Thinking about 2022 – Letter from George Muzinich

Thinking about 2022

Dear Investor,

As we think about the 2022 market, we are inevitably drawn to what we have seen in the last few years. In 2019 we had low interest-rates, a strong economy and virtually no inflation. In 2020 we had low interest rates, hardly any inflation and a struggling economy. In 2021 we continued to have low interest rates, a strong economy but increasing signs of inflation. We had a strong equity market in 2019, a frightening first half of 2020 which was then followed by a strong bull market for the next 18 months. Where does this leave us for 2022? As the old saying goes “if I knew, I would be a rich man”.

Can the siren song of low interest rates, a strong economy and no inflation come back? Hope springs eternal but this scenario seems extremely unlikely. Something will have to give. We could potentially have an environment of a strong economy and low interest rates encouraged by central banks believing that inflationary pressures will be only temporary. This is the conventional wisdom that underlies the current continued strength of the markets. What will happen, however, if inflationary pressures aren’t quite as temporary as expected?

Many will continue to cling to the belief that inflationary tendencies will be short-lived. No one wants to be accused of jeopardizing economic growth by withdrawing stimulative measures too early and pushing an economy into recession. Hopefully trade blockages will recede, energy prices will weaken and wage pressures will stabilize. If any of these three variables do not behave as we hope, we may still witness some upward inflationary pressure. If two of these variables behave poorly, inflationary pressures will increase further. If all three do not act as we wish, we may face stagflation.

It has been truly remarkable how the markets have faced a steady stream of negative news and have still maintained their upward trajectory. “Buy the dip” has been the prevalent mantra.

Optimism of all sorts has fueled this upward bias. Optimism on the efficacy of vaccines, optimism on energy prices, optimism on wage restraint, optimism on new technologies, optimism on China and Russia related international tensions, optimism all around will hopefully carry the day and give us a few years to savor some of the excitement of the roaring Twenties of a century ago.

The gold rush of 200 years ago compares poorly to today’s gold rush of bitcoin mining. The venture capital that backed the railroads, the steamships, the airlines, the communication networks of another era cannot compare to the untold riches created by the venture capital of today. We are living in an amazing era of sudden wealth creation. Traditional measures of valuation have little to offer in such an environment. We value companies based on an optimism of the future too hazy to define.

Perhaps the current market optimism will last another year or two. It will probably last as long as current conditions of low interest rates and stimulative policies continue. Market participants may continue to enjoy the fruits of this hyperactive period of speculative behavior. They should do so, however, with an understanding of the risks involved.

Although we admire the vision of others we are here to offer another reality. A reality that is based on traditional metrics such as cash flow analytics and commercial prudence. In a world of zero or negative interest-rates, we try to generate returns that can provide an income stream that can compound and provide what we believe to be attractive real, inflation adjusted, returns over time.

Kind regards,
George M. Muzinich


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