“None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented. At the Fed, we are doing all we can to help shepherd the economy through this difficult time.” -Jerome Powell Chairman of the Federal Reserve

Before we begin our quarterly investment commentary, we are pleased to announce an expansion: Kurt Beimfohr, Jeff Vieth CFP, and Erica Berger will be joining our team. While our investment strategy will not change, the addition of these team members adds depth to our current capabilities, as well as helpful expertise in financial planning and fixed income management. Some of our long-time clients may recognize Kurt’s last name, as he is the son of Knightsbridge co-founder, Al Beimfohr. Thus, the addition of Kurt, who for years has been a successful financial executive in his own right, represents a special homecoming of sorts to the Knightsbridge family. His associate, Jeff, has the Certified Financial Planner designation, and will strengthen our offering in this area. The friendly new voice you may hear on the phone if you call our main line, will belong to Erica, who will be available to assist clients. Given our expanded services we are now doing business as Knightsbridge Wealth Management. To accommodate our larger team, in September we are moving across the street to 450 Newport Center Drive, Suite 630. We look forward to offering you deeper client service from our new location.

Imagine for a moment that you pick up your morning paper and read that your state government has established a new agency with the stated intent to spend one hundred million dollars a month buying duplexes all across the state. It just so happens you own several duplexes yourself, which you rent out to tenants for some extra income. Is this good news?

Well of course it is... you naturally expect the price of duplexes to go up! You had planned to sell one of your buildings for $200,000 to fund your living expenses... and immediately tell the interested party that your price is now $250,000. The buyer agrees.

Before long, the State Agency comes around and wants to buy one of your units for $300,000. You hadn’t intended to sell, but it seems like a good price, so you do so. But now you’re sitting on some extra cash. You’re an investor, so you want to put that extra money to work, buying another property you’ve had your eye on. You fix it up, sell it for more than you dreamed possible, but now can’t find any more reasonably priced duplexes to buy. They’re too darn expensive! You’ve always specialized in duplexes, but single-family home rentals and apartment buildings now look significantly cheaper versus the rents they generate. Thus, every time you sell a duplex, you buy a small apartment complex instead. In no time, prices for apartment buildings are rising as well, even though the State Agency has made no apartment purchases.1

Thinking through this vignette is one of the best ways to understand what is going on with the stock market. The Federal Reserve has come into town to buy a Trillion dollars’ worth of bonds2 (with money printed out of thin air) and, thus, the price of bonds has unsurprisingly skyrocketed. In July 2019 a 10-year Treasury Bond sold for 50 times the annual interest it produced. In July 2020 that same bond sells for 57 times its annual interest stream.

Just as a duplex is reasonably similar to an apartment building, a bond is reasonably similar to a stock. Thus, even though the Federal Reserve hasn’t been buying stocks, stock prices are going up anyway. Bond investors, flush with this cash, are bidding up stocks as soon as they sell their bonds to the Fed. Accordingly, in the second quarter, the S&P 500 rose 20 percent, its biggest quarterly gain since 1998.

It is said that a rising tide lifts all boats, and that goes for monetary tides as well (see cover image of this letter). Watching the market every day, this is exactly what it has felt like; stocks just want to go up... fundamentals be damned. On June 8th, the height of the Q2 market rebound, every single stock in the S&P 500 was up over the prior 10 weeks, an incredibly rare occurrence. To take a specific recent example, June 25th was the day that it became very clear that the U.S. was in a second COVID wave, as Texas halted its reopening. Stocks rose that day.