Jeep Grand Cherokee
You may have noticed some of the market enthusiasm has waned in recent weeks. In no small part, this is because valuations, particularly in the technology sector, have been stretched too far. However, there is another reason markets pulled back this week and that is fear of inflation. While the Federal Reserve has been very clear for some time now that it wants higher inflation, some believe it may come sooner rather than later. We saw the 10-year Treasury spike to 1.6% this week which indicates investors are increasingly reluctant to buy intermediate-term fixed income.
Using the same logic, if inflation does get away from the Fed, it will quickly end its bond buying program followed by hiking interest rates. By doing so it would slow the economy, by increasing borrowing costs, with the consequence of hurting corporate earnings. Therefore, we saw the selloff in both the bond and stock markets this week. Having said that, the Fed has been very clear it WANTS inflation to rise above 2% for an extended period to make up for sustained lack of inflation. The market may be overreacting to what it perceives as a bigger threat than exists. I won’t discount the fear because we should expect inflation to rise in the coming year. But there is no reason to believe the Fed doesn’t have the tools or the expertise to keep it under control.
In other news, I often write about the changing landscape, whether it be the food we eat, the cars we drive, or the ways we interact with technology. The companies that are on the leading edge of these technologies could very well end up being the next Apple, Amazon, or Google. Yet I haven’t written much about digital currencies, i.e. Bitcoin, because for many it is just too big a step. This week I learned that China is racing to become the first big economy to introduce a centralized digital currency. One of its most notable features is the ability to conduct transactions without the Internet. It also won’t require a bank account to access the funds. While potentially a groundbreaking development, it does not come without its risks. The two most glaring risks are the ability of the government to socially control its citizens and its ability to monitor every transaction in real-time to surveil its citizens. While I often embrace technologies that make our lives better, this is one that I will withhold judgement on for now.
In company news, we learned this week that Verizon, AT&T, and T-Mobile spent a combined $80 billion on 5G spectrum. My initial reaction is why is it so expensive? The Federal Communications Commission (FCC) is the body that auctioned the frequencies and stands to gain from the exorbitant price, but the consequence of heaping debt on these already highly indebted companies seem egregious. I understand the issue of supply and demand, but in this case, there are only three bidders. AT&T hopes to spin off DirecTV, which it purchased in 2015 for $48 billion, to recover some of the cost of this purchase. One commenter on the article asked, “How does VZ and T create earnings stream to hurdle over this huge investment?” I am left wondering the same thing.
In closing, one iconic car model may soon be changing its name. I read this week that the Cherokee Nation wants Jeep to stop using the tribe’s name on its SUV’s, and recently held a conference call with executives from Stellantis (the rebranded name for the merged Fiat, Chrysler, and Peugeot). Money does not appear to be a motivating factor since the principal chief of the Cherokee Nation said, “Financial incentives, things of that nature, to me, don’t remedy the underlying problem.” It appears to be more a matter of principle. He went on to say, “I think we’re in a day and age in this country where it’s time for both corporations and team sports to retire the use of Native American names, images, and mascots from their products, team jerseys, and sports in general.” Jeep first used the Cherokee name in a 1974 two-door wagon, which was called the Cherokee Chief. It has since built cars called Cherokee continuously with the Grand Cherokee being Jeep’s bestselling vehicle. In 2020, the Grand Cherokee and Cherokee models made up 40% of Jeep’s total annual sales. This got me wondering. After some research, I discovered the names of 26 U.S. states have Native American origin. Alabama, Iowa, and Kansas are named after tribes that lived in those states. And one, Oklahoma, is from the Choctaw word meaning "red people." Are we to imagine that these states should also change their names? I have mixed feelings about this, as I’m sure you do too. Feel free to share your thoughts with me. Now you know.
Bruce J. Mason, MBA