By Nick DePersis
Investment Manager, ISDA
As we approach the close of the first half of 2022, an adage comes to mind: “It’s time to pay the piper.” As the U.S. and the world faced an unprecedented global pandemic in 2020, governments and central banks did whatever they could to stave off economic collapse. Here in the U.S., we now know that those measures injected more than TEN TRILLION DOLLARS into the economy via personal stimulus checks, PPP business grants, and many other programs. While this more or less accomplished its goal with a rapid recovery of the economy followed by a year and a half of strong economic expansion, another monstrous challenge was growing — INFLATION.
First, it is important to note that inflation in and of itself is not a bad thing; in fact, moderate inflation (2%-3%) is proof our economy is growing. What we are experiencing now is unchecked rapid inflation that has been driving the cost of groceries, real estate, gasoline, and you name it to levels that begin to truly affect daily affordability. There is a very simple way the U.S. Federal Reserve tends to “cool” an overheating or inflating economy — by raising the overnight borrowing rates for banks. This causes a cascading effect of rising rates across all interest rate-sensitive products, i.e., mortgages, car loans, lines of credit for business, loans for new construction, which then cause an overall slowdown in spending as the “cost” of money is higher. Unfortunately, this time, things are different.
Inflation caused by monetary policy, i.e., injecting too much money into the economy, can be cured by the rate hikes, but where the more daunting issue occurs is when there are external factors contributing to inflation outside of the Fed’s control. Currently there are four major factors driving inflation: too much money in the economy, supply chain constraints due to COVID/labor force disruption, shutdowns in China, and the Russian invasion of Ukraine. As you can quickly see, only one of those factors can be influenced by the Fed. This is what has landed us where we are, a time where the Federal Reserve will have to hike interest rates at a pace that hasn’t been seen in decades. Moreover, the Fed must do it in a delicate way to avoid a recession.
On a positive note: out of all challenging situations, great opportunities are borne. Credit quality on fixed income assets has not deteriorated, but we have seen yield trend much higher making for very attractive purchases in our portfolio. We continue to be extremely nimble in our management to take advantage of what opportunities the markets give us. We will navigate the ever-changing economy, interest rate movements and market with the utmost stewardship to safeguard the assets of the ISDA.
With regard to quality, we are happy to report the portfolio, once again, carries no “junk”-rated bonds. I am proud to present the ISDA Financial Life report through the 1st Qtr. 2022 (please see table).