by Franklin J. Parker, CFA | for ongoing updates through the week, you can follow me on Twitter.
The Summary
- As expected, the Fed raised interest rates by 0.25% last week. Also in-line with expectations were producer prices (the Fed’s preferred inflation gauge), posting a staggering 10% year-over-year. Of course, inflation figures have yet to include the recent run-ups in energy and food prices, so next month’s figures are likely to be still worse. In the end, inflation appears to still be accelerating rather than abating.
- Markets began an upward run last week. Some of that may be from the Fed’s decision—there was some debate over whether rates would rise by 0.25% or 0.50%, so something in the middle was priced in. A big question that remains is how the Fed will handle its current balance sheet, investors eagerly will watch guidance on this front. Letting the bonds mature would be most accommodative, whereas selling them off would be more restrictive. This week we get data on new home sales, durable goods orders, and consumer sentiment. These should give some insight into the feeling of consumers and the strength of spending in the face of mounting inflationary pressures—especially durable goods orders.
- All-in-all, markets have pushed off of their recent lows. My downside target was 15% to 20% from the S&P 500’s high, and that was hit, albeit briefly, on February 24. Recent market action suggests that the lows may have been logged. That said, I am still cautious. Inflation hasn’t been tamed, and it represents a serious threat to earnings. Not to mention, these pullbacks typically last a bit longer than a couple of months. More than anything, this market is unpredictable. In the end, your goals will determine how you position your portfolio.
The Details
I hate driving.
Well, to be more specific, I hate driving in traffic. A Sunday drive on a back country road it actually quite pleasant (especially given the right car).
For years now, I have been eagerly awaiting the long-promised self-driving car. The idea that I can just get in and the car takes me where I want to go is immensely appealing. The investment knock-on affects of this convenience, however, are something I have pondered on awhile now. Let’s hit three highlights.
First—and this would not happen right away—self-driving cars have to potential to “speak” to each other and control the flow of traffic exponentially more efficiently than human drivers. Like most major cities, Dallas (where I live) has but a few major highways flowing into the city. If, through computerized efficiency, we could increase the speed on those highways by 1.5x or even 2x (what is known as the “throughput”), what might that do to the price of real estate in the suburbs? After all, people tend to pay up for proximity of time, rather than distance per se, so more outlying areas could command higher prices. This development alone has the potential to reshape real estate pricing around cities nationwide.*
Second, the expectation is that self-driving cars will create a much safer driving experience. With fewer accidents, we will almost certainly see a drop in insurance premiums—especially as driving-related casualties drop precipitously. Car insurance premiums represent a significant amount of revenue (and float) to many insurance companies, which are, of course, simply investment companies at heart. And this brings up the third thing.
If insurance companies have noticeably less revenue and investment float, we are likely to see an increase in prices for those securities which are preferred by insurance companies (i.e. high-quality corporate and sovereign debt, blue-chip stocks, and even some derivatives). Capital markets are quite deep, of course, so whether this is noticeable is an open question. But, were I an insurance company analyst, or an analyst in the financial department of an insurance company, this would be on my radar.
All of that said, I am immensely excited about this potential future (the safety potential alone is incredible—no more drunk drivers!).
To those engineers working on the problem: I am respectfully begging you to hurry up!
*I would also expect parking lots to go away, but that explanation would make this post run a bit long. Suffice it to say that I think there is considerable opportunity in the shifting dynamics of real estate.
Chart of the Week
Since 2020, economic policy uncertainty has been very high. Much of that, of course, has been due to the extraordinary measures taken during the Covid pandemic. However, much of the Covid concern is behind us, and as 2022 gets under way in earnest, we find ourselves with the third-highest level of policy uncertainty in at least 40 years.
Stable economic policy is important, of course, because businesses must plan many years into the future. When businesses feel that they cannot reliably forecast economic conditions, their willingness to take on risk wanes and their investment wanes along with it.
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