards the holiday season.

We continue to believe that though some of the increase in inflation is due obviously to that kind of base effects (such as oil prices going negative at one point last year), the increase we are seeing in wages is real. It won’t reach the point of qualifying as hyperinflation, but it seems likely to continue for the foreseeable future. The reality is that you can’t pay people more and then take it back. …Maybe in theory but not in real life.


There are signs of a bubble everywhere, but bubbles can continue for longer than most people suspect. Meme stock prices, cryptocurrency prices, and a non-fungible token (NFT) by an artist who was completely unknown just a few years ago selling for over $60 million are just some of the signs of excess in this market. Former Federal Reserve Chairman Alan Greenspan famously talked about “irrational exuberance” in the financial markets, but his comment was in late 1996-- the S&P peaked in March of 2000 after having more than doubled from the time of his original statement. When the current bubble eventually bursts, it will take down all stocks, not just the more speculative stocks that are being bid well beyond normal valuation metrics.

One of today’s great companies, Amazon, is a testament to how that happens. Amazon had revenues of $1.6 billion in 1999 which grew to $3.1 billion by 2001, but the stock got destroyed over that period, going from $106 to just $6 as the dot com bubble broke and market forces took out even the best of companies. Artificial intelligence, bio-technology blockchain, crypto currencies, digital banking, electric vehicles, green energy and virtual reality are likely to change the world much like e-commerce did in the late 1990s, but that does not mean their stocks won’t get annihilated before this all shakes out.

As the old saying goes, when the hour of need arises, the time for preparation has passed. Therefore, we advise investors to be cautious with the market at all-time highs (and all-time valuation highs by just about any metric) between now and the end of the year. The question is not if the Fed tapers but when, and history has not been kind to the market when the Fed has shrunk its balance sheet in the past.

In other words, remember your Hill Street Blues:

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