The Investment Scientist

Archive for September 2022

In a previous article, I argued that for folks in the wealth accumulation phase, market discounts like we are getting now, between 22% of the S&P 500 and 33% of the Nasdaq, are actually good news. The same amount of money can now buy more enduring assets. And yes, owning more enduring assets in retirement is absolutely better than owning fewer! In the future, I shall write another article about what constitutes enduring assets (#). But back to the current topic.

I got an email from a retired client of mine, who asked: “What about me? I am past the accumulation phase. I need to draw a fixed income from my portfolio, and I just saw it shrink by nearly 20%.” We did a review of his portfolio, afterward, he felt much more reassured.

Did I do some kind of magic trick? No, I simply showed him what was hidden in his portfolio statements. I compared not just the value of his portfolio, but also his projected yearly portfolio income between August of last year to this August. Here is the comparison table. 

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The following is a chart I grabbed from the St. Louis Federal Reserve website. It more or less explains why we are experiencing runaway inflation now, and why it may not easily go away.

The chart shows the total M1 money supply. Note that as recently as 2012, the total money supply was just over $2T, but now, only ten years later, it is over $20T. That’s a ten-fold increase. The majority of this increase came during the Pandemic when within a few short months, the money supply increased from $4T to 16T. 

Only after March of this year, when it became clear that inflation is not “transitory,” did that money supply begin to taper off slightly. It does not look like it will ever go back to the level it was at prior to 2020, though.

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Since the beginning of this year, the stock market has experienced its worst six months in the last 50 years. At one point, the Nasdaq was down 30%, and the Dow and the S&P 500 were in bear market territory. From its lowest point, the market has recovered a bit, but after Chairman Powell’s Jackson Hole speech, the market seems to have resumed its slide. So the question is, will the market give us even deeper discounts on stocks?

Before we go into that, let me sum up my impression of Chairman Powell’s Jackson Hole speech. He has found his inner Paul Volcker! He has turned from a super dove to a super hawk when it comes to inflation.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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