With the events of the last few days, February seems like a distant memory. More importantly, it was yet another test of the integrity of the Reserve Cash Management strategy, and it performed as designed. As we have espoused, the emphasis of the RCM is broad diversification and an emphasis on liquidity, and that has served our investors well during the crisis. We’ve emphasized that to keep any more than $250,000 in a bank account is to make an unsecured loan to that institution. The RCM is a strategy that holds the securities in the name of the client, in a separately managed account, at a qualified custodian, thereby eliminating counterparty risk.

We’re delighted to communicate that the Halyard Reserve Cash Management (RCM) composite generated a positive net return of 0.72% for 2022. During a year in which nearly every risk asset fell in value, we are delighted with that outcome. That’s not to say that the composite didn’t suffer some interim mark-to-market losses as the Federal Reserve defied expectations and raised the overnight lending rate by 400 basis points. The composite endured an unprecedented six mark-to-market losing months last year despite the Halyard team’s highly conservative duration management.

The short maturity fixed income market is offering the most attractive yield opportunity since before the financial panic of 2008, thanks to the Federal Reserve’s aggressive reversal of Fed Funds. We argue that the Fed has been forced into such an aggressive move by their years of ineptitude but, nevertheless, the move presents an attractive opportunity for investors to actually earn an attractive return on their cash. Prior to this year, the idea of 60/40 investing (a portfolio strategy of holding 60% of assets in equities and 40% in fixed income) had been supplanted by “forget bonds and buy the dip in stocks when their price corrects.” That strategy worked well prior to this year, but has proved catastrophic for portfolios this year, with the selloff in the darlings of the retail market, namely FANG stocks. All are down double-digits in 2023, with META, the parent of Facebook, down 69% from its peak. The best performing of the group is Apple with a year-to-date loss of only 27%. Topping the FANG losses, Bitcoin, the favored trading vehicle of the more “sophisticated” retail traders has lost 75% of its value since last December. With the cryptocurrencies printing new lows as we write, we wonder what’s stopping Bitcoin from plumbing the depths below 10,000. It’s certainly not valuation, because it really doesn’t have any intrinsic value.

The August CPI report was a shocker in that the expectation was for inflation to finally drift lower. In fact, the report confirmed that inflation continues to run at an elevated pace and the Fed’s raising of short-term interest rates is doing little to quell the uptick. To put it into perspective, the year-over-year rate of inflation last August was an already an elevated 5.25%. At the time, the Federal Reserve wrongly assured investors that inflation was transitory, and they didn’t need to adjust monetary policy because in short order the uptick would pass. Recall, at the time Chairman Powell was up for renomination and, we suspect, reluctant to do anything to battle rising prices, fearing that to do so would torpedo his chances for renomination. From our perspective, he had done a lousy job and should not have been renominated, but that did not come to pass.

As expected, the Consumer Price Index (CPI) in June registered the highest inflation in 40 years. Year-over-year the rate of price appreciation of the CPI came in at 9.1%. In reviewing the details of the report, the source of the inflation is broad-based. Even more troubling, recent surveys indicate that consumer expectations for future inflation are climbing.

Earlier this month the jobless report showed that the economy added 372,000 new jobs in June, well ahead of the 265,000 that was expected. Given the anecdotal weakness we’ve been witnessing, our expectation was that the jobs figure would disappoint. Contradicting the headline number, the household survey showed a decline in the labor force of 353,000 jobs. As we’ve explained previously, the two measures are usually directionally in agreement, but not always.