NAVIGATING UNCERTAINTY

In our assessment, the first half of the second quarter the markets continued to assume the Federal Reserve was going to let growth and inflation run to address economic recovery and employment. With higher-than-expected inflation numbers, the Federal Reserve signaled they are now paying more attention to inflation. This signaled a tapping of the brakes on growth and the bond market responded with lower rates and the stock market started to rotate out of the more economically sensitive sectors and stocks.

We believe that interest rates, fiscal stimulus and the vaccine rollouts may all signal stronger GDP growth in 2021 lifting stocks and hurting bond returns.

Investors have skin in the game. That means that when we are wrong and make the wrong allocations according to our error, we get punished. This does not logically imply that investors are always right. Bubbles seem to be a real thing. But it does mean that investors might have a more direct set of incentives when it comes to the economic outlook than, for example, pundits or people who are asked about their confidence levels in general opinion surveys.

First, let me introduce the most important economic statistic that you've (probably) never heard of, Gross Output. It was invented by economist Mark Skousen and was adopted by the federal government, which now reports it quarterly. Unlike GDP, Gross Output includes the stages of production which occur before the transactions which are counted in GDP. It's a fuller picture, more like a cat-scan than an X-ray.