Volatile Markets, Sarah, and Inflation.

Many of our clients will have noticed that some of their accounts have been accumulating cash during recent months, and that some of that cash has been used to purchase shares of securities during the past couple of weeks. This is according to plan. Normally, our clients hold securities which make periodic distributions of cash. Those distributions are not automatically reinvested, instead they are held as cash in the client’s account until we see a buying opportunity.

Recent falling stock prices have presented what we hope will eventually be recognized as a buying opportunity. For example, during the past 3 months the Dow 30 has lost 7.59%, the FTSE100 (large UK companies) has lost 10.54%, and the Shanghai Composite (China) has lost 29.91%. There’s no law that says that stock prices can’t go lower, but we do expect higher prices eventually, and we know that we bought at lower prices than we would have paid a few months ago.

Our clients also own bonds, which have generally not lost value during this period. Among other purposes bonds provide benefits somewhat like an automobile’s shock absorbers, they provide a smoother ride. A smoother ride reduces the risk of going off the road. Or plan.

My niece, Sarah was recently married. She and her new husband then moved to an apartment in downtown Chicago. They sold one of their cars, leaving one car for the two of them. What? Just one car for two American adults? How can this be? Well, firstly they live in downtown Chicago and they are in good health so they are able to walk to many destinations. Secondly, the Chicago area does have good public transportation, and thirdly they use Uber. When they need a ride they just click a few links on their smart phones and a reasonably priced car and driver picks them up at the appointed time to deliver them to the grocery store across town. They don’t need to tell Uber where to pick them up, because Uber uses their phone’s GPS to connect with the nearest available driver. They can track the location of their driver, whose name and car details appear on their smartphones. They can message or call their driver if they need to. Their fare is automatically charged to their on file credit card, and there is no need to tip. A receipt is emailed to them. Their driver is motivated to do a good job because they can easily post comments and ratings.

I mention Uber because it will likely be a significant player in the future of automotive transportation, which could soon change the very infrastructure of our cities. In my view there is much good news here, including the possibility that transportation costs will be much less in the future than in the present.¹

I am interested in the Uber story because it is another amazing example of the acceleration of change that complicates life in the 21st century, and because I believe that advancing knowledge/technology leads to a need for new economic models. Last week the annual meeting of central bankers was held in Jackson Hole, Wyoming. The Wall Street Journal has reported on the meeting. Below are a few excerpts from their report:

…Central bankers aren’t sure they understand how inflation works anymore…

…The conundrum challenges much of what central bankers thought they understood about the world…

…“There is definitely less confidence, a lot less confidence” about how inflation works, James Bullard, President of the Federal Reserve Bank of St. Louis…

…The economy’s performance has “really challenged” the notion of a strong link between unemployment and inflation…

One of the reasons for the uncertainty is that the employment rate has now moved back into the “full employment” range, but inflation remains below the 2% rate desired by the Fed. I have stated in prior writings that several circumstances have likely contributed to the ongoing low inflation rate, among them automation. Uber would be one example of the automation that tends to mitigate against inflation.

We welcome your comments and/or questions.

¹ My Daughter recently had brief sight seeing trip to Chicago and used an Uber car for transportation around the city. She reports that the Uber vehicle cost was about half the cost of a cab for the same routes. Her Uber driver would not accept a tip due to concern that it might jeopardize his 5-star rating.

Leave a Reply

Your email address will not be published. Required fields are marked *