Year End Fireside Chat with David Edwards, President of Heron Wealth
David Edwards, President and Wealth Advisor and Buff Parham of Parham Associates presented a webinar Sunday, December 19th at 6PM EST.
Here is the transcript of their conversation:
Brief Look Back at 2021
What’s the one word you might use to describe 2021?
The one word for this year is the same as last year: Resilience. There are two things I’m talking about. One is the resilience of average Americans, and particularly our clients, who fought through every possible obstacle this year and came out on top. The other is the resilience of the American economy, which sprung back faster than anyone could have imagined, and is now well above the levels of March 2020, right before the pandemic started.
It’s instructive to look at how the 25 or so of our families who are business owners dealt with the past year. For sure, things were pretty bleak between March and May of 2020 — I spent a lot of time talking on the phone with our clients, making sure they got their PPP loans (I got mine). PPP loans were real life-savers for a lot of companies. Not everyone survived, but the ones who did actually ended up with a reserve of capital that they’d never had before, enabling them to go out and hire new people and expand their businesses.
My business had its best year ever — grew 51% in revenues last year. We were working so hard I had to hire two new people. Talk about resilience. I was worried about the survival of My business in May 2020, but I’ve never had a better situation than right now.
The ongoing failure to resolve the pandemic will drag on the year to come. We had hoped it would be over by now, but vaccine resistance creates reservoirs of unvaccinated people scattered across the United States and the world. That creates opportunities for new variants to sprout — first Delta, now Omicron. The mortality rate in the United States is still #1, hovering around 850,000 people right now. It will be another 200,000 by the end of 2022, and the economy doesn’t seem to care at all. It’s sad for individuals and families, but the economy doesn’t care; if the economy doesn’t care, the stock market doesn’t care.
Which development of this past year will have the most impact on next year?
When we did our conversation in November, talking about the “hard” and “soft” infrastructure bills, I was hoping that the “soft” infrastructure bill could be enacted. The “Build Back Better” bill would have addressed climate change, continued to pay four hundred-dollars-per-child credits to low-income families, gotten broadband Internet out to all Americans, and invested in green energy. Passage of those measures would have had enormous benefits to the economy, but I don’t think it’s going to go through.
We still have Manchin of West Virginia putting his foot down. He doesn’t like the green energy part of it because he owns coal mines. He doesn’t like the fact that “it might be inflationary.” As a result, our opportunity to invest in our economy, to make the kinds of investments that the Chinese are making right now (that enable them to leapfrog us), we’ll just slide further in their wake.
There’s always an “unknown unknown.” It’s fun to look at a chart of U.S. stock market over the last 50 years and then add in all of the horrible things that happened during that interval. The Korean War, the War in Vietnam, 9/11, the first Gulf War, assassinations of JFK, RFK, MLK, and Malcolm X. And yet, the stock market seems always to get higher. Why? Because bad things happen every day, but the people who work for General Electric, McDonald’s, Johnson & Johnson go back to work every day. That’s what keeps the economy going.
Prospective Look Forward to 2022
In keeping with our theme, what one word might be appropriate to describe 2022 at this point?
Hopeful. As in, I “hope” we can get past all the things that, if you turn on the television, open the newspaper, or — heaven forbid — open your Twitter feed, you just want to call it quits. Everything just looks so bad. And there’s a crazy disconnect: Joe Biden’s ratings are the absolute lowest in his presidency, down to the 40s already. But wait a minute — unemployment is at 4.5%, the economy is booming, the stock market’s at a record high, we seem to have some good ideas about how to address climate change (which by the way is clearly a thing after this past year), and nobody gives him any credit at all.
When you read about people attacking cabin attendants on aircraft — put those idiots on permanent no-fly lists, that day. You hear about people rioting in school board meetings — ban them permanently. Why do we have to pussyfoot around about this stuff? If people are idiots, treat them like idiots.
Is there a “great unknown” that we should anticipate for next year?
We did talk last month about inflation. I said I was taking a wait-and-see approach on inflation, like the Federal Reserve. Well now, six weeks later, they’ve got more information, they’re a bit more concerned. We do hear messaging from the Fed that they’re going to raise rates in 2022 — no big surprise, they would have done that eventually. Higher rates will put a damper on the bond market. Elongated bonds will fall in value. Inflation will also put a damper on the stock market, because higher interest rates means the value of future stock market earnings are less, which lowers the value of the stock market. It’ll grow, it just won’t grow at the 18% we saw this year.
Economic Outlook
Inflation seems to be persistent. Any idea on what the CPI will look like come December 2022?
At this juncture, the CPI is 6.9%. That’s the highest number in 30 years. For December 2022, I’m going to estimate 4% or under. The reason why I say that is we’re still ricocheting around from 2020 and 2021, when people had much more cash for goods than usual, due to spending much less on service (e.g.: movies, restaurants). At the very same instant, the world’s supply chain got all jammed up.
So, you have these crazy shortages — cream cheese in New York City, or Christmas trees. But all these problems seem to go away pretty quickly. I ordered a toaster yesterday and it was delivered today. That’s pretty good on supply chain. I couldn’t get it faster if I went to the store.
Let’s project that the bottlenecks work themselves out — it’s physics, ports are running on 24 hours schedules, trucking companies are paying big bonuses to get more truck drivers hired. We should see inflation come down to about 4% next year. Then, a couple years after that, it might be back to the long-term 2-3% that’s prevailed for the last 20 years.
With the “Great Resignation” in full swing, will the job market continue to have more openings that can be filled?
Yes it will. A month ago, we were trying to understand, “Wait a minute, unemployment has fallen 4.6%, but there are 4 million fewer Americans working than in 2020. Where’s the disconnect?” Well, now we have some more information. It turns out that a lot of boomers in their fifties and sixties decided to retire prematurely. Also, COVID hits people over 65 pretty aggressively. Covid killed 1 out of 100 Americans 65 and older over the past year.
So, there’s simply fewer people available to work than before. People in their twenties, thirties, forties are looking for more job income. What they’re finding is, “Hey, I’m making $15/hr here, I can go over there and make $16/hr there,” or $18/hr, or $20/hr, $25/hr, $50/hr.
For a 20-year stretch, average American were disadvantaged in the jobs market. Real wages for average Americans peaked in 2000 and declined steadily ever since because U.S. employers found they could outsource, bust unions, use automation and technology. Employers pressed cutting wage costs as far as they can go, and now all that’s left are jobs that need humans. Unfortunately for employers, there are fewer humans than before, so wages have to go up.
I’m really happy about that. Wage pressure doesn’t affect me — I’m an East Coast liberal elite 1 percenter — and it doesn’t affect my clients, who are also in the 1% (or higher) category of net worth and income. I used to tip 15% for routine service transactions, and now I tip 20%, because I’ve come to appreciate how hard people work for me for how little money. Companies will figure out how to pay higher wages and still be profitable. The ones that can’t probably shouldn’t be in business in the first place.
When I was a young trainee at Morgan Stanley back in the 1980s, they spent a fortune on my peers and myself — making us smarter, giving us skills, elevating our professionalism as rapidly as possible. All of those training programs went away because they’re expensive, and companies learned to treat people as expendable. Now, you don’t have any loyal staff. Don’t cry because you can’t command people’s loyalty. You simply have to pay more.
Pandemic
Should we start looking at COVID as a “norm” of everyday life?
Yes. We’re transitioning from COVID as a pandemic to COVID as endemic. What I mean by that is, we’ve already had two rounds of primary shots. People are now getting their booster shots (I’m scheduled to get mine the first week of January). The problem is that as long as there’s a reservoir of unvaccinated people in the world, there’s an opportunity for COVID to settle in, evolve, and develop into a new variant. It took Delta 6-9 months to scatter around the world. It’s taken Omicron four weeks to infect the world.
That’s the bad news. The good news is, all diseases get less lethal over time. Super lethal variants kill off their hosts before they can jump to the next host. Bubonic plague used to be pretty lethal. The disease exists still today, but infection is not a death sentence people experienced in the 1300s.
The other thing that’s been interesting to see is how hotspots come and go on about a two-month cycle. For example, in August/September, Florida was way high, the Northeast was low, and the Rockies were medium. Two months later, the Rockies, Michigan, and Minnesota were extremely high, Florida was dropping down to nothing, and the Northeast was coming up again. Now, the Rockies are dropping down, but the Northeast has heated up again. You can literally see the virus working its way back and forth across the country.
We almost got down to no virus at all this past June/July. I feel like, as soon as we get past this Omicron hump, which could last just about four weeks (based on information coming out of South Africa, where it was first identified), we could head back toward lower numbers again.
It will still mean 200,000 more dead Americans by 2023. We’ll probably get annual booster shots for COVID the way we get annual booster shots for the flu.
Do additional and more permanent mandates look inevitable?
Absolutely. At this point, I have zero patience for somebody who says their freedom is more important than getting their vaccine. The reason I say that is, you don’t have a right to drive drunk. Drunk driving makes you a danger to other people. I feel the same about the vaccine. At this point, there’s no evidence that it’s bad for you, but people are stubborn and difficult and don’t like doing what they’re told, and then they experience 20 times the mortality rate of people who are vaccinated AND their resistance is dangerous to other people.
Stock Market Outlook
The equity markets had a stellar 2021. With the Fed changing course, can we expect the indexes to keep surging in 2022?
2021 had three advantages:
1. It was rebounding from 2020 (which itself was a good year).
2. You had this huge surge of earnings across the S&P 500, led by companies like Amazon, Apple, Johnson & Johnson, Pfizer, and J.P. Morgan. I always tell people, revenue drives earnings, and earnings drive the stock market.
3. Interest rates stayed at rock bottom levels, barely above zero for the last two years. That made the value of future stock market earnings more valuable.
Now, we have interest rates in retrograde, they’re going higher, that puts more pressure on the stock market. Also, companies’ earnings have made the easy gains. Now companies have to get more creative to maintain earnings growth.
Remember this history: After the 2008/2009 recession, the U.S. Congress was very tightfisted about putting money back into the economy to get things going. That economic recovery was the slowest of any recession since the 1920s, and the unemployment rate stayed higher much longer than usual.
Here, we’ve had the GDP soaring. It just blew past the previous records, and unemployment dropped right back down to the levels of March 2020. Then, we had this $1.5 trillion hard infrastructure bill on top of the $1 trillion that we put out back in March or so. Then, there’s this other potential $2 trillion injection happening in 2023. If you give the economy a lot of money, you definitely turbocharge it. Do you turbocharge it to the point of inflation? Maybe, but I’d rather have the economy growing first and worry about inflation later.
Are there any particular sectors that could be big winners next year?
Our primary strategy is that healthcare, technology, and financial services are the three fastest-growing parts of the economy. We tend to overweight them as a result. But we also have real estate, consumer staples, utilities and REITS for stabile dividends. We also invest in consumer discretionary and energy, trying to take advantage of the surge in the economy. We haven’t changed target allocations all that much in the last 25 years that I’ve been running this firm. Those seem to be numbers that work.
Coming into 2021, our client portfolios were over-weight large cap technology companies and underweight energy companies. We began to sell large cap growth and start buying small cap value particularly in the oil sector. Now, we’re looking through our portfolios to see which sectors drifted too far in the other direction. We’ll start doing some selective selling in January to push those capital gains until April 2023.
Politics
Any prediction on the midterm elections at this point?
It seems pretty clear that Congress will swing Republican in 2022. There’s also a high probability that the Senate will break the current 50/50 tie, more likely will be 51-52 Republican, 49-48 Democratic. If either of those happen, the Biden legislative agenda comes to an end. The Republicans have no plans of their own, but they’re dead-set on not letting any Democratic plans going through.
The Presidential election starts January 3rd, 2023 with the seating of the 118th Congress. Donald Trump will probably run for President again. I suspect he will have Nikki Haley as his VP to offset Kamala Harris as a female Vice President. He will run no matter how many indictments and civil lawsuits dog his footsteps.
On the Democratic side, Joe Biden would be something like 81 when he’s up for reelection. Does he have the strength to keep going? I don’t know. I don’t see myself working when I’m 81 or 82. Kamala Harris has not had a lot of success or visibility as Vice President. Would she run in his place? Or would there be 12 or 20 or 40 Democrats running as well?
I always tell people, I used to be a Republican. I gave up after 2004. My political opinions did not change all that much, but the Republican party moved so far away from my ethics that I couldn’t stay republican anymore. I’m not a big fan of the Democratic Party either. The centrists and the progressives spend as much time fighting each other as they spend fighting the Republicans. It’s not a two-party system anymore. It’s a three-party system. No single political block has enough votes to make a permanent difference in the lives of average Americans. So, average Americans don’t show up to vote.
Do you anticipate any significant impact on public opinion if the House Committee on January 6th starts holding public hearings in prime time early next year?
I doubt it. First off, everyone’s news is segmented these days. So if you watch CNN or MSNBC, you’re going to see the same sound bites all day long — preaching to the choir. If you watch Fox News, you won’t see any of the hearings because they’re too busy worrying about Mr. Potato Head or Critical Race Theory or someone burning down the Fox New Christmas Tree (an event worse than 9/11 if you listen to the on-air personalities.)
I don't see one iota of change of opinion as we go through these hearings. But it’s definitely fascinating to watch as a historian. I am looking forward to learning, moment by moment, which Republican Congressmen and Congresswomen were hip-deep in supporting a coup. It’s living history!
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Audience Questions
Any thoughts on the worldwide auto industry?
Right now, if you want to buy a new car, there is no negotiation on price. The reason there’s no negotiation on price is because orders for new cars are backlogged significantly. I happened to buy a new Grand Cherokee this year. When I picked it up, the saleslady said, “Congratulations, you get two keys. From here on out, everyone’s only getting one key because we don’t have enough chips for two keys.” What is interesting is that 0% financing is pretty much the norm right now. So I said, “Fine, I’ll pay for this car over the next five years instead of paying for it upfront.”
Last year, the demand for new cars was high from consumers, with a lot of people using their government checks for down payments. Demand was also high from car rental companies like Hertz and Avis rebuilding their fleets after selling off their cars in 2020. Now, the rental companies can’t meet demand. I went down to Florida for about a 12-day vacation in November. For 12 days, renting a car would have been $1,500. Pass!
So, that’s the micro. The broader question is how quickly the world’s auto fleets will transition over to electricity. I always look for tipping points. For me, the tipping point is the delivery guys in New York City. Messengers all used to be on bicycles or had little gas-powered scooters. Now, delivery people have these electric bikes that go 30 mph easily, run all night long on a battery about the size of a carton of cigarettes. My reaction: Wow, this is the future! The batteries have finally gotten to the point that electric vehicles are competitive with gasoline, both in terms of price per mile and total possible distance.
The final component to address is that electric batteries still take about three hours to fully recharge. For 95% of driving — to and from work, the shopping mall — you don’t need to worry about batteries. You plug your car in each night and unplug it each morning. But for things like road trips where you are likely to run your batteries to zero, can the engineers find a way to do flash refills, recharging in ten minutes, instead of three hours?
The shift to electric will have a huge benefit on climate change. The transition will also propel a huge upgrade in infrastructure. Originally, power plants were located close to cities. There wasn’t a lot of infrastructure needed to get electricity from the ConEd station on 59th St to my apartment on 93rd St. Now electricity comes from wind farms in Nebraska or solar farms in Florida or wind farms off the coast of New England. We need a huge investment to get electricity where it needs to go, and we need better storage methods. The element of the soft infrastructure bill that addressed this need was very valuable.
The Chinese are already converting their cars to electricity. If 1.4 billion people all drove gas-powered cars, the fumes would suffocate the entire country.