Mind on Money: It’s time for the economic ‘bar’ to close

Mind on Money: It’s time for the economic ‘bar’ to close

My oldest daughter was married about five years ago. Like all brides, she put thousands of hours into her wedding plans, including creating a 19-page instruction manual complete by listing the time I was supposed to be in bed the night before the wedding. She was given a budget, and being the frugal creature she is, she was very focused on staying within it.

Being a craft beer aficionado, she delegated to me the worthy task of working with the bar to choose the liquor and beer that would be served at the wedding. I obsessed over my mission, researching and negotiating for the best beers available for the event. We would have some local craft brews, some headliner craft beer, and a selection of light beers. Money was no object, we were going to have a great beer selection.

After seeing my schemes, she confronted me and said, “Dad, you are blowing my budget on the bar.” To which I famously replied, “Budgets are for brides, Dads don’t have budgets, Dads have aspirations”. She gave me her hallmark scowl and shook her head.

The night came and the party commenced. Truthfully, I wasn’t really as cavalier about costs as I had made out. I had selected the best beer and liquor, but in order to control costs, I had also negotiated the bar would close at 11:00, an hour before the reception was over. This would save me hundreds of dollars, and I thought the party would be wrapping by then anyway. I thought I was being so clever.

Now, however, it was 11:00, the DJ was great, and the party was roaring. The bar started shutting down, and the guests went bonkers. My wife rushed over to me and told me to “do something.” I ran to the bar, I begged, I pleaded, I offered cash. The bar tenders said they didn’t have the authority to change the contract. The bar was over. It still wakes me up in the middle of the night.

This, my friends, is almost exactly where our economy is positioned at this point in time. While the pandemic was certainly no party, the Federal Reserve and the federal government threw every single fiscal or monetary tool I am aware of and more at the economy and financial markets for support during this unprecedented crisis.

The bar of financial tools was wide open, zero interest rates, quantitative easing (bond buying with printed money), money market support, direct lending to businesses, Paycheck Protection Loans, repeated individual stimulus checks, Emergency Assistance Loans, and half a dozen other opaque programs we as individuals don’t even perceive. Then, at 10:55, right before the liquor contract ended, the newly elected President, not wanting to let a good crisis go to waste, ran over and poured on the American Rescue Plan, which was like buying the whole room a shot of cinnamon whiskey before the bar closed. His party then tried to keep the bar bill growing with the Build Back Better plan, which fortunately never came to pass.

The consequence? It's 11:05 and the room is completely out of control. Only instead of ruckus chicken dances, runaway inflation is the consequence of this open economic bar. Prices for food and energy are off the charts, interest rates have risen at the fastest pace of my career, and the stock market, while somewhat resilient thus far, has embraced substantially increased volatility as investors attempt to discern where the market party goes now that the bar is closed.

What I am describing is being termed in the financial press as “financial tightening.” This obscure term doesn’t do the reality of the changes it describes justice. In very real terms, in my opinion we are about to experience the most dramatic shift in economic policy and financial conditions in the last 40 years, which is beyond the scope of memory of most current investors.

Don’t get me wrong, in order to wake up feeling better tomorrow by hopefully slowing inflation and reasserting the credibility of the Federal Reserve as well as the U.S. Dollar, the bar needs to close.

Maybe the guests can keep dancing, get a snack and ease into the Uber to go home, but right now they are just realizing the bar really is closed for the night, and they are not happy.

I keep saying, 2022 is not going to be an easy year to be an investor. For long term investors, this may be a good time to find a distraction. For those more attuned to financial markets, I believe there will be challenges, but also opportunities going forward. Risk management will be critical, and fortitude required. With 10 forecasted interest rate hikes ahead of us, the bar really is closed; it’s time to figure out how to get home safely.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.