John Lekas – CEO and Senior Portfolio Manager
May 1st, 2023
US Average Hourly Earnings Yearly Percent Change
We believe the inflation we are seeing in the CPI and elsewhere will persist well into 2024. As we have stated in the past, this inflation is due to high wages, not the cost of goods sold. Wages have surged 38%* on average since 2020, compared to the typical annual increase of 3.66%, making it difficult to reduce without terminating staff; and until the U-3 and U-6 unemployment rates reach 5 or 6%, we believe inflation (as measured by the GDP deflator and CPI) will not subside. In a nutshell, everyone is looking at the wrong number. The number to watch is unemployment. (U3+U6)
An increase in unemployment from 3.5% to 6% could result in a steep decline in equity markets, necessitating a focus on quality assets in both equity and fixed-income environments.
Secondly, the banking sector has not yet resolved its issues, with mergers and failures anticipated in the coming year. We believe the next shoe to drop will be real estate as the FDIC gets aggressive with regional banks because of the recent bank failures. There is $1.5 trillion of real estate debt due by 2025. Regionals have the bulk of this debt**.
Thirdly, we believe sanctions that were put in place because of the war in Ukraine have hurt the USA, gummed up liquidity, and may have begun to displace the dollar as the world’s reserve currency. The current administration is too blind to recognize or admit a failure and get off it (the current banking crisis is one example). As they continue to blunder, look for more politicization, and not real fixes as we move forward (debt ceiling, reparations, windmills, balloons, failing to increase FDIC insurance, etc.) policy is random and will hurt the financial system.
We are beginning to see layoffs from large corporations and look for more. Initially, this is good news, but as we move forward, look for markets to contract rather than expand.
Three main risks are associated with fixed income; liquidity poses the greatest threat, followed by credit, with duration being the least. Quality provides a higher level of liquidity and safety. We continue raising cash, keeping quality high, and looking for opportunities as markets move lower.
LCTIX Stats as of 3/31/2023
- Five-star fund
- Duration: 0.24
- Distribution Yield: 6.61%
- Average Credit Quality: A+
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