Image: "When you come to a fork in the road, take it!" Yogi Berra.

• Stocks rose and bonds fell during March as investors reacted to the Fed raising rates by 25-bps when a 50-bps rate rise was expected.
• February's inflation came in above 8% on a year-over-year basis. We still expect higher readings until the end of 2022 as rental and food inflation is flows through the numbers.
• There are many similarities to 2008 developing. While we don't expect a financial crisis, we are watching closely for rising bond defaults caused by Russian sanctions.
• President Biden and Wall Street analysts are talking about nuclear war. This is a low probability event, but the odds of this happening seem to be rising, unfortunately.
• Our current inflation situation may be a deliberate policy by the central banks of the developed world. How do we know? Economists were writing about how and why the central banks should inflate back in 2011.
• Japan has let their currency collapse. They aren't the only ones.

Table 1: Performance update

Mental preparation for a bear market

The odds of entering a bear market keep rising. Bonds peaked in August 2020 and have accelerated their weakness into 2022. US stocks peaked in December 2021, weakening in front of imminent Fed rate hikes and widespread inflation.

Are you ready? By that, I mean, are you mentally ready? Because you are contending not with the market, but your own emotions and mistakes.

In a bull market, everyone is confident that they are a long-term investor. In a bear market, not so much. Emotionally, we get to a point where we can't take it anymore and must de-risk. The emotion becomes the driver, leading to action.

We encourage you to consider 2 key factors as interest rates rise: 1) your long-term allocation targets, and 2) your risk tolerance. For those families working with us, Chris and I have spent hours reviewing your unique situation and are confident that we are ready for the coming storm. For those unsure, please call us and let's talk.

Stocks aren't bonds; bonds aren't stocks

I apologize for stating the obvious, but each asset class has different key drivers.

The point is that bonds are getting sold-off for a very specific reason: inflation has remained persistently high and the Fed is dragging its feet about fixing it. While the current bout of inflation is complicated because of Covid, don't forget the Federal Reserve has been trying to increase inflation since 2009. Central banks are a major cause of today's high inflation and refuse to move aggressively to rectify it.

But why are stocks hanging in there while bonds take a beating? Simple, the global economy is still expanding at the same time the central banks are dragging their feet about slowing down this pell-mell growth. Rising interest rates will eventually get high enough to change borrowing behavior in housing and business, then stocks will care. There are some early signs this is happening in housing, which may be a harbinger for the other cyclical parts of the economy.

In the meantime, the market is giving everyone a graceful opportunity to de-risk their portfolio if they are overweight risk.

Bond weakness and rising interest rates are a problem for the real economy

Interest rates continue to rapidly climb higher. Remarkably, interest rates in the United States remained relatively stable despite our 8% inflation and a Federal Reserve reluctant to raise interest rates.

Higher interest rates will significantly slow down growth in the real economy. The mechanics of this are easy to see if you think about how we typically buy houses. First, you determine how much of a monthly expense you can afford for a house, then you either call a mortgage company or lending firm and ask them how much they will lend you. Next, assuming you have good credit, the lender will qualify you for a monthly amount, look at the mortgage interest rates, then give you the maximum amount they are willing to lend you to purchase a house. This last part is mechanical: higher rates mean a lower maximum amount. And just like that, the bid for property falls because the borrower is unable to obtain the asking sales price. If the seller wants to sell, the house price must fall to the maximum amount the borrower is able to borrow. The house buyer is buying based on payments.

This simple example is playing out in the housing, car, commercial property and industrial markets. Rising rates will eventually slow spending, slow economic growth, and hopefully reduce inflation. For the time-being however, the economy is experiencing some of the strongest growth in decades and this why inflation remains persistently high.

Figure 1: Recent history of 10-year and 2-year Treasury bond yields

Bond positioning is very important

Where you place your money in the bond market is important, especially when inflation is high and the Fed is raising rates. Bonds that mature in 10 or 20 years are very sensitive to changes in interest rates, while bonds that mature in 3 months are very insensitive to these same rate changes.

Here is a chart that compares the recent performance of short, medium and long duration bonds. You can see that the 3-month Treasuries where we are overweight have maintained their value, while the 20-year Treasuries have fallen significantly.

It is really hard for the big investment firms to steer around this turmoil. Their funds are too big to hedge or rotate, so they just ride the market up and down.

We currently have all of our bond exposure in 3-month Treasuries and Floating Rate bonds.

The dollar is not dead, not even close

Japan recently let their currency collapse. You don't hear much about it, but this policy is deliberate because in creates inflation for the local economy and lowers the cost of their exports to other countries.

It turns out the Japanese aren't alone in devaluating their currency. The following chart compares the US Dollar to the currencies of our major trading partners excluding China. All have done a remarkable job of devaluing vis-a-vis the dollar, creating a competitive edge for their native industries and a reason for our manufacturing to move off-shore.

The dollar is not dead; not by a long shot.

Figure 2: Currency relative performance since 2009

Current similarities to 2008 are not a good sign

Remarkable similarities to 2008 abound:

1. Strong energy prices that hurt consumer spending power

2. Financial defaults that jeopardize the financial system

3. Falling markets as investors de-risk portfolios

Some Russian bonds are getting marked down to zero at the broker-dealers in Europe and America. While the Russian stock market has re-opened, there are many trading limitations. Here in the West, Russian securities are not trading; some mutual funds and ETFs have marked down their Russian holdings to zero, despite the market opening in Russia.

In other industries like aircraft leasing, the Russians have confiscated leased airliners located in Russia. The Russian airlines are essentially defaulting on their agreement with the leasing companies based in Ireland and Bermuda. Someone is going to lose billions on this action alone.

Just as the 2008 mortgage defaults first created concern, then panic, we must closely watch how these Russian losses are absorbed by the markets. Because of leverage and distribution, these losses can create major problems in unexpected places, just like 2008.

Wall Street and Nuclear Annihilation

This next topic is almost a parody: Rising risk of nuclear war is a buying opportunity! There is an old joke on Wall Street that you can't hedge the apocalypse: 1) if you survive, everything is destroyed; 2) if you hedge, how are you going to collect?

The sad part is that it is being discussed at all. Let's hope calmer heads prevail on both sides of the current conflict between the East and the West. None of this talk of stocks and bonds will matter if the big ones get dropped.

The author of the report below is estimating a 10% chance of a civilization ending war in the next 12 months.

Is inflation a giant conspiracy?

Have the central banks been colluding for years to create the current wave of inflation? Maybe.

What they have been doing is analyzing solutions to major economic problems in the Western democracies such as: 1) too much debt, and 2) too little growth.

The concept of financial repression is not a new one and it wasn't created by the Japanese in 1990. It was developed during the 1930's as a response to the Great Depression. So, in a very significant way, the central banks of Europe, Japan and America have been planning this for years.

How do we know? They told us right here: The Liquidation of Government Debt

Here is a key excerpt:

While inflation makes perfect sense from a public policy perspective, it is not a good deal for the politicians who have to take the blame for it because it is very unpopular with the voters.

Here in the United States, the members of the Federal Reserve in their speeches have stated that reducing inflation is their number 1 goal. However, in their actions, they are timid and reluctant to do anything decisive because it will hurt the stock market and economy.

Our positioning in equities and bonds has been beneficial so far in 2022. We are underweight stocks, overweight precious metals, and overweight short-term bonds. Each of these choices has helped us stay ahead of the benchmarks this year and moderate the market's volatility.

The economy is slowing, valuations are high, interest rates are rising, and the Russian sanctions are going to force some firms into bankruptcy. We expect the markets to be volatile as we go through the spring.

If you have any questions, please call me at 281-402-8284.

Sincerely,

Rob and Chris

Robert J Lloyd, CFA^®

President and Chief Investment Officer

Lloyds Intrepid Wealth Management

1330 Lake Robbins Dr., Suite 560

The Woodlands, TX  77380

281-402-8284

Robert.Lloyd@lloydsintrepid.com

www.lloydsintrepid.com

Lloyds Intrepid LLC (“LIWM”) is an Investment Advisor registered with the State of Texas, where it is doing business as Lloyds Intrepid Wealth Management. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at 281.886.3039 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from LIWM with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.LloydsIntrepid.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.