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  • Writer's pictureEric Cinnamond

Friends in Different Places

<September 28, 2021>

In an attempt to take advantage of the housing bubble, in 2005 we sold our home in Jacksonville Beach, Florida and rented a home in Ponte Vedra Beach, Florida. After home prices fell, we bought a house in Ponte Vedra, where we live today. In addition to being a great place to live and raise a family, Ponte Vedra is also a popular retirement destination. In fact, most of our neighbors are elderly or retired. While we couldn’t ask for better neighbors, the supply of children on our street is limited, making it difficult for our kids to make friends.

The most common solution for finding something for kids to do in Ponte Vedra is to either join a country club or enroll your children in activities where they can meet and play with other kids. We went with the activities or sports route—specifically, travel baseball and softball.

Before spending much of our free time at baseball and softball fields, our social circle consisted of mostly white-collar professionals. As the years have passed and we’ve made friends with a growing number of travel ball parents, our social circle has shifted.

Travel ball parents are a unique group. They’re passionate, determined, competitive, and for the most part, very hard working. Many of their occupations are essential to the economy, such as nurses, electricians, plumbers, truck drivers, IT technicians, and construction workers. They are on the economy’s front line and have been a great source of information for me regarding current business trends.

While we see each other less frequently, I’ve remained in touch with my former social circle, which mainly consists of lawyers, marketing executives, real estate specialists, asset allocators, and business owners. Interestingly, over the past few months I’ve had an unusually high number of conversations with old friends. Historically, these well-to-do friends typically contact me during sharp declines in the stock market, asking me when their net worth is going to rebound! However, much of their recent uneasiness is related to soaring asset prices. Increases in their net worth have been staggering and, in many cases, life altering.

For those wondering why so many people have not returned to work, look no further than my friend who sold his business and house for enormous gains and is now retired. Instead of being a productive member of the workforce, he’s roaming the beach searching for shark teeth! Another friend recently asked me about his retirement account. He wasn’t bragging—he was just in disbelief about how much money he’s made and was wondering if he should take profits. Another friend asked if it’s a good time to trade in some of his unrealized gains for a new pool. I said, “Sure, but good luck finding an available pool construction crew!” He joked and said, “What’s the point of having all of this money if it doesn’t buy anything.” He pointed to the product and service shortages he’s experiencing personally, noting that it’s no longer just about price, but about availability.

While my wealthy friends riding the asset inflation wave have seen their net worth increase considerably, there is growing apprehension that their gains, and the trajectory of asset prices, are unsustainable and possibly artificial. “When does it end?” is a common question, followed by, “Should I cash in and retire?” and “Where can I invest my cash? Currently I’m getting nothing!” And my favorite, “Where is all of this money coming from?” For those that understand where the money is coming from, they ask, “They can’t keep printing forever, can they?”

As my professional friends ponder what to do with their growing investment portfolios, the mood and concerns within my travel ball social circle is far different. While they too feel that something isn’t quite right, they are much more focused on getting through the workweek than contemplating the direction of the financial markets. Instead of telling me about their equity portfolios, they enlighten me on labor and supply shortages, growing backlogs, and a succinct description of the current operating environment—“We’re slammed!”

Examples include a contractor who told me he can name his price on home renovations. He said he’s backed up six months just giving quotes and said a lady recently hugged him for simply showing up! A window and door distributor had similar stories, saying she’s backed up six to nine months on deliveries and is having trouble obtaining product. Another parent, a nurse, recently arrived to practice late. She was exhausted and saddened after losing two middle-aged patients to COVID during her shift. An owner of a smoothie store informed me about his difficulty finding labor, causing him to work longer hours and weekends. He said finding and keeping workers at the new unofficial minimum wage ($15/hour) has been practically impossible. Another parent who works for UPS just laughed when I asked if he was busy. After a plumber told me about his hectic day, I advised him to ask for a raise. I informed him of the generous signing bonuses plumbers were receiving for job hopping. And that’s been my advice to every person I speak with who is doing the heavy lifting in today’s economy—ask for a raise or promotion. And for business owners with overwhelming backlogs, I suggest increasing prices until some sense of control is regained, or business is lost. A travel ball parent who owns a home restoration company told me that’s exactly what he’s been doing. He said he can’t keep up with his workflow and is so far behind he’s raising prices and turning away business. And for what it’s worth, he said if you’re in the market for new cabinets, good luck!

Regardless of the social circle I speak with, one thing is clear—the economy and financial markets could use a break from the Federal Reserve’s “full-throttle” monetary policies. Stress is building with the economic and asset price wheels spinning so fast there is a sense that at any moment something could break. The Federal Reserve, in our opinion, has “QE’d” so hard and for so long that their policies have become counterproductive. Meanwhile, Fed members attempt to justify current policies by claiming there is too much slack in the labor market and inflation is transitory. The Fed’s views conflict with some of the most pressing challenges workers and business owners are experiencing. In fact, if you want to hear a good laugh, tell a business owner there is too much slack in the labor market! And if the business owner isn’t laughing hard enough, tell them inflation isn’t a problem and is transitory.

As we watch inflation build throughout our opportunity set of small cap businesses, we believe the odds of inflation being the catalyst for the next bear market are increasing. Instead of being transitory, we see signs of inflation persisting, with many of the companies we follow announcing additional price increases heading into 2022. Assuming current trends continue, we expect the transitory inflation narrative will eventually succumb to reality and threaten the Federal Reserve’s ability to monetize debt and maintain negative real interest rates. Without the Fed’s intrusive interference in the free markets, interest rates would once again move freely, allowing asset prices to properly reflect their underlying fundamentals. Ironically, instead of the Federal Reserve saving us from inflation, we believe it will be inflation that saves us from the Federal Reserve.

Although there are many uncertainties in the current environment, we’re certain of one thing—the economy and financial markets do not need more money stuffed into their gears. Based on conversations with friends, parents, business operators, and investors, money creation is no longer the solution—it is the problem. Considering money creation is currently the only thing the Federal Reserve has to offer, we believe further “help” will only add to the challenges facing our economy and its exhausted workforce. If Fed members are having difficulty seeing this, we suggest they step away from their Bloomberg screens and tightly knit social circles. To get a clearer picture of what’s happening in the real economy, attending a youth baseball or softball game this weekend would be a good start!

Eric Cinnamond

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QE: Quantitative Easing, which is a form of unconventional monetary policy in which a central bank purchases securities from the open market in order to increase the money supply and manage interest rates.

Wilshire 5000: The Wilshire 5000 Total Market Index is a broad-based market capitalization-weighted index composed of 3,451 publicly traded companies.

Negative real interest rates: Interest rates that are below the rate of inflation.


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