Published On: November 18, 2022
Written by: Ben Atwater and Matt Malick
They say patience is a virtue. In our view, it is a virtue in short supply.
One way to think about patience is simply the idea of giving things time to work. We would all like instant gratification. But only a genie can snap his fingers and make something happen immediately.
We have always been “crypto currency” skeptics. In our email updates in recent years, we have opined that zero interest rates can make anything seem valuable for a time, even digital “coins” with little to no practical use. But even with the spectacular collapse of crypto over the past year, crypto hype may persist for some time, despite the nonsensical nature of it.
Inflation may also persist for many more months, and perhaps even years (although we think months is more likely). In January, the Fed Funds rate was 0.25%. It is now 4.00%, a 1,500% increase. Despite this unprecedented rise, the Fed appears committed to further increases.
This week’s financial headlines had St. Louis Fed President James Bullard jawboning markets with comments like “While the policy rate has increased substantially this year, it has not yet reached a… sufficiently restrictive level, [and therefore] the policy rate will need to be increased further.”
How would he or anyone else have any idea if what the Fed has done is sufficient? After all, the simple act of raising rates is only a catalyst to change human behavior, namely to slow consumption and moderate speculation, and changing behavior takes time. Decades of empirical studies have consistently suggested that monetary policy has a lag of up to 18 months.
We are hopeful the Fed will increase rates in December and then pause indefinitely. Patience may help avoid unanticipated consequences.
Impatience leads to extremes. If the Fed keeps going, they might break the economy and – next thing you know – they will be racing rates back to zero again and creating all new bubbles. Instead of crypto, the next time around people could be trading Martian rocks or old restaurant matchbooks.
The market’s stumbles of late have proven yet again that a patient, disciplined and consistent investment approach is best. But such an approach takes buckets of patience. Fortunately, patient investors have a meaningful advantage.
Let us wish that, like a good investment strategy or a fine wine, the Fed decides that patience is a virtue.