It’s hard to believe that 2021 is entering its final three innings, while 2020 still looms large in many peoples’ minds. 2021 certainly has had a fair share of celebrations and challenges not to be too outdone by its predecessor. However, it seems the first three quarters have left most folks with more questions than answers. So, let’s examine some of the questions I often get and see where we stand.
Where do we stand with COVID-19?
The Delta variant of the Coronavirus seems to have started to level off and decline in the United States. After a summer of spiking cases and stretched emergency rooms, this is a welcome relief. Questions remain regarding other variants, but at least for now there seems to be some (literal) breathing room. Unlike the original strain, the Delta variant had little overall economic impact. Unless a future strain mutates to the point of rendering vaccines and previous immunities impotent, we see the future economic impact of the Coronavirus to continue to decline in the United States. As vaccinations spread it will further curtain the impact in the wider global community as well.
Why does nobody want to work anymore?
It seems you can’t leave the house today without running into a ‘Help Wanted’ sign. In fact, the United States has the largest number of job openings in history at almost 11 million available jobs in September. A couple of months ago there was discussion of enhanced unemployment benefits causing this issue, but those have ended without the problem mitigating. When one looks at the labor force participation rate[1] you can see a drop during the initial months of the pandemic, and while there has been some recovery, participation is still down. When we look at age groups, we see the biggest drops in those workers 55 years of age and over and those 20-24 years old. We think older workers decided they’ve had enough, and with 401(k)s at or near all-time highs, have decided to retire. Also don’t forget that the 55 and over crowd includes the largest generation in history, the Baby Boomers. As for the college age crowd, we think after seeing what happened to service workers during the pandemic, they are refocused on building their skills through education. Finally, only one age group is participating more in the workforce than there were in February of 2020, the 16-19 year old’s; maybe kids these days really do want to work.
Why do things cost so much more?
Every time I go to buy groceries, I know two things for certain. First, it’s likely to cost more than my last trip even if that trip was last week, and more importantly, that I should avoid the cookie aisle unless I want to really test my self-control. Food, cars, rent, houses, timber, gas, and a myriad of other things cost more today than they did a year ago. The Federal Reserve has pointed out that these price increases are “transitory” or temporary and things will return to normal soon. With all respect to that fine institution, but that’s not likely in some cases. Two things are causing price increases and while one is temporary the other is likely secular. The first is post COVID supply chains are, in short, a disaster. We told everyone to put down whatever they were doing and head home. This means that cargo containers are languishing unused in some places while in others they are going to the highest bidder. Large retail firms in the United States are leasing their own shipping vessels to make sure they have goods for the Christmas season. Many people who used to work in the transportation industries found other work during the pandemic (or retired as mentioned earlier). Uncertain supply combined with increased demand is a fool-proof recipe for higher prices. Although this is where we find ourselves today, eventually things will return to ‘normal’ as supply chains become more efficient.
The other reason, and perhaps the one that is likely to stay with us for a longer time, is the dropping power of the dollar. Another question I get often is “where is all this money the government is spending going to come from?” The answer seems to be we are going to inflate it away. During the pandemic the United States (and just about every other country) spent enormous amounts of money to keep its economy from disintegrating. To do this the U.S. borrowed money at a staggering pace that has not been seen since World War II. So how are we going to pay it back? One answer could be we cut back on government spending and increase taxes to create a surplus we can then use to pay back our debt. Maybe it’s just me, but I doubt “Less Spending / More Taxes” is a winning slogan at any level of government. The other answer is we devalue the debt and pay it back in cheaper dollars. This is the path of least resistance for governments as it causes the least electoral heartburn. In simple terms, the government starts by borrowing a dollar. The government then spends that dollar buying one dollar’s worth of goods. However, and here’s the trick, the government pays back the dollar years later but by then the dollar will only buy 50 cents worth of goods. If that sounds confusing, I understand. The investor take-a-way is that higher inflation may be here to stay and we should plan appropriately.
As always, we thank you for you continued trust and confidence. If you have any questions about this newsletter or anything else, please don’t hesitate to reach out to us.
[1]. A statistic that includes those who are currently working or are actively looking for a job.
Kevin P. Sullivan, CFA, CFP®, AIF
1229 Lake Plaza Drive
Colorado Springs, CO 80906
719.576.4500
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[1]. A statistic that includes those who are currently working or are actively looking for a job.