Government Cheese

Chad and I were playing baseball in the front yard. We heard him coming down the street. The muffler gave him away. We wondered what would be on the roof this time? Old tires? 30 year old lawn chairs? Whatever he was bringing had to be on the roof because the Plymouth Horizon was full of newspapers stacked from seat to ceiling. As he pulled in his driveway, we were a bit perplexed because there was nothing on his roof. When he got out, he was carrying two huge bricks of something, something wrapped in cellophane. Government cheese.

Mr. Wilson was bringing us cheese. Bringing my mom cheese, to be exact. He was in his 60s, worked his entire life at GM in Defiance, “dated” a woman who lived elsewhere in town, and collected junk. In today’s world, he would be called a hoarder. He drove one white Plymouth Horizon and there were two more as lawn ornaments. He scavenged everything he could find of “value”. Old tires. Lawn chairs from the 60s. Stacks and stacks of newspapers. Tools from the stone age. My dad and I mowed the yard, navigating the valuable junk he brought home and left in the yard. The neighborhood looked at him with equal parts disdain, for his unkempt appearance, and aggravation, for his inability to keep his yard mowed. Keeping up with the Joneses was not on Mr. Wilson’s agenda.

Mr. Wilson liked my mom and dad. Most people talked politics with my dad at their own peril. The mix of theology, philosophy and an understanding of the history of the preceding 50 years was too much for most. But Mr Wilson could hang. His intelligence belied his appearance. And he liked my mom. I think he was impressed by her ability to corral the five little kids running around. Or her ability to make ends meet in this tough inflationary time. He knew my dad’s job at the county only went so far.

So, Mr. Wilson brought us cheese. Big blocks of moldy cheese. At the time, I had no perspective on where the cheese came from. It makes a lot more sense now. The government controlled cheese from World War II until the early 80s to maintain the price of dairy when dairy industry subsidies artificially increased the supply of milk and created a surplus of milk that was then converted into cheese. The government had so much cheese that it was stored in 150 warehouses across 35 states. In 1981, President Reagan signed a bill into law to distribute the cheese. At the time the bill was signed, there were more than 2 lbs of cheese for each person living in the US. Enter Mr. Wilson and his well-intentioned blocks of moldy cheese.

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As they say, while history may not repeat, it often rhymes. Right now, the US and the world are up to their eyeballs in cheese. The US government and governments around the world have been handing it out since the 2008 financial crisis. The stimulus checks and forgiven PPP loans were the most obvious signs of cheese. Long before that, as far back as 2008, the government was doing what’s now called “Quantitative Easing”. Put simply, they created government bonds and then bought their own bonds, creating money in the system. In addition, the Federal Reserve lowered interest rates to zero and left them there. This enabled a historic housing boom followed by excesses in numerous markets – stocks, cryptocurrencies, and eventually supplies for the boom (lumber, copper, etc.). And this was not just a US phenomenon. China, Canada, Germany, the UK, Australia and numerous other countries followed the same playbook. Add the Ukraine war to the mix and restrictive energy policy and you have… inflation.

Earlier this year, the US (Federal Reserve) reversed course and started raising interest rates with much of the world following suit. This is having a dramatic impact on the housing markets. As I write this, a 30 year mortgage has gone from under 3% to almost 7%. Consider this: with mortgage rates at 3%, the payment on a $500,000 mortgage is $2108/mo. With rates at 7%, a $2108 payment buys a $315,000 house. As you can see from the chart below, this has driven the inventory of homes up 45% year to date.

Housing is slowing, and we’ve all seen gasoline prices dropping from above $5 to the $3.25 to $3.75 range. We expect more signs of slowing. However, much of the early housing/stock market/commodity inflation has been replaced by wage inflation. Wage inflation has been critical to getting people back to work. This will need to moderate for the Fed to slow interest rate hikes.

From a market perspective, you might be surprised to hear we view the stock and bond market drops to be healthy. As I write this, the S&P 500 is down 24%, Dow Jones down 20%, NASDAQ 100 down 33% AND the bond aggregate down 15% (the worst year in history). While it’s painful to see accounts down, the market was at unsustainable levels, making future potential gains non-existent. Over the past 100 years, the market has returned between 6 and 8%. Markets have a way of returning to this mean level and the recent flush has brought that into focus. The bond market was yielding 0-1% early this year. With the moves in that market, we are now able to buy bond funds yielding 4+%, making those funds much more palatable as investments. We’ve spent a lot of time analyzing and making changes to your portfolios to minimize downside losses. It never feels good to lose 10, 12, or 15%. At the same time, we measure ourselves against the indices mentioned above and are thankful we’ve been able to limit the downside compared to those indices. We don’t rule out a deeper decline in stocks as the economy slows. However, we don’t see this as the end of the world. Bear markets come, bottom, and turn into bull markets. As Warren Buffet says “Be fearful when others are greedy, and greedy when others are fearful”. And just remember, too much government cheese eventually gets moldy.

Jared

Brian Kellett, CFP brian@kellettschaffner.com. Phone 513-312-6067

Dave Bodnar, CFP david@kellettschaffner.com. Phone 513-258-6973

Jared Kline, CFP, EA jared@kellettschaffner.com. Phone 513-768-2238

Kellett Schaffner Wealth Advisors LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Kellett Schaffner Wealth Advisors LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Kellett Schaffner Wealth Advisors LLC unless a client service agreement is in place.

Government cheese statistics from Wikipedia. The story about Mr. Wilson is true to the best of my memory. YCharts are created by yours truly.