Editor’s Note: The husband-and-wife duo, Dryden and Laila Pence, own Pence Wealth Management, a Newport Beach financial firm with $2.4 billion in total client assets and often ranked among the nation’s top wealth managers. The following is an edited excerpt from a speech Dryden gave in September to his clients at a company conference in Costa Mesa.
Many of your parents told you about The Great Depression, how it changed their perception on life. We all saw how the world changed dramatically post 9/11. And now we’re in a world post-COVID, which will probably be endemic and come around year after year.
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On top of the $4 trillion annually spent by the federal government, we put an additional $5.4 trillion into the world’s largest economy in one year. That extra amount alone is equivalent to 25% of 2019 nominal GDP; inflation adjusted, that’s more money than we put into the entire economy in all of World War II.
The Next Normal is Abnormal. We’ve not been here before.
Look at our job creation. We were peaking with jobs, and all of a sudden, we lost 22.4 million jobs in a period of six weeks. We only lost 15 million jobs in The Great Depression. But five months after the lockdowns, we had half of them back. That’s abnormal—in 2009 it took two and a half years to get to the same point.
All of a sudden, we see GDP that goes down 31% in a quarter, then up 33% the next. That’s abnormal.
The data is going to be crazy for a little while and few of the numbers or comparisons are going to make sense until about 2024.
This creates an environment where people come on the media and tell you all sorts of things typically to scare you so they can sell you gold.
When you hear pundits on television or newspaper articles say well, this is up 5%, or this is down 23%, just step back and ask yourself, “compared to what?” You’re going to find that most of these comparisons are to abnormal numbers.
When the data doesn’t make any sense, who should you trust? Look around and see what people are doing.
Human beings are what drive the economy. Nobody makes a penny until someone decides to buy. So, if we can get in front of the decision-making process and understand the consumer, we can be more predictive about not only what they’re going to buy, but who they might buy it from and how they might buy it.
That’s why I trust personal consumption expenditure. Every dollar is a vote and humans are the most adaptive species on the planet. That’s why we’re at the top of the food chain.
We are our only predators. It is important to recognize that we’ve had challenges before. We’ve had economic challenges before. We’ve had military and biological challenges before. We’ve overcome every one of them as a nation, as a species and as a planet.
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When we studied 9/11, we asked when did things get back to normal? At 17 months after 9/11, we had 95% of air traffic loadings back. Now we’re roughly 17 months after COVID and a similar pattern is happening. The same restrictions, just on a different path. We’re back to about 70%.
My point is that after about 18 months, Americans got fed up with being inconvenienced and got back to a normal form of life. They find a way.
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Not only did we put $5.4 trillion of government stimulus into the economy, we’ve got trillions in excess savings. People didn’t spend money for a little while.
There’s a lot of pent-up demand. There’s a lot of money, and payrolls are back above where we were at the end of the Obama administration.
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The stock market’s at an all-time high. Well, of course it is—earnings are at an all-time high. What’s the thing I said was the most important? Earnings. If earnings are at an all-time high, then the stock market ought to be at an all-time high. Makes perfectly good sense.
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Now for the things that you’re worried about: inflation and interest rates. The big question we see often, is this inflation transitory or permanent?
In May, everybody said inflation at 4.8% was crazy. But if you pulled out used cars and trucks, which is a temporary phenomenon and a direct result of the shutdowns, inflation was 2.3%.
Are the huge numbers of ships at the L.A. ports going to be unloaded by Christmas? At the very least, don’t expect major sales when things are supply constrained. Prices go up when we have tons of money in the economy chasing too few goods.
Now people are getting worried about the Federal Reserve raising interest rates. How much are they going to raise the interest rate? How fast?
The Fed wants an average inflation rate of 2%. They haven’t been able to get that but two times since 2007. So, in some ways, this is a gift to them. Depending on how far back the Federal Reserve views “average” inflation, consumer prices could rise 3% for the next five years before we ever get back to the number they really want to be at.
So, if inflation goes to 3% or 4%, is the Fed going to panic and raise interest rates dramatically? We don’t think that’s likely.
The Fed uses interest rates to influence behavior. Lower interest rates stimulate the economy, while higher interest rates slow it down. It’s simple as a can of corn.
When I graduated from Harvard in 1982, interest rates were 18% to 21%. Inflation was about 13%. Today, however, we baby boomers are not as important as we used to be, because millennials are the largest generation in the labor force and have been since 2016. They’re the ones who are buying houses.
Interest rates are relative, and to millennials a 6% mortgage is completely crazy. As a result, they respond at a lower absolute interest rate. What happened when interest rates got close to 5% in 2018? Housing demand dropped like a rock.
So, if you’re panicking about interest rates going back to 10%, it’s safe to say that you shouldn’t worry.
Earnings and fundamentals should continue to be strong throughout the rest of 2022 and 2023. By the time we get to 2024, we’ll have active, meaningful statistical comparisons about what’s going on.
When you ask me about the economy, I’d say it’s pretty good. It’s hard to put this much money into the economy and have things go badly.
