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Quotidian Investments Monthly Commentary – August 2022

September 3, 2022

Following Quotidian’s substantial upward momentum in July, our positive progress continued throughout the first two weeks of August supported by an influx of new investment monies into equity markets together with excellent official data releases which indicated that inflation in the USA might already have peaked. As a consequence, by the middle of the month Quotidian’s high point in August itself saw a performance uplift of + 10.25% for the month alone at that point.

The annual US inflation figure announced late in July showed that Consumer Price Inflation had fallen from the 9.10% figure declared in June down to 8.50% in July; a notably positive indication that the Federal Reserve’s strategy to control inflation and bring it down to its target range of circa 2% is working.

There was never any doubt that that would eventually be the case because the Fed’s plan is founded on a basic economic concept which historically has long been the most successful method of suppressing inflation. Very simply, by increasing interest rates (and thereby increasing the cost of servicing any outstanding mortgages, loans and debts) the central bank effectively reduces the level of discretional income available to the consumer. That, in turn, subdues the demand for goods and services (which are no longer affordable to those consumers now with lower spending power) and thus squashes demand and brings a temporary halt to the virtuous economic cycle.

Ultimately, the result of this simple economic measure impacts negatively upon corporate profits. Nonetheless, this is usually intended as a relatively short-term measure and, according to the minutes of the Federal Reserve’s various recent meetings it aims to have inflation in its grip by the end of the year.

However, the positive momentum was not to last. Three weeks into August equity market focus was manoeuvred towards a speech that Jerome Powell was scheduled to deliver to an audience of bankers and market-makers at what has become an annual economic symposium in Jackson Hole, Wyoming.

This shindig is a skiing resort in winter and a camping/recreation resort in the summer and the “economic symposium” has, since 1978, been a watering hole fitting neatly into the change of seasons for those in the US financial world to impress each other and showcase their own “masters of the universe” brilliance. In our view, it’s level of seriousness and intellectual stimulation can be gauged against its local full-time residents (who include luminaries such as Kim Kardashian, Sandra Bullock and Ru Paul).

Market-makers are obviously fully aware that the Federal Reserve’s strategy to control inflation is the correct one and will indeed eventually bring about the desired result. By turning the focus onto a relatively unimportant speech at an equally unimportant ‘end of holiday’ gathering they could (with a little bit of ingenuity) bend the narrative into something more useful to their own purposes. Indeed, that is exactly what they then did.

Jerome Powell’s ‘keynote’ address was nothing more than a rehash of the song he’s been singing for the past two years or so in respect of inflation and how best to control it. His plan is demonstrably working and will continue to do so. There was nothing new in his address and nothing to disturb his long-standing central message. Quite rightly, he warned against complacency and emphasised the need to continue along the well-trodden path of interest rate increases and see the job through to its required conclusion. It is, of course, highly desirable (not to say essential) to avoid premature releasing and its close relative premature slackening.

Sadly, that change of focus gave those with the deliberate intent of reintroducing negativity their opportunity to misinterpret the real message and mutate it into a reason to create another temporary market downturn. The focal point was therefore turned from a statement of common sense and re-presented as a call for ‘aggressive’ interest rate increases. When Powell rose to begin his relatively short speech Quotidian’s real-time performance stood at plus 3% for the month of August. By close of play later that same day market-makers had been hard at work with their red pens and marked prices down by 5% across the board. This is not real-world pricing and does not reflect real trading; it is yet another visitation to ‘planet fear’.

Please remain aware that these repetitive mini-markdowns are nothing more than market-makers attempts to weaken our willpower and thus dislodge us from our asset holdings. We counter these continual and barely disguised endeavours to feather their own nests at our expense by continuing to resist their fear-based challenges.

Market-makers (predominantly the major American investment banks) certainly have the power to move and manipulate markets in the short-term (through false narratives and fear-based false pricing) but in the end they cannot deny the positive momentum of economic reality and the successes consistently achieved by profitable businesses.

Ultimately, by understanding their motives and tactics, we will prevail and investment performance will return to its previous highs. Obviously, equity market-makers are fully aware of that and so they continue to use fear to try and dislocate amateurs and mislead naïve professionals in order to then feather their own nests. Unwary investors who sell out when they should be holding on (or topping up their asset-based holdings) merely help market-makers to reap the benefit of market resurgence when it comes.

The monthly uplift we achieved in July and the early part of August is proof positive that the tech sector of the equity market has been grossly under-priced. Inflation in the USA will be brought under control faster than market analysts may currently think. Market-makers, on the other hand, only think about inventing new ways to best enhance their own profits at the investors’ expense.

On 31st August 2022 the FTSE100 index closed the month at 7,284.15 (a fall of -1.88% in the month of August itself) and it therefore now stands at -1.36% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 31st August shows a fall of -9.98% for the month and it follows that the Fund’s year to date performance figure closed the month at -38.57% (and still a big improvement over our low point for the year).

One of the reasons for our cynicism in relation to market pricing over the course of 2022 is that the numbers simply appear to be too coincidental. For example, in the first two weeks of May the Fund’s performance was -11.38% yet in the last two weeks of May it was +13.74%. Those numbers are not quite identical but are too close for usual and typical comfort.

Likewise, in June our performance was -15.99% yet in July it was +17.94%. And more recently, in the first two weeks of August our performance peaked at +10.25% yet in the last two weeks of the month’s performance fell to -9.98%.

Our scepticism and distrust of market-makers and the current quite incredible range and frequency of volatility in equity pricing stems from years of observing good news being quite deliberately mutated into bad news and the overall economic narrative suffering from metamorphosis in its reporting too. All done for the financial benefit of the market-makers themselves and against the best interests of the investor. Despite all that, equities remain the asset-class best placed to achieve medium and longer term gains and maintain pace with inflation (provided that one has patience, courage and an understanding of how equity markets actually work).

One of our investors very kindly sent me a recent video of Warren Buffett (the well-known US investor) addressing a local audience with his take on some of today’s market issues. Sadly, at the age of 91 Mr Buffett is showing his age now but he still hits the target (particularly when he mentions fraud in the same breath as Wall Street).

We’ve long observed that the majority of investors tend to buy liabilities in the belief that they are assets……and that truism is one of Buffett’s central themes in this address. Greed has a lot to answer for. It clearly affects the judgement of an awful lot of ‘amateur’ investors as well as that of some traders in the in-house departments of some famous investment names.

In the long run, though, only those companies who produce products or services that have real value will be worth investing in which is why Quotidian’s fundamental investment strategy is to search out long-term value (and stick with it) rather than indulge in short term speculation.

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