What’s the latest on market conditions?

Summer 2021 was supposed to be wild and carefree, the so-called “Hot Vax Summer” (as CNN Business wrote back in May) that would show the U.S. getting back to normal “post” COVID-19. Instead, the Delta variant gave us a fourth wave of the pandemic that, in some places and according to some metrics, has been even bigger than the third wave.

And as recently as July, I was answering questions about the pandemic easing!

Yet the situation is clearly different than it was, with over half of Americans fully vaccinated and fewer behavioral restrictions in place. Because the situation is changing so rapidly, it’s worth revisiting the economic outlook.

Short answer: it’s murky.

The recurring theme is the Delta variant. In one sense, the underlying economic conditions are strong on the demand side, but the companies and Chief Financial Officers (CFOs) that are looking past the current upturn have some real concern about how durable the current recovery is.

That’s because this recovery has more question marks than the average recovery, given that we don't know what's around the corner. And the more we learn about the Delta variant, it's almost like playing whack-a-mole. The answer to one question just presents four or five other questions.

Remember, the whole demand cycle requires insight beyond what's happening today because a lot of products have some sort of lead time associated with them. To the extent an organization invests today in inventory or capacity (or whatever it is that they need to do to meet demand months from now), they have to be able to make some good, educated guesses about the future.

There's tension about what to do next. In some ways, that's playing out in the meeting minutes from July’s Federal Reserve meeting. Should they adopt a more hawkish tone relative to buying enormous amounts of various securities each month? What timeline should they follow with any changes? The economy looks like it's recovering, but at the same time, there's also dissension with respect to how quickly they should raise rates. Should they do it sooner, or should they wait until mid-2022, late 2022, or even early 2023?

And all this uncertainty creates an unnerving situation.

One consequence: companies across the spectrum seem to be raising liquidity. I've done it in my own business; I probably have more cash now than I have in a couple of years. I have a lot of companies that have had substantial gains, and I'm kind of in the camp where I think a lot of demand has been kind of pulled forward. That said, I also think that the recovery will be uneven, and I’m not sure that valuations are properly reflecting both demand side and the possibility of higher rates down the road. So, I'm a little more cautious, and I’ve positioned myself a little more defensively.

The reason is because I want to be ahead of what I think the market is thinking about. You can't make money being lockstep with market insight. You only get rewarded for seeing insights that no one else really sees.

My expectation is that the market has not been properly discounting the more hawkish tone that the Fed is going to end up taking, one way or another. That’s why I've been raising liquidity over the last couple months. If nothing else, we have to wean ourselves off of a crisis era monetary policy. We're not in a crisis era right now. So, why do we have a monetary policy that suggests we're in a 2008/2009 level financial crisis, when the underlying economy is probably doing okay, and asset prices are at all-time highs? That doesn't make sense. But this is an area where the market is going to lag.

When monetary policy is very lax and accommodative, and you have a lot of money that lands in a lot of checking accounts, then the by-product is Robinhood/GameStop fiascos. Cryptocurrencies that have no business at all being in the market that are trading at ridiculous prices overnight. An NFT market that no one had even heard of nine months ago, and now it's being bid up for jaw-dropping amounts of money. This situation isn’t going to last, and I’d rather be ahead of the curve when that fact finally catches up with the rest of the market.