2Q 2021 Client Letter

In the second quarter of 2021, we saw some volatility related to concerns about inflation and the consequent effects on interest rates. The debate about this topic is robust and there is little consensus around the myriad price increases we’re experiencing. Are they “transitory” or long-term? Are the causes related to an increase in demand, to supply constraints, or perhaps both? How do we incorporate both short-term and long-term trends into our investment portfolio? Despite the prevalence and vociferousness of this discussion, our view of long-term investing is unchanged: superior companies with superior economics will outperform when given time.

In previous letters, we stressed that economic activity and the markets would be directly linked to the successful control of COVID-19 through vaccination. Unfortunately, we have not achieved that yet. State vaccination programs were not standardized and the acceptance of a vaccine has not been uniform by demographic. As a result, the post-pandemic recovery is inconsistent and certain areas of the country with low vaccination rates are proving to be particularly susceptible to the Delta variant. This impacts not only the health of Americans, it also has effects on regional, national, and global supply chains. On the other hand, we are seeing improved consumer activity in a number of areas, particularly the travel and leisure industries, as the consumer has returned with cash in hand and pent-up demand. As long-term stewards of your capital, we do not speculate, and we do not deviate from our long-term orientation to capture the markets’ short-term favor.

Through the second quarter, the positive economic trajectory was reinforced by fiscal and monetary stimulus. At present, fiscal disagreement centers on how many more trillion should be spent on infrastructure and social programs in addition to COVID-related expenditures. On the monetary side, there is less infighting within the Federal Reserve (Fed) as it continues its monthly purchase of $120 billion of Treasury bonds and mortgage related securities. Over the past year, the EU and the Fed have spent over $17 trillion in their efforts for stimulus and interest rate suppression. The questions that percolate are: How much is enough? What are the consequences of such stimulus? When should the Fed begin to taper these programs? As the market pundits express their opinions regarding the next Fed move, we are reminded that they are usually wrong, but they rarely lack conviction.

The consequence of all the government stimulus and the source of significant market worry is inflation, as we said in the introduction. Historically, inflation is very difficult to tame once it gets started and doing so is a painful process. Inflation disproportionately impacts the less affluent by decreasing the purchasing power of their limited dollars. In short, their money doesn’t buy as many goods and services, which is a difficult reality for many who might already go without. To curb inflationary pressures, interest rates increase through normal market action and Fed policy, which has historically slowed the economy and even brought on recessions and acted as a headwind for equity markets. While there are underlying discrepancies that should not be discounted, low inflation and improved quality of goods due to innovation, productivity improvements and globalization have been the norm for 20 years. This scenario may be changing as evidence of wage pressures and commodity price increases ratchet up prices elsewhere. We will see if these increases are “transitory”.

The focus of Heron Bay Capital Management remains the same, whether inflation is transient or more permanent. We believe that buying high quality companies provides not only superior returns, but also protection against inflation.

As always, we appreciate your trust in us. We look forward to our continued partnership to help you meet your families’ goals in a thoughtful and prudent manner.


Disclosure

Heron Bay Capital Management, LLC (“HBCM") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where HBCM and its representatives are properly licensed or exempt from licensure. For current HBCM information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with HBCM’s CRD #305537.


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