Mid-Year 2022 Update

Last week, we learned about the passing of an American hero David McCullough.

Many years ago, I had the unique opportunity of having a small private dinner with him.

He reflected on his books and life as an author and answered questions. He will be missed!

I wanted to write a brief *Think Piece* based on how I see the Investment landscape right now.

Henry Kissinger, who I have admired and have followed his thought leadership for many years,

has a new book out. Enclosed is a WSJ Article on his current views of the Geopolitical

landscape. What I find interesting, but disturbing, is his view that we are in the most RISK prone

period that he has ever seen since the Cuban missile crisis. The U.S. has poked the bear of both

Russia and China (both nuclear powers). A quote from the WSJ article states, “Mr. Kissinger

sees today’s world as verging on a dangerous disequilibrium.”

How does this Macro-view relate back to your investment portfolio: With the recent stock

market rally in July 2022, I think the market is still way ahead of reality. The Fed will have to

continue to raise interest rates above the 4% level (10-Year T-Bill) to get a handle on inflation.

This will take us into 2023-2024 and potentially a *W* shaped recession during that time

period. In addition, cost-push *Wage Inflation* which we are starting to see now is very, very,

very, hard to eliminate. This tends to appear late in the economic cycle. For example, on July 2,

2022, American Airlines offered its pilots pay rises nearing +17% under a new contract. These

pay increases will add $2 billion to America’s cost structure. Going forward, the

*Unemployment Rate* will need to increase to the 10% range versus the 3% current level to

get this type of wage inflation under control. Finally, as we discussed above, Geopolitical RISK

factors are currently elevated which could create a *black swan* event at some point. While I

have no idea of the timing and probability of such an event, I am at least thinking about the

effect on portfolios. In today’s investing environment, increased uncertainty = lower P/E (price-

to-earning) multiples for the overall market.

My main message is to make you aware of future risks. We remain diligent with higher than

normal cash levels. Also, we are more focused on Divided Income (individual stocks with high

dividend yields) to help offset the impact of elevated and sticky inflation in the near term.

Respectfully,

Dr. Christian Koch