Economic Outlook – July 2021

Every solution may create a new set of problems. These problems may not be knowable in advance – or, if they are knowable, the timing of their arrival is still unclear. All sorts of solutions start out with good intentions and particular goals in mind, but they often spawn new problems somewhere else.

The rapid push toward electric cars in California is a simple example. The problem to be solved is eliminating pollution and emissions from internal combustion engines. The proposed solution, however, fails to take into account the state’s rolling blackouts and an infrastructure inadequate to provide electricity to existing households and businesses – even in the absence of millions of electric cars plugged in for charging.

Secondarily, it would seem as though electric cars also could solve another problem by reducing the oft-criticized technique of oil fracking. However, mining lithium for use in batteries is not much different than fracking, as it takes 500,000 to 1,000,000 gallons of water to produce a metric ton (2,204 pounds) of lithium. The lithium mine in Silver Peak, Nevada uses six billion gallons of water each year from an already drought-stricken area. In addition to local water depletion, chemicals like hydrochloric acid used in the lithium separation process can leach into water tables and affect air quality.

So we should ask ourselves, is the solution to the problem any better than the resulting collateral damage?

Of course, the same approach can be applied to looking at “solutions to problems” in the economy and markets. Well-intended solutions such as monetary policy, low interest rates, fiscal programs and deficit spending have migrated to problems like elevated asset prices, inflation concerns, yield-starved bond investors, tight credit spreads, increasing portfolio risk, product and labor constraints and elevated corporate debt levels, to name a few. Sure, there were good intentions – but it’s just like planting a raspberry bush. Your intention is to enjoy the fruit, but you’ll always have some shoots spring up where they are not wanted, and it’s tough to get rid of them without eradicating the entire bush.

Will those well-intended economic programs be discontinued to remove the collateral problems they may have caused? Not entirely so. It’s more likely that the “shoots” will need to be trimmed. What does this look like? We anticipate slow, methodical transitions in an attempt to let markets get used to the idea that things will be changing. The Federal Reserve appears to have taken the first step, talking about the prospect of “tapering” (reducing) its asset purchases in the open market. Actual implementation of that first step is likely still six to nine months away. The idea is to minimize the collateral damage (decline) in the market by getting investors used to the idea that the Fed will be reducing its influence at some point.

Our economy and markets “patch” may look good, but navigating all those prickly market challenges to harvest the fruit of market returns is a delicate progression. Like any good horticulturist, we look to cultivate the garden and enjoy its fruits for many years to come. Thank you for your confidence in Bell.

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