Notes on the Week Ahead: Recent Episodes
Dr. David Kelly
Listen to the latest insights from Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management to help prepare you for the week ahead.
The summer of 2026 has been dominated by the AI boom. Some fear that AI is advancing too quickly for thoughtful regulation. Others worry that end-user revenues will lag too far behind massive capital spending and fast-growing debt. From an economic perspective, AI is pure momentum, generating huge profit gains, adding to investment spending, boosting upper-income consumer spending via a wealth effect and coinciding with very solid gains in productivity.
No one liked the defendant. That much was clear. But when the jury retired to consider their verdict, they hardly knew where to start. The case was so confusing and the judge’s instructions hardly seemed adequate. “Perhaps”, suggested the foreman, “we should start with a list of questions…”
The earnings season has started with a blast. As of Friday morning, 49 of the S&P500 companies had reported second-quarter earnings, with 85% beating expectations and the index on track for a blockbuster 23% year-over-year gain for the quarter. According to FactSet, analysts now expect S&P500 operating earnings to reach $340.74 for 2026 as a whole, up 24% from 2025, following strong back-to-back gains of 10% and 13% in 2024 and 2025 respectively.
Alan Greenspan, who served as Fed Chairman for almost 20 years, died last month at the age of 100. He was a talented and faithful public servant who guided U.S. monetary policy through the stock market crash of 1987, the boom years of the 1990s and the dot-com bubble. He was thoughtful and witty in his public comments. However, he seemed to regard a lack of clarity as almost a virtue. He inherited a Fed that had always been reticent to communicate and he largely maintained that cloak of secrecy.
Despite very average economic performance, consumer sentiment remains at extraordinarily low levels. While there are many interesting aspects to this phenomenon, one is of particular relevance to investors. As we show on page 32 of the Guide to the Markets, peaks and troughs in consumer sentiment have, for many years, been powerful contra-indicators of stock market performance over the subsequent 12 months. However, does this relationship still hold, if the reason for weak sentiment is beyond the realm of a rational assessment of broad economic conditions?
In the pantheon of running injuries, there is a well-established hierarchy. A recreational runner, finishing any marathon, or exerting themselves at half that distance, can expect to come down with delayed onset muscle soreness, otherwise known as DOMS. Starting from barely a twinge at the finish line, the pain rises in intensity over the next few days, with your quads telling you firmly that your running days are over. But then it fades and a week later you should be running like a spring lamb again.
Last week, as a frothy stock market continued to zigzag across a high plateau, two events occurred with significant implications for the macroeconomic outlook. First, the President signed a Memorandum of Understanding with Iran, potentially bringing the Iran war to a close. Second, Kevin Warsh presided over his first meeting as Fed Chairman, resulting in a slightly more hawkish tilt to monetary policy in the short run and the promise of significant reform in the long run.
Last Wednesday’s CPI report, while not a surprise, still showed a year-over-year inflation rate of 4.2% - higher than in any month since April, 2023. For investors, this raises a number of questions. First, is this the peak for U.S. inflation and, if it is, how fast will inflation fall from here? Second, are we looking at the right inflation rate, anyway, given differences between CPI and PCE deflators, headline and core measures and the new Fed Chairman’s preference for trimmed mean and median readings?
Two weeks ago, Sari and I took a vacation - an extended road trip down the East Coast as far as Charleston and then inland back to New York through the Appalachians. On a long driving stretch on the way back, we stopped at a Jersey Mike’s just off the highway for some much needed nourishment. As we were waiting to pay, a talkative man, in the height of good humor, was ordering behind us. I don’t know if he knew anyone working at the store, but he acted as if he did. He said he’d just got a job after five months searching and he was going to celebrate - by buying two big subs - one for that evening and another to put in the fridge for the next night.
The Financial Accounts of the United States is a quarterly Federal Reserve publication containing a great many large numbers but very little commentary, presumably because the authors feel the numbers speak for themselves. And the numbers do speak rather loudly.
In 19th century English novels, so-called “quarter days” often provided a chronological backdrop to the plot. A relic of medieval times, the quarter days were Lady Day (March 25th), Midsummer Day (June 24th), Michaelmas (September 29th) and Christmas Day (December 25th). These were the dates upon which rents were paid, leases expired and employment contracts took effect. Quarter days were often when the landlords of Austen expected their income, the impoverished families of Dickens had to cough up their rents and the farmworkers of Hardy would move on to their next place of employment. In short, they were days of accounting and reckoning.
On Tuesday, the Senate Banking Committee will hold hearings to consider the nomination of Kevin Warsh to be the next Fed chair. His confirmation will likely be delayed until the Justice Department’s investigation into Jerome Powell is fully resolved. Despite this, Mr. Warsh’s answers to the committee’s questions could shed light on the future direction of monetary policy.
Evening newspapers, like vinyl records and rotary phones, are fading relics, all victims of the smartphones into which humanity is gradually burying its consciousness. But once, they were a vibrant part of daily life.
Growing up in Dublin in the 1970s and 1980s, there were two evening papers, the Evening Herald and the Evening Press. Sold at every street corner, they would distract commuters from the damp and discomfort of the tight-quartered, smoke-filled upstairs of double-decker buses.
A year ago this week, the President announced what he described as “reciprocal tariffs” on goods imported from all major U.S. trading partners. These tariffs, which were much broader and higher than expected, led to an immediate and sharp decline in stock prices.
In a speech last April, Fed Chair Nominee, Kevin Warsh, lamented the mission creep of the Federal Reserve as well as the Fed’s expanded balance sheet. Many academics agree with Warsh – the Fed has often tried to address problems that are not within its remit and with tools not suited to their purpose. Some of these endeavors have inflated the balance sheet which, rather like a Swiss army knife, is a tool used for many tasks, none of which it does particularly well.
One of the benefits of my marathon training is that, most weekends, I get to jog over the Newton and Wellesley hills with my running buddy, John, who happens to be a financial advisor. Over the course of three hours we solve the problems of the world, reviewing them with dour pessimism at the start of our run and assessing them with breezy optimism later on, as the running endorphins kick in.
Three weeks ago, I wrote an article entitled Detangling Solution for the Economic Outlook in which I outlined a baseline forecast for 2026 and into 2027, amidst many distortions and entanglements in economic data and trends.
So much has happened since then, including a raft of new economic numbers, the Supreme Court’s decision on IEEPA tariffs, and, most seriously, the start of an all-out war in the Middle East, that it makes sense to go through the exercise again, or, as the marketers of hair products might say, “rinse and repeat”.
On Friday, the Supreme Court released a long-awaited decision, ruling that the President’s imposition of tariffs, using the 1977 International Emergency Economic Powers Act, otherwise known as IEEPA, was illegal. The President held a press conference that afternoon and issued a proclamation announcing a general 10% tariff on imported goods, using a different statute and promised to invoke a third set of statutes to replace the overturned tariffs on a more permanent basis. On Saturday, he announced that the 10% tariff rate was being raised to 15%.
Between taking a shower when I get up in the morning and another when I get home from running, I am a significant consumer of detangling solution. In my youth, an unruly shock of hair required liberal doses of the substance just to bring some order to my muppet-like locks. Today, sadly, the forest has thinned out, making detangling solution somewhat less necessary. However, with less to do up top, it would be nice if it could gently seep into my scalp, detangling some of the confusion beneath.
Last week saw dramatic moves in financial markets. Gold and silver, which rose very sharply last year and in January, suddenly lurched down before stabilizing. Bitcoin took a nosedive before achieving a significant, although partial, recovery on Friday. Mega-cap tech stocks posted huge earnings gains but announced even more lofty capital spending plans, contributing to a general selloff in the sector. And, at the end of the week, stocks saw a resounding rally, pushing the venerable Dow Jones Industrial Average over 50,000 for the first time ever.
On Friday, the President announced Kevin Warsh as his pick for Fed Chair. Warsh has a track record of hawkishness from his previous stint as Fed governor. He has also annunciated a broad philosophy that the Fed has moved too far from its original mandate by promoting ESG objectives and in enabling excessive federal spending through quantitative easing. That being said, he has argued more recently that the Fed should cut interest rates more aggressively.
Amidst a torrent of unsettling international and domestic events, the week ahead could be very consequential for the Federal Reserve. The FOMC will hold its first meeting of the year on Tuesday and Wednesday. While they will likely leave interest rates on hold, any dissents on that decision and their commentary on the economic outlook will provide clues to the direction of short-term interest rates in 2026 and beyond. In addition, this week the President is expected to announce his nominee for Fed Chair, the person who, presuming they are confirmed by the Senate, will lead the Fed over at least the next four years.
Americans don’t like fruit cake.
This issue comes up every December when Sari, having stolen the job from me, sets about making the family Christmas cake. It is a divine confection - currants, sultanas, cherries, candied peel and almonds, liberally presoaked in whiskey and then folded in with flour, eggs, butter and spices and baked for hours at a low temperature. The scent in the kitchen is intoxicating but temporary as the cake, when cooled, is encased first in almond icing and then in royal icing. It weighs in at a hefty eight pounds and tastes magnificent when I can no longer restrain myself on Christmas Eve or Christmas Morning.
Forecasting the economy right now feels a bit like trying to carve a path through thick jungle undergrowth on a foggy day. There are multiple layers of confusion and a forecast has to address these issues first before tracing out a possible path forward.
The Red River of the North starts at the confluence of the Bois de Sioux and Otter Tail rivers and forms most of the border between Minnesota and North Dakota. It then crosses into Manitoba and empties into Lake Winnipeg before its waters finally flow into the sea at Hudson Bay. Cities have grown up along its banks including Fargo, Grand Forks and Winnipeg and their residents are all too aware of one unfortunate feature of the river. Unlike most large U.S. rivers, it flows from south to north.
On Wednesday, the Fed will hold its last FOMC meeting of the year. Their actions and communications could move interest rates across the yield curve and so are important for investors.
When I first arrived in America, America seemed to be all about cars.
It was the early 1980s, and I had come over from Ireland to do a Ph.D. in economics at Michigan State University. The campus was strewn with the hand-me-down vehicles of the student body – great gas-guzzling behemoths rendered hopelessly uncompetitive by the soaring gas prices of the 1970s and fighting a losing battle against Japanese imports. Still, the domestic auto industry was crucial to the U.S. and particularly Michigan, and rising sales numbers, released every 10-days, were monitored as the hopeful early shoots of recovery from the brutal double-barreled recessions of 1980 and 1981-82.
I was watching a football game over the weekend and I saw a giant lineman go down. He was in obvious pain and hobbled, assisted and very slowly, to the sideline. The TV commentators, to my amazement, said he didn’t look too bad and he was probably healthy enough to return to the field in a snap or two. But to look at this man, battered, bruised and probably many times concussed, his frame swollen by a cardiac nightmare of a diet, his veins pumped up with sugar, caffeine and who knows what else, you’d have to ask “in what world could anyone truly call him healthy?”
In our age of overwhelming technological progress, I still cling to the simpler practices of my youth. I read books rather than tablets, write with an ink pen in cursive rather than text with my thumbs, and attempt to use mental arithmetic, rather than a calculator, in solving math problems. I also greatly prefer an analog watch to a digital one.
I was rewatching Apollo 13 over the weekend - a fabulous movie, by the way, if you’ve never seen it - about how, in 1970, three astronauts returned safely to Earth following an explosion on their spacecraft, two days into a journey to the Moon.
Among the many problems faced by the crew and mission control was one of navigation. In order to conserve electrical power, they had to shut down their computers, along with their navigation systems, until they powered them up again just before reentry. Of course, this made it far more difficult to plot their course – but it was also far more important that they do so – so that they would be in the right position when they approached the Earth.
This quarter, we dropped the oil page from our Guide to the Markets.
There are always exactly 65 pages in the Guide, so when we want to add a page, we have to get rid of one. The process is, unfortunately, democratic, so when my younger colleagues wanted to add pages illustrating U.S. equity market concentration (page 10), the AI capital spending boom (page 22) and dollar weakness and international equity outperformance (page 43), I had to surrender the oil page.
But I did so with all the foreboding of well-grizzled experience.
One of the more challenging positions in football is that of place kicker for the visiting team. In theory, the job is simple – boot the ball through the middle of the uprights. However, there is a raucous crowd cheerfully doing its best to distract you. There are often swirling winds or other elements of nature ready to divert the football from its target the moment it leaves your foot.
As we enter the second week of the government shutdown, markets appear unconcerned. Last week, the S&P500 rose to an all-time record high, 10-year Treasury yields edged down and, while the dollar slipped slightly, measures of volatility across stocks, bonds and currencies all remained subdued.
As I get older, my memory gets a little foggier. That being said, I believe it was at lunch at a restaurant near our office on Friday, March 6th, 2009, when I and the then three other members of the Market Insights Team, Andy, Marlene and Jerry, made a bet. That day, although we didn’t know it at the time, the stock market hit its financial crisis low and the bet concerned how long it would take for the market to recover its losses.
When engaged in the dark arts of foretelling the Fed’s words and actions, I have always adopted what might be called the “prudent economist rule”. What would a prudent economist, serving as a Fed banker, do - assuming that they were armed with a reasonable economic forecast and with due consideration for the Fed’s inflation and unemployment goals and the need to maintain financial stability?
Stocks rallied in the immediate aftermath of Friday’s dismal jobs report, with the S&P500 jumping 0.5% to an all-time high of 6,532 when the market opened at 9:30AM. While this gain faded to a loss by the end of the day, the initial surge can only be rationalized in one way: investors bought stocks in the hope that weak economic data would force the Fed to cut rates more quickly.
American summers, much more so than in the rest of the world, are defined by two bookends: Memorial Day and Labor Day. As a result, the first week in September is always a time to review and plan. This is particularly important for investors this year since, facing a barrage of unsettling political and economic news, on one side, and very solid investment returns, on the other, it’s tempting to ignore fundamentals altogether and leave investments on auto-pilot.
On August 7th, with little fanfare, the IRS announced that, as part of its phased implementation of the OBBBA, it would not be adjusting W2 or 1099 forms for the current calendar year but would provide guidance and new forms, in due course, for calendar 2026.
This seemingly innocuous statement confirms that we will see in an even larger crop of personal income tax refunds early in 2026 than was anticipated when the OBBBA was passed. These higher income tax refunds should work much like a new round of stimulus checks, adding to consumer demand and inflation pressures early next year.
One of the great challenges of modern life is avoiding distractions.
In our daily lives, we are flooded by breaking news, music on planes, ads in taxis and little numbers, gazing up at us from phone apps, saying that somebody has something to say. In the investment world, we are bombarded by scrolling tickers, new products and jargon, impenetrable financial reports and the analysis of every twist and turn of government policy.
The key, of course, is not to get distracted by things that are not important. One of those things is the money supply.
The inflation temperature is about to rise. It should be a low-grade fever, triggered by tariff impacts but mitigated by low energy prices, declines in shelter inflation and global economic sluggishness. But it should also linger well above the Fed’s 2% target, as the initial impact of tariffs is supplemented by the effects of a weakening dollar, a lack of labor supply and fiscal stimulus in the first half of 2026. It could, of course, be further sustained by another round of fiscal stimulus before the mid-term elections.
This is a particularly challenging time to try to develop and present a balanced view of the economic outlook and its implications for investors. This is partly due to dramatic changes in trade, immigration and fiscal policies that are just beginning to impact the economy, partly due to distortion and mismeasurement in many key economic series and partly due to sharp attacks on the Federal Reserve and, more recently, even government statisticians, that can cloud the judgement of political partisans on both sides.
For investors, the week ahead will be dominated by the Fed decisions.
Possibly, some AI chatbot will spot the obvious grammatical error in that last sentence and change it from “the Fed decisions” to “the Fed’s decision”. However, there are really two decisions to consider: First, what will the Fed decide to do about interest rates and, second, what will the President decide to do about the Fed. Both have important implications for the economy and investing.
As you make your way through Terminal 5 in Heathrow airport, there are plenty of opportunities to buy a T-shirt bearing the slogan “Keep Calm and Carry On”. The wearer of such a garment, upon their return to the United States, is presumably advertising the idea that a visit to the blessed plot has bestowed upon them the ability to weather all manner of shocks with equanimity.
When it comes to financial markets, however, the British could learn calmness from the Americans. The U.K. gilt market, petted and coddled by timid politicians, seems to descend into turmoil under the mildest provocation. Meanwhile, U.S. markets, hardened by years of unruly words and abrupt policy changes from Washington, does indeed seem to “keep calm and carry on”.
Despite very significant shifts in U.S. economic policy and major geopolitical events, investors can look back at the first half of 2025 with some satisfaction. Through July 3rd, the S&P500 provided a total return of 7.5% for the year, despite being on the brink of a bear market just three months ago. Fixed income has also done well, with 10-year Treasury yields falling by 23 basis points, generating a 4.2% return year-to-date while high-yield bonds have delivered 4.8% on the back of a further narrowing of already tight spreads.
On Tuesday, we will release our third quarter 2025 Guide to the Markets. On Wednesday, we will host conference calls with financial professionals to discuss the outlook.
It’s an outlook dominated by the impact of dramatic policy changes on a relatively slow-growing U.S. economy. The result, in the short run, may resemble a wave, as the economy cools down in the second half of this year, heats up in early 2026 and then cool down again. However, in the long run, the net effect of these policy changes could result in an economy with slightly slower growth and higher interest rates than seemed likely at the start of the year. This being the case, it is hard to justify this spring’s rebound in U.S. stocks to new record highs less than three months after teetering on the brink of a bear market. Consequently, investors would still be well-advised to seek broader diversification in areas such as international equities, value equities and alternative assets.
Investors this week will be focused on the implications of the U.S. attack on Iranian nuclear facilities. While this is clearly a very significant event from a geopolitical perspective, it may be less important for financial markets.
The key issue is how Iran responds. One often-mentioned scenario is that they could try to close the Strait of Hormuz. Such a move would have a dramatic impact on world energy markets as roughly 20% of the world’s oil production moves through the Strait. However, this strategy would be highly counterproductive for Iran, first, because it would eliminate its own ability to export oil and second because it would trigger a U.S. effort to reopen the Strait that could further damage Iran’s depleted military capabilities.
When we bought our first home, the builder neglected to mention that it was built upon a river. Of course a river at the bottom of a garden is a charming sight. Something that seeps up through the cellar is less attractive, and so, in due course, the builder was called back to install a sump pump. Our young sons were fascinated by the hole in the basement floor and the coppery water that flowed at the bottom and wondered whether, with the help of makeshift fishing poles, it could yield some fish.
When I was growing up, school holidays weren’t packed with organized activities. Sometimes, to relieve the boredom of a rainy day, I would tackle a jigsaw – I remember one particularly challenging 1000-piece puzzle which, when completed, promised to reveal a charming picture of Dutch skaters on a frozen lake.
This week, after a very busy few months, I am putting down my pen, picking up my metaphorical spade and bucket and taking some vacation time. 2025, so far, has been a challenging year for analysts and it is tempting, as I’m trying to clear my desk, to assert that not much has changed over the past few weeks and so I don’t need to update any analysis of federal government policy, the economy and markets. However, the reality is that events in Washington and on Wall Street over just the last two weeks do require a reassessment.
There have only been two U.S. recessions since 2001 – the Great Financial Crisis and the Pandemic Recession. Both of these were huge – accounting for two of the only three times since the 1940s that the unemployment rate has vaulted to double digits. However, because the recessions of our recent memory have been so dramatic, investors may not appreciate the risks from a softer sort of slowdown.
A crowd is gathered around the sickbed of the economic expansion. Among the multitude are the workers, consumers and business people who would be most impacted by its demise. There are political partisans too, some fervently praying for recovery, others quietly hoping for the opposite. At the foot of the bed are fiscal and monetary doctors, the former preparing a sugary solution to inject into the patient and the latter casting nervous eyes both on the patient and the fiscal doctors, concerned about a renewal of inflationary fever. Foreign governments and central bankers also stand vigil, from as safe a distance as they can manage, conscious of the infectious nature of the patient’s disease. And close by the door are investors, contemplating a quick exit from American assets but haunted by the memory of the many past remarkable American recoveries. There is a knock at the door. It is the last week in April and a battery of tests are in that should shed further light on the delicate health of the economic expansion.
Last weekend, I neglected to finish my Notes on the Week Ahead as I got caught up in watching the Masters. In truth, it was mostly a battle between Rory McIlroy’s emotions, which produced two double-bogeys in his final round, and his exceptional skill, which propelled his second playoff shot to within three feet of the hole. I was particularly happy to see his victory since he hails from the same island as myself, But I was also glad to see him win because, at 35, he is no longer in the first blush of youth. It is a sad truth that in athletics, as in life, no-one soars forever. Twenty years from now, McIlroy will probably still be a fine golfer – training and resilience should see to that. But he may no longer be exceptional.
One clear advantage of getting older, (and I can attest to many of its disadvantages), is that you learn from experience. The financial market chaos, following the President’s tariff announcement, is different from previous market slumps. Every market selloff is. However, a common thread in all crises is that the best decisions begin with a structured approach to analysis.
I may have mentioned this before, but as a young lad, I had a very healthy appetite. Consequently, when deciding on a hobby, I prudently elected to go with “cooking”. My experiments included making fudge and my mother dutifully supplied me with sugar, vanilla and helpful advice. However, we possessed no candy thermometer and, as anyone in the fudge-making business will tell you, getting the temperature right is essential. Too hot and you end up with toffee or hard caramel. Too cold and you end up with a grim sludge, which no degree of refrigeration can render palatable. Making fudge is a delicate operation.
I was running along the roads of our neighborhood last weekend when I came upon a small herd of deer. I often see these beautiful but dopey creatures at dawn as they wander aimlessly in the middle of the road. When a car or truck bears down on them, they stop and stare. Perhaps they are pondering whether it would be more fun to hop into the woods to their right or gambol off into the field to their left. But, of course, the only important decision is to get out of the road. A “wait and see” attitude could be fatal.
I was at a conference last week and a financial advisor asked me what I thought he should say when a client asked him what was so bad about tariffs.
It’s a fair question. Many people who instinctively believe in free trade would still have a hard time in clearly explaining the trouble with tariffs. And since tariffs are likely to be a big issue this week, with the president promising to impose postponed 25% tariffs on Mexico and Canada and a new, second 10% tariff on China as of March 4th, it seems like a good time to review the problem.
In December, the Census Bureau announced that the U.S. population had grown by nearly 1% in the year ended July 1st, 2024, marking the strongest annual gain since 2001[1]. Given this, it seems strange to be already talking about slowing population growth. However, the reality is that the gap between births and deaths is continuing to shrink, with almost all of our recent population growth coming from immigration. Going forward, if immigration is dramatically curtailed, overall population growth could turn negative by the middle of the next decade while the working-age population would immediately start to contract.
[1] See Net International Migration Drives Highest U.S. Population Growth in Decades, U.S. Census Press Release, December 19th, 2024.
In the four weeks since he took office, the president has issued an extraordinary number of executive orders, while promising dramatic change across the full reach of the federal government. While these policy moves have broad political, geopolitical and social implications, for investors, the most important concern tariffs, immigration, the federal workforce and the federal budget.
The rapid pace of these moves, along with frequent reversals, court challenges and mixed signals on future policy actions, make it difficult for economists to assess their cumulative effects. Also important, and even harder to analyze, is the potential for policy uncertainty to delay business decisions. Much has been said about the potential for the new administration’s policies to add to inflation pressures. However, investors should also consider how these actions, and the uncertainty surrounding them, could slow economic growth.
For investors, Europe seems like a train in a station, perpetually gathering steam and loading up for a long-delayed journey, but clearly advertising only a modest pace when it gets under way. Such has been the case for the European economy and, even more so, for European equities for many years. This has, of course, been deeply frustrating for those investing in European stocks, which, while often producing OK returns, have underperformed U.S. stocks in 12 of the last 15 years.
On Saturday, the White House announced the imposition of heavy tariffs on goods exported from Mexico, Canada and China and all three nations announced their intention to retaliate. These tariffs threaten to raise prices and slow economic activity across all four countries. While the end game of this trade war remains very uncertain, it has the potential to impact bonds, stocks and exchange rates. For investors, regardless of the early market reaction, the reality of a trade war suggest the need for broad diversification including allocations to real assets and international assets.
This Wednesday, at 2:00 PM, the Federal Reserve will release a statement on monetary policy. It will, as usual, be a brief and colorless document and will look paler still in comparison to the more than 60 executive orders, proclamations and memoranda that have emanated from the White House in the first week of the President’s new term. However, the Fed’s statement and Jay Powell’s press conference could well be of equal importance to financial markets.
“Unsustainable!”
To quote Inigo Montoya: “You keep using that word. I do not think it means what you think it means”
For decades, journalists, economists, politicians, and central bankers have said that the U.S. federal debt is on an “unsustainable” path. However, it has stayed on that path, climbing from a very manageable $3.3 trillion, or 31.5% of GDP, in fiscal 2001, to $28.3 trillion, or 98.2% of GDP in fiscal 2024.
In football, it’s always better, at the snap of the ball to disguise your intentions. Are you going to pass or run the ball? Is it a zone defense or man-to-man? In business or in military maneuvers the same rule applies – keep them guessing.
However, in macro-economic management, it is better to make your plans clear. That way businesses can feel more confident in hiring and investing, as can consumers when deciding to buy. It is one of the reasons the Federal Reserve publishes a quarterly Summary of Economic Projections (or SEP) and so frequently repeats its determination to achieve 2% inflation.
Over the holiday season, we got to spend some time with our very charming granddaughter and, as a bonus, I am now fully re-acquainted with all the verses of “The Wheels on the Bus”.
As we enter 2025, the American economy is rather like an old school bus – slow but steady, reliable and resilient. It generally moves forward. However, it is not invulnerable. The wheels of the bus are being pulled off the ground by ballooning asset prices. The new driver of the bus may or may not try some dangerous policy maneuvers. The wipers of the bus may be obscuring obstacles in the road ahead. And the people on the bus, instead of spreading out and sitting down, are all standing up, crowded to one side so that if something does go wrong, there could be significant injuries.
When testifying to the Senate Banking Committee back in 1987, the newly-appointed Fed Chairman, Alan Greenspan, provided some insight into his views on communication: “Since becoming a central banker”, he said, “I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”
His successors have generally tried to be more open with regard to both their opinions and their intentions. However, there are times, when the Fed will want to communicate to financial markets without piquing the interest of either the general public or the administration.
Many years ago, I worked for the Office of Revenue and Tax Analysis at the State of Michigan and, from time to time, Saul Hymans and his colleagues from the University of Michigan would visit the state government in Lansing to discuss the latest output from their macro economic models of the U.S. and Michigan economies.
As they started into their presentation, I was always eager to hear about their forecast. However, I was rather puzzled about how much time they devoted to the current quarter. I mean they had a big macroeconomic forecasting model – couldn’t we just skip the present and move on to the future?
This week will be full of market-moving economic data. We expect purchasing manager surveys and light-vehicle sales to indicate steady demand in November, as investors await Friday’s jobs report. Recent data on unemployment claims point to continued momentum and payroll growth should rebound from October’s meagre reading which was suppressed by both weather and strike activity. Markets will also be focused on wage growth, with futures still only assigning a 64% probability of a December Fed rate cut.
That being said, any decision on a December rate cut will also depend on next week’s CPI report and, whether they admit it or not, the Fed’s own quiet assessment of the potential for the new Administration’s agenda to reignite inflation. It will likely be some months, therefore, before investors can more accurately assess the potential path for economic growth, corporate profits, inflation and interest rates. As we note in our year-ahead outlook, while we have emerged from a cyclical storm, we have entered a policy fog.
I’ve been running my own econometric model of the U.S. economy for almost 30 years now. The basic structure is simple. You start by forecasting the components of demand, that is to say, consumption, investment, trade and government spending. This gives you an initial projection of real GDP growth. You then feed this into labor market equations, along with some demographic assumptions, to forecast the growth in jobs, the unemployment rate and wage growth. All of this, along with assumptions about energy prices and the dollar, then drive forecasts of inflation. Given this outlook for growth and inflation, you make an assumption about the path for the federal funds rate and then run forecasts of other interest rates. With all of this in hand, you can forecast productivity, corporate profits, the federal budget deficit and household net worth. And then you go back to the start to see how all these changes impact your original demand forecast. You repeat the process until you arrive at a reasonably consistent solution.
The most urgent task facing investors in the wake of the 2024 elections is figuring out how much of the Trump agenda, as broadly outlined on the campaign trail, will be put into effect.
A full and literal implementation across taxes, trade and immigration could have unwelcome consequences for the economy in both the short and long run. A more partial implementation, (which seemed to be anticipated by financial markets last week), could net out to be positive for stocks and negative for Treasuries in the short run. However, even this more restrained policy path would likely result in sharply-rising government debt and the potential, in some areas, for building economic and market risks. For this reason and because of the further run up in the U.S. equity valuations in the wake of the election, investors would be well advised to continue to rebalance portfolios both across asset classes and around the world.
The last few weeks have seen spectacular weather in New England, with warm temperatures and blue skies almost every day. By now, we would normally have stored the back-yard furniture inside to prevent it getting ruined over the winter. But instead, on weekend afternoons, Sari and I drowsily read our books in the sunshine with the still-loud chirping of the crickets letting us pretend that summer isn’t really over. Nor is there any harsh weather in the near-term forecast – it should be in the 70s on Thursday when the trick-or-treaters set off on their rounds. But the gentle rustle of falling leaves is providing its usual warning of colder days ahead and the need to be prepared.
Growing up in Dublin, I had a well-earned reputation as a child of very healthy appetite. At birthday parties, I’d always make sure, at the outset, to get my share of any cocktail sausages, cucumber sandwiches or Rice Krispie treats going around. When it came time for cake and ice cream, I made sure my plate was amply stocked. And I know my mother was filled with pride, (and the other young mothers equally filled with envy), as her little man waddled back up to the table in search of seconds.
But even I had my limits. I vaguely recall a rather distressing incident on the car ride home from one of these parties. I won’t go into the sordid details – suffice to say that the upholstery in the back of the car neither looked nor smelt quite the same thereafter.
On Tuesday, the Commerce Department will publish international trade data for August. The numbers will, undoubtedly, show a deficit – the U.S. has run a trade deficit every year since 1975. This, in turn, implies that the U.S. dollar exchange rate is too high – we buy everyone else’s stuff because it’s cheap; they don’t want to buy ours because it’s expensive. That being said, even as Americans have sent dollars overseas to buy goods and services, these dollars have returned to buy U.S. stocks and bonds, fueling a booming stock market and allowing the federal government to borrow relatively cheaply.
I have a habit, or so my wife tells me, of staring intently, for minutes at a time, into an open refrigerator, in search of one particular item. When she can no longer stand it, or when the binging of the refrigerator alarm informs the world that its contents are now thawing, she gently asks me what I am looking for and points it out, sitting, as it always is, right in front of my nose.
I had a similar feeling of sheepish embarrassment last week, when I reflected on the impact of the extraordinary surge in wealth on the economic and financial environment. I spend a significant chunk of my life looking at stock indices and home prices. And yet, throughout this year, while agonizing about tenths of a percent in the unemployment rate or the inflation rate and how the Fed might interpret them, I have neglected to consider fully how burgeoning stock market and housing wealth has changed both the economic environment and the position of investors.
On Thursday, the Bureau of Economic Analysis, commonly known as the BEA, will release revised data on the national income and product accounts going back to the start of 2019. This is an annual process, usually only mildly interesting to economists and ignored by everyone else. However, this year it’s more important since it could help clarify the trajectory of the economy at a critical time for both political and monetary policy choices. It’s also important because it could help resolve at least some of a yawning discrepancy between the estimates of output produced and income received in the American economy.
Cutting short-term interest rates from a peak is a little like hauling a piano down a flight of stairs. The operation is best done slowly and with care.
The Federal Reserve will probably show some awareness of this in their actions and communications this week. That being said, one of the greatest identifiable dangers to the economy and markets today is that the Fed, by acting too aggressively or talking too negatively, increases the risk of the economy falling into recession.
On Wednesday of next week, the Federal Reserve will almost certainly embark on its long-anticipated easing cycle. However, whether the first cut in the federal funds rate is 25 or 50 basis points is still very much in doubt. This is a crucial question for the economy and financial markets since a 50 basis point cut might well do more harm than good if businesses, consumers and investors saw it as a signal that the Fed is worried about recession.
The most important issue for the Fed as they debate this decision is the strength of the U.S. labor market. It is quite clear that job growth has slowed over the past year as the post-covid rebound has faded. But is the labor market stalling, or just slowing to a more gradual pace?
The U.S. working age population is growing relatively slowly. The Bureau of Labor Statistics estimates that the U.S. population aged 18 to 64 grew by less than 0.1% over the past year.
Every August, for more than 40 years now, the Federal Reserve has held a retreat in Jackson Hole, Wyoming. It has become an important venue for Fed communications and investors this week will be focused on Jerome Powell’s speech, to be delivered at 10:00AM eastern time (or 8:00AM Wyoming time) on Friday.
The topic of this year’s conference is “Reassessing the Effectiveness and Transmission of Monetary Policy”, a subject that is well worth careful reconsideration. This, no doubt, will be the focus of Chairman Powell’s remarks.
The last two weeks have provided a vivid reminder of how sensitive markets can be to small changes in the macro-economic outlook.
With a nudge down in oil prices, the Fed’s 2% inflation goal suddenly seems achievable within a matter of months. With a slight weakening in the labor market, the unemployment rate has shifted to a trajectory that has foreshadowed recession in the past. In response, the 10-year Treasury yield fell from 4.29% on July 24th, to 3.78% on August 5th while the VIX index, a measure of stock market volatility, more than doubled over the same period, with stock prices falling sharply by the close of business last Monday.
We live at a time when extreme voices get the most attention and so it is tempting, following a string of weak economic numbers, to yell the word “recession”. However, a balanced assessment of demand and supply suggests that we are, thus far, merely transitioning to slower growth. A slower growth path is a more vulnerable one, particularly because excessive monetary ease is more likely to weaken than strengthen the economy in the short run. Nevertheless, barring some outside shock, the baseline scenario should be a slowdown scenario, even as volatile markets remind investors of the importance of diversifying and paying attention to valuations.
The mood on the economy has changed quite quickly. The economic headline from just 12 days ago was that real GDP growth had, yet again, surprised to the upside, coming in at a robust 2.8% for second quarter, well above the 2.1% consensus expectation. Since then, however, we have seen higher-than-expected weekly unemployment claims and weak readings on construction, durable goods orders, home sales and manufacturing activity. This was topped off, on Friday, by a softer-than-expected employment report, both in terms of payroll job gains and the unemployment rate.
My wife, Sari, and I love old movies and one of our favorites is the Long, Long Trailer, staring Lucille Ball and Desi Arnaz. Desi and Lucy are newly-weds who decide, instead of buying a house, to purchase a trailer home which they hitch onto the back of their car and set off on their adventures. Soon, without any idea of how to drive such a contraption, they find themselves ascending into the Sierra Nevada mountains, driving up steep, narrow and twisty mountain roads. Unbeknownst to Desi, Lucy decided to collect rocks as souvenirs along the way which she hid all over the trailer, adding extra weight to an already dangerously unwieldy vehicle. The funniest part is watching them making small talk, pretending nothing is going on, as their car engine roars, gears squeal and little rocks spit out from their tires, over the cliffs and out into the abyss below. The contrast between the nonchalance of their conversation and the terror in their eyes is priceless and it only increases as they head over the peak and begin to descend.
The most dangerous time, both for oversized trailers and central bankers, is when you begin to descend from a peak. Recent data suggest the Fed should, finally, begin to cut rates in September. This operation could work out OK. However, it is a delicate one and, particularly, when both markets and portfolios appear to be overconcentrated, it is important that investors take what steps they can to maintain or regain balance in their portfolios.
Despite a slightly higher-than-expected payroll job gain, the June employment report was on the soft side, with downward revisions to payroll gains from prior months, a drop in temporary employment and only modest gains in wages. However, the weakest aspect of the report was the unemployment rate, which edged up from 4.0% to 4.1%. This, in itself, wouldn’t be particularly notable were it not for the fact that the unemployment rate has now risen steadily over the past 14 months from a 54-year low of 3.4% set in April of last year.
The play, entitled “Steadily She Slows”, has, from a dramatic perspective, turned out to be a dud.
It started with such a promising prologue of pandemic, recession, recovery, political upheaval, war and inflation. However, it has since settled into a drawn-out, repetitious script, wherein the lead actor, consumption, hogs the center stage and the supporting cast, in the form of investment spending, government spending and trade, has very little impact on the plot. The promoters, on cable news shows and social media feeds, do their very best to gin up public interest by prophesying catastrophic collapse into recession or reignited and blazing inflation. But still the play drones on, unloved by all, except, of course, the investors, who are profiting handsomely from its extended run.
As a young lad growing up in South Dublin, I received certain geography lessons on where I could, or could not, safely roam. In particular, I was warned not to stray north of O’Connell Street. I remember debating my mother on the issue, once when I wanted to go to a movie at a theatre near Parnell Square. I can’t remember exactly what I said, but I probably claimed that bad things didn’t happen on the North Side quite as frequently as South Side mothers thought they did. But my mother held her ground on this occasion…someone might or might not get beaten up in Parnell Square that afternoon. But if her son wasn’t there, it wouldn’t be him.
After almost every speech, someone asks me about risks – what keeps me up at night. And today, with a soft-landing economy and the stock market near record highs, it does seem like a good time to review risks. But it’s important to recognize the most obvious point about market risk. The risk to you, as an investor, isn’t simply the danger of some negative event – it is the product of the probability of that event and your exposure to it. How you are positioned says a great deal about how worried you should be about any risk.
Every three months, the 19 members of the Federal Reserve’s Federal Open Market Committee, of FOMC for short, aided, no doubt, by an army of econometric minions, work up new forecasts for key economic variables and their assessment of appropriate monetary policy. In recent days, as they have huddled in their offices engaged on this task, they’ve had much to be thankful for. The economic roller coaster triggered by the pandemic and the policy response, which manifested itself in wild swings in output, unemployment and inflation, has subsided. Moreover, the very narrow road by which they thought inflation could be subdued without triggering a recession, turned out to be not so narrow after all. The U.S. economy has maintained solid economic growth and a very tight labor market even as inflation has fallen towards their 2% objective.
For centuries, economists have extolled the almost magical properties of competitive markets. In the 1770s, Adam Smith wrote about an “invisible hand” by which individuals end up promoting the common good even though they only ever intended to do themselves a bit of good. In the 1970s, Milton Friedman spoke passionately of the virtues of a free-enterprise system in boosting innovation and productive activity. Such voices are quieter now and much of modern economic commentary is devoted to how to fix an economy when markets fail or how governments and central banks should seek to manipulate it. However, the U.S. economy in the wake of the pandemic should serve as a reminder of the power of simple economics. No matter how abnormal the starting point, an economy will, if sufficiently neglected by the government, tend towards balanced growth.
One of the most common plotlines in all of literature is when a protagonist, overestimating the gravity of a situation, responds with a series of unfortunate decisions. Perhaps the classic example of this is Romeo, not appreciating the difference between a sleeping Juliet and a dead Juliet, but the pattern has played out in innumerable stories.
When it comes to the state of the economy, it seems clear that Americans are harboring too negative a view. In the short run, this misapprehension may not lead to disaster. However, it could still imperil investment returns if it leads to political decisions that make a relatively healthy economy sick.
The importance of any piece of economic information depends on your time horizon. For traders, the issue is how it will move markets today. For politicians, its relevance lies in how it could shape public opinion between now and the next election. However, for long-term investors, what really matters is how it will impact the economic and financial environment for decades to come. From this last viewpoint, there is no more important topic than the continued deterioration in the federal finances.
Information released in the last few days provides an updated perspective on this issue. However, before delving into this, let’s take a quick look at upcoming economic data.
The most common scavenger bird in the western United States is the turkey vulture, more commonly called the turkey buzzard. It is a marvel of evolution, with keen eyesight and an extraordinary sense of smell, allowing it to locate the recently deceased from miles away. Ungainly as it takes off with furious flapping, once in the air it is a majestic creature, soaring thousands of feet upwards on air thermals, with an out-spread V-shaped wing span of up to six feet. As it circles from a height, it surveys the landscape below and then plunges to feast on the remains of less fortunate creatures.
I don’t believe in reincarnation but, if I did, I would have to say the best real estate investors were probably turkey buzzards in a previous life. And never more so than today, when the real estate landscape is littered with the victims of the seismic changes wrought by the pandemic and a sudden return to normal interest rates, following 15 years of super-easy money.
I have never been blessed with any skill in golf. However, I do have some imagination and so I can imagine a situation in which I am lining up a long and difficult putt. With well-justified humility, I wince as I strike the ball, knowing it will miss. However, even two or three seconds after sending it on its way, I realize that, surprisingly, I’m still not sure how it will miss – I can’t quite tell if it’s going to miss to the right or to the left. And so, of course, the ball trundles its zig-zaggy way up to the lip of the hole, pauses, and then topples in.
Last week’s GDP report ignited angst on both sides. Some worried that the economy was slowing too much, with recession in the offing. Others saw too much inflation, requiring an even more aggressive Fed campaign to squash it before it begins to reaccelerate in a serious way.
Since the advent of modern financial markets, bonds have always had the reputation of being conservative – rather like an elderly family lawyer in a leather-bound chair frowning at more jumpy and excitable stocks. Bonds would never make you rich. However, they would provide you with a moderate, steady and dependable income.
This reputation was challenged in the 1970s and 1980s by Treasuries yielding more than 10%, in the wake of high inflation, and the explosive growth of the high-yield market. In the decades that followed, yields drifted down in parallel with inflation but investor excitement was maintained by a steady stream of capital gains as well as income. However, once monetary easing hit its peak in the days following the Great Financial Crisis, high-quality bond yields fell to levels that promised very little income and, at best, modest capital losses, assuming yields eventually recovered.
Growing up in New England, our sons had a privileged childhood as sports fans and particularly as football fans. Between 2001 and 2020, the New England Patriots, coached by Bill Belichick and with Tom Brady at quarterback, competed in nine super bowls and won six of them - a truly extraordinary performance in a league of 32 teams. It is all the more impressive because of the NFL’s efforts to make the league competitive. These include the salary cap, which forces all teams to spend roughly the same on their rosters, and the draft, which awards the top picks to the worst teams from the year before.
And yet the dynasty continued for almost two decades, with the Patriots winning many games that they should have lost due to their own confidence and their opponents doubts. And the supposedly eroding effects of low draft picks seemed to have little impact on the team, as relatively unknown players found a way to win.
Next Monday, I once again get to lace up my shoes and join my friends from the Dana-Farber team in running the Boston Marathon. This year will be particularly special, as both of our sons are also running the race.
One of the advantages of being an older member of the team, (and I can testify to plenty of disadvantages), is that you accumulate advice that you can share with younger members, particularly those who are running their first marathon. One such piece of advice is to drink before you are thirsty and to eat before you are hungry.
By the time you are thirsty, when running a marathon, you are likely severely dehydrated and low on electrolytes, causing, at best, a sharp deterioration of your performance. By the time you are hungry, your blood sugar will probably be too low, making the rest of the race slow and painful. In short, in long-distance running, one key is to make decisions before it feels like you need too.
When I was nine, my father was elected to the Irish parliament and joined the new government. Not long after that, my history teacher, a man of the opposite political persuasion, was expounding on the Norman conquest of Ireland and the attempts of the local Irish clans to wage war against them….”not like the “wage war” we have with the current government” he said, finding humor in a rather dull subject. I, being an overly sensitive child, took this as a terrible insult to my father and promptly burst into tears, whereupon he sent me out into the hall for disturbing the peace.
This week, investors will be focused on the Fed’s second Federal Open Market Committee (FOMC) meeting of the year. They are widely expected to make no change in interest rates. However, Fed communications will provide guidance on two important subjects: First, they will update their summary of economic projections and their “dot-plot” forecast for the federal funds rate. Second, and particularly in Chairman Powell’s press conference, they will likely provide some further hints on when and how they could begin to phase out quantitative tightening. While their messaging will likely continue to point towards monetary easing in the months ahead, the implied timing and extent of that easing could have major impact on markets.
Financial reporters and market strategists often argue about whether we are “early-cycle”, “mid-cycle” or “late-cycle”. However, these perspectives are based on an outdated model of how the U.S. economy behaves. In a pure “business-cycle” paradigm, the U.S. economy would, today, be in the late innings of an economic expansion that must naturally end rather soon. However, a more realistic model of today’s economy suggests that this expansion could continue for some time more and that, when it ends, it will be because of some financial, environmental or geopolitical shock rather than the inevitable result of the age and stage of the expansion. This doesn’t negate the need for diversification. However, it does suggest that a portfolio should be stress-tested mostly against how it would react to a downturn triggered by non-economic shocks.
On Friday, December 29th, 1989, the Nikkei 225 stock index hit an all-time high of 38,957. It then began to fall and it took until February 22nd of this year, more than a third of a century later, to reach this level again. Today, for the first time, it closed above 40,000.
This ultra-long bear market in Japanese stocks was accompanied by the collapse of a colossal property bubble and was followed by decades of economic stagnation, rising government debt and periodic deflation. While Japan still faces many challenges today, there are signs that it is turning a corner from both an economic and financial perspective. However, decades of Japanese economic and financial malaise provide some powerful lessons for Japan itself and for governments, monetary authorities and investors around the world.
In last week’s article and podcast, I looked at the potential path for the U.S. economy over the next two years, noting that the outlook suggested a very tight labor market throughout. This would be a generally healthy outcome for the country, boosting economic growth and productivity and supporting solid wage growth. To the extent that it maintained pressure on profit margins and limited monetary easing, it would be less favorable for investors. However, a number of readers asked the very reasonable question of whether my analysis took account of the recent migration surge at our southern border.
I spent most of last week fighting with a model.
Before anyone starts googling “Nerdy Economist in Fashion Week Brawl”, I should clarify. I was fighting with a macroeconomic model that insisted on telling me something I didn’t believe. To be precise, it was projecting that, given the recent and projected pace of U.S. economic growth, the unemployment rate would slide to 3.0% by the end of 2025.
This I don’t believe for reasons I’ll explain. But the changes in assumptions necessary to produce a more reasonable answer can tell us a lot about the likely path of economic growth, inflation, interest rates, corporate profits and the dollar over the next two years with significant implications for financial markets and investing.
I think of myself as a pretty punctual person. I get impatient when others are late and I don’t give myself much time to spare when catching a flight. But sometimes, like when spending time with family, it’s OK to run a little behind schedule.
One month into 2024, the economic slowdown appears to be running behind schedule. Growth is stronger than expected, the labor market is tighter and our forecast for inflation to hit 2% by the end of the year looks less certain. But for investors, it should be all good. Our 2.0.2.4. forecast of 2% growth, 0 recessions, inflation falling to 2% and unemployment at around 4% is now looking a little more like 2+.0.2+.4-. But it still rounds to 2024, leaving plenty of opportunity for long-term investors.
This Friday, the groundhog will emerge unwillingly from his lair, examine the available evidence, that is to say, the presence or absence of his shadow, and, in all probability, reject any speculation about an early spring - at least for the next six weeks. According to USA Today, this has been the groundhog’s prediction in 107 of the last 127 years, or 84% of the time. That being said, the weather channel is forecasting “considerable cloudiness” over Punxsutawney, PA on February 2nd, so we might still get lucky.
Last Friday, as much of America was settling in for the coldest weekend of the year, the University of Michigan released its preliminary January reading on consumer sentiment. The numbers were a pleasant surprise – the consumer sentiment index jumped 9.1 points to a reading of 78.8 – the best number seen since July 2021. This confirmed other signs of a thaw in the public mood. The Conference Board’s consumer confidence index rose 9.1 points in December to its second highest reading in two years while even the perennially negative Gallup survey on “satisfaction with the way things are going in the U.S.”, showed some improvement in December.
Every January, firms throughout the financial industry, including our own, hold annual training meetings or conferences. One of the highlights of these meetings is an award for salesperson or sales team of the year. These titles are hard-earned and well-deserved. At least for our own firm, I can say that the winners are always those who, not only achieve impressive revenues for the firm, but do so through very hard work, understanding the investment environment and, most of all, understanding the needs of our clients.
Among the many comments on inflation in the minutes of the last FOMC meeting was the following, rather gloomy, prediction:
Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress on reducing inflation may need to come from further softening in product and labor demand with restrictive monetary policy continuing to play a central role.
Translating from Fedspeak: Several Fed officials worried that they might still have to trigger a recession to get inflation all the way down to their 2% target.
This perspective gained some support in Friday’s jobs report which showed a stalling out in a long trend of falling wage growth. However, a broader analysis suggests that non-labor-market factors will continue to reduce inflation in 2024, giving the labor market time to normalize without the pain of recession. While there are plenty of shocks or policy mistakes that could disrupt this path, the mostly likely scenario is a continued slide in inflation to the Fed’s 2% target without a near-term recession – an outcome that should support both U.S. bonds and stocks.
As one year ends and another starts, I often think about a personal balance sheet for the year gone by and make some resolutions for the year ahead. For myself and our own family, 2023 was a pretty good year, particularly relative to the pandemic-scarred years at the start of this decade. As for resolutions, apart from the usual healthy-living aspirations, I am determined to spend less time looking at screens and more time looking at faces.
This is also a good time for investors to review the balance sheet of economic and investment performance for 2023 and make some resolutions for the year ahead.
As winter weather envelops the homes of New England, our thoughts naturally turn to warmer days and maybe a beach house on Cape Cod. Of course, if you intend to rent such a house for a week next summer, it’s pretty much a roll of the dice. You could get lovely weather or it could rain every day. However, if you plan to buy a beach house on Cape Cod, you really only need to understand the climate. The sunny summer days will far outnumber the wet ones.
One of the least pleasant aspects of winter is driving on icy roads as the snow piles up in front of you. Long experience has taught us that winter driving is possible. But it is slower, with a narrower margin for error, and a greater chance of sliding off the road.
Similarly, if we extend the economic forecast horizon to encompass not just 2024 but also 2025, it’s still possible to trace out a “soft-landing” scenario, whereby the economy keeps growing even as inflation returns to the Fed’s 2% target. However, it would be, at best, slow-going and, like driving into a worsening snowstorm, there is a rising risk of the economy sliding into recession.
Last Wednesday, the University of Michigan released its final reading on consumer sentiment for November, with the index coming in at 61.3, up from its flash reading but down from October and worse than 92% of monthly sentiment readings since 1978. Meanwhile, the “misery index” for October, calculated as the sum of the unemployment rate and the year-over-year CPI inflation rate, came in at 7.1%, better (or that is to say, lower) that it has been 79% of the time over the same period. We continue to have a bottom decile attitude about a top quartile economy.
This general gloom may account for part of the recent buildup in retail money-market funds which have risen by almost 50% over the past year to over $2.2 trillion. While some of this is the result of outflows from bank deposits, much of it represents long-term savings that investors are unwilling to commit to long-term investments.
If you do a quick google search on the phrase “tensions rising”, you get 230,000 hits. If you search the phrase “tensions falling” you get 3,700 hits. One of the cardinal rules of journalism is to only report on rising tensions and never improvement.
However, in recent weeks, there has been a quiet decline in tensions across a number of dimensions. This is being matched by falling inflation pressures and signs of moderating economic growth. After a turbulent few months, the economy seems to be back on the soft-landing track, a path that should support both the stock and bond markets and also allow the dollar to resume its stalled out decline.
One almost unnoticed innovation in our modern world is the tracking app. Whether you’re booking a car service, enduring a long flight or just waiting for a pizza, with a click or two, you can find out exactly how long it should take the car, flight or pizza to reach its destination. These apps are useful for planning purposes and provide a level of reassurance that you are, in fact, headed to where you should be headed. A similar monitoring of the downward path on inflation can provide some reassurance that inflation is, indeed, on track to hit the Fed’s 2% target ahead of schedule.
On August 16th, 1858, the first telegraph message was transmitted across the Atlantic on a cable newly laid on the ocean floor. The line speed was slow and the cable failed a few weeks later but it was a start. By the late 1860s, a second cable, made of better material, was in operation and telegrams began to be sent more regularly, cutting the time required for transatlantic communications from weeks to minutes.
“We just came for one thing, too”.
Sari and I were meandering toward the checkout in a crowded Costco on Saturday morning and I was reflecting out loud on our accumulation of a substantial and diverse pile of goods, although we had come to buy just one thing. But we were not in the same league as the woman who’d overheard me. She may have come for just one thing too, but the lower rack of her cart was loaded, the little area at the front for babies or purses was full and the main body of the cart was stacked so high above her line of sight that her daughter was helping direct the vehicle to a checkout lane. Clearly the next innovation in cart design needs to be the installation of a periscope.
Investors in the week ahead will likely be most focused on the aftermath of the terrible attacks in Israel over the weekend. The consequences of this violence are, of course, first and foremost a human tragedy for all the families affected and they are in our prayers at this time. However, an initial rise in the dollar and oil prices in response to these attacks serves as a reminder of the potential for conflict in the Middle East to impact the global economy and investors will need to keep a close eye both on the evolution of the conflict and its economic implications.
In an idealized world of medical practice, you would go to the doctor, describe a few symptoms, undergo a few tests and then listen carefully to the doctor’s diagnosis, prognosis and prescription. The diagnosis might well be due to something entirely out of your control and the prescription would often be a pharmaceutical. However, very frequently, the prescription would be in the form of advice on life-style changes. In an idealized world, you would take that advice and implement it.
To tell the truth, I haven’t done much hiking up mountains recently. I did scale a few minor peaks, years ago, when our sons were in boy scouts. However, it was always hot weather heading up and, between separating those young gentlemen who decided to fashion light sabers from tree branches and attempting to corral those whose first instinct was to chase into the woods after squirrels, it was a somewhat trying business. The reward, for all, of course, was the view from the top and it was always breathtaking. However, as you stood on the summit, things would cool off pretty dramatically and you had the sober knowledge that safely descending from the top is always a trickier proposition than getting there.
My father worried out loud, broadcasting his concern about a wide range of issues, ranging from the suspicious surplus of toothbrushes in the upstairs bathroom and his children’s acquisition of strange accents to declining standards in public education and the ominous state of the government’s finances. My mother fretted more quietly, sparing her vocal chords at the expense of her sleep.
Finally, traditional indicators also may be missing the mark in predicting persistent inflation. In particular, in the June Summary of Economic Projections, most members of the Federal Reserve’s Federal Open Market Committee in effect professed that an unemployment rate of 4% or higher was necessary to attain the Fed’s long-term objective of 2% inflation. However, the unemployment rate has now been below 4% for 21 straight months and, yet, since March of last year, year-over-year wage growth has drifted down from a peak of 5.9% to 4.3% last month.
For almost 60 years, the British journalist and New York resident, Alistair Cooke, recorded a weekly, 15-minute radio commentary entitled Letter from America. As a teenager, I would listen to it, late at night, on the BBC World Service. Cooke had a beautiful speaking voice and a remarkable way with words, as he painted landscapes of American culture and portraits of America’s personalities. Letter from America made me feel well-acquainted with this country long before I arrived here. Cooke, of course, had strong opinions based on his own observations. However, he also had a quality of balance – he was not one to be swept up in the latest national obsession but, rather, spoke of his world in a measured way.
The only real drawback to my job is the number of flights I have to take - but this is a serious drawback when evening flights get delayed. Without the energy to do any productive work, I often combat the misery by playing board games on my iPad and I’ve lately added Monopoly to my repertoire. I used to play Monopoly as a child, of course, but my strategy has evolved with the years. When I was younger, I hated owning boring railroads. Now I quite like them. They’ll never provide with the fortune you can extract from a guest at your Boardwalk hotel. But if you own all four of them, they generate a nice steady income and sooner or later, someone will pick up the Chance card that triggers the minor windfall of double rent.
To be good long term investor, you need courage and you need brains. However, you need them in different quantities at different times. In the depths of a bear market, you mostly need courage since it’s almost a “no-brainer” that the economy will recover and will lift financial assets with it. In a bull market, its mostly about brains since, while people are less haunted by economic fears, valuations are higher, increasing the need to be more discriminating in both asset allocation and security selection.
As the calendar flips to August this week, consumers, workers, investors and the Federal Reserve all have reason to be pleased with recent data. Stock market returns have been strong all year, economic growth has been surprisingly resilient, unemployment remains very low and, despite all of this, inflation has fallen sharply. The Fed continues to tighten in a manner that appears aggressive given the balance of risks. However, so far, this does not appear to have inflicted too much damage on the overall economy or markets. So where do we go from here? One approach to this question is just to review an economic checklist of Growth, Jobs, Inflation, Profits and Rates.
The pandemic was my excuse to abandon piano lessons.
It wasn’t that I wouldn’t practice or didn’t enjoy pounding away on the keyboard. The problem was that my piano teacher, Tatiana, is a perfectionist. She wanted me to get it exactly and precisely right and so I practiced the same piece over and over. She would smile as I did my lessons but it was a strained and pathetic smile, as the masterpieces that she had loved from her youth were mangled, tortured and slowly murdered in a most grizzly fashion by yours truly. Finally, I couldn’t do it to her anymore and I used the pandemic as a way out.
Over the centuries, an abiding tension among many major religions has been the pendulum of severity. One era will be marked by a relaxed view, where smiling clergy make liberal allowances for minor transgressions. However, this is often followed by a puritanical reaction, wherein the flock is warned that the path to salvation is an exceedingly narrow and rocky one. The Federal Reserve seems to have undergone a similar transformation in recent years. Long gone are the days of “average inflation targeting” and praise for the beneficial effects of a super-tight labor market. Inflation is now the eternal and infernal enemy and the Fed will yield no quarter in battling it.
When I first arrived in this country, 40 years ago this summer, my strongest impression was that America was a land of optimists. European economists, politicians, commentators and consumers all saw the outlook as dark and troubled. However, Americans, facing equal challenges, seemed to see the glass as half full.
I have a sad tale to relate. After dodging Covid for the last three years, my wife Sari and I were at a wedding two weeks ago and the virus decided to crash the party. Two days later, I tested positive and Sari tested negative. I’ll spare you the grim details, since almost everyone has had a similar experience. However, despite only mild and fleeting symptoms, I experienced a rebound and so I’m sitting alone, testing daily, and waiting for a negative so I can return to society.
Investors in 2023 have also been waiting for a negative. Waiting to see if economic growth would turn negative. Waiting for a well-established negative trend on inflation. And waiting for the Federal Reserve to perceive enough general negativity to stop raising interest rates. As the first half of the year draws to a close, the wait continues. However, in rather sharp contrast to my predicament, there is plenty that investors can do while they wait.
One of the advantages of being back in the office, when I am actually in the office, is I get to hear a variety of opinions. These opinions are sharply divided today on the issue of a U.S. recession. One camp feels that recession is inevitable. Another sees a path to a “soft-landing”. Of course, this argument really refers to a recession starting in the next quarter or two. Sooner or later, a recession will occur. However, that brings up other questions, namely, when will a recession start, how deep will it be and how long will it last?
Markets in the week ahead will be focused on Wednesday’s FOMC meeting. We expect the Fed to leave the federal funds rate unchanged although both the post-meeting statement and the dot plot will likely emphasize that inaction this week should be considered “skipping a rate hike” rather than putting an end to monetary tightening. Indeed, Fed communications could explicitly warn of a possible further rate hike in July. On balance, however, cooling data on inflation and growth between now and that meeting should be enough to convince the Fed that no further tightening is warranted. Some of these data will be released this week.
In 1787, on the last day of the Constitutional Convention, a lady asked Benjamin Franklin what form of government had been agreed to. He famously replied, “A Republic – if you can keep it”. He was, of course, alluding to the danger that partisanship or ill-advised policies could yet return the young country to the monarchy it had so recently escaped.
I am shockingly, comically bad at golf. However, that doesn’t stop me from occasionally watching more gifted souls play the game.
One of their techniques is to examine a putt from multiple perspectives. They take a careful look at the green as they come up to mark their ball, look at the putt from the side, squat down to consider it from the opposite direction, and generally scout out the lay of the land from all angles. For myself, since I’m generally wielding the putter playing my seventh or eighth, I don’t further test the patience of my companions with such preparations. However, I will admit that, for the average golfer, looking at a putt from multiple angles yields useful information.
A similar rationale can be applied to monetary policy decisions. Changes in monetary policy are among the most important drivers of stock and bond returns. Consequently, one of the questions we are asked most frequently is where will the federal funds rate be at the end of the year?
Across the economy, the outlook is for slower growth. Slower growth in demand, in employment, in profits and in inflation. Recession is by no means certain. However, a slow-growing economy is rather like a slow-moving bicycle – the slower its moves, the easier it is to topple it over. And so, in the spring of 2023, there is a significant risk of recession starting before the end of the year.
On Ireland’s Atlantic seaboard, ten miles west of the town of Lisdoonvarna, stand the majestic Cliffs of Moher. They are a popular tourist attraction but also a dangerous one – in the 25 years ended in 2017, 66 people tragically plunged over the cliffs to their death.
Of course, there is no reason why anyone should meet such a fate. The long grassy path beside the cliffs is bounded by a wire fence, with frequent signs warning visitors not to cross it or to venture any closer to the cliffs. However, inevitably a few foolishly ignore the warning and, for a few of them, it is their last bit of foolishness on this earth
The quantity of money was a big issue in the background of my childhood. There were no money machines or credit cards (at least in our house). So every Monday, my father would write a check for cash, usually for less than 100 pounds, and hand it to my mother for housekeeping for the week. She would then drive to the bank, cash it, put the notes in her purse and slowly dole them out as the days went by and she tried to keep a family of seven fed. Throughout the week, as she shopped and worried, she would know how much, to the penny, was left. The quantity of money was a binding constraint in her life.
It seems like a distant memory now, but in the decade before the pandemic, the main preoccupation of the Federal Reserve was boosting inflation, as measured by the headline personal consumption deflator, to 2%. Inflation undershot this target in ten of the twelve years between 2008 and 2019.
Eliud Kipchoge, the only man to ever run a marathon in under two hours, is in town for next week’s Boston Marathon. In the runup to the race, reporters will no doubt ask him about whether he is worried about any particular competitor. He will predictably reply that he is not - but that he has to focus on his own fitness and his own decisions in running the race. As with all individual sports, the keys to success or failure lie largely in the athlete’s own hands.
In three weeks, I will once again have the honor of running the Boston Marathon as a member of the gasping geezers division of the Dana-Farber Marathon Challenge team. A year ago, as I clambered up the Newton Hills, I resolved that, if I was ever fool enough to do this again, I’d lose a few pounds before attempting it. Admittedly, a few miles later, I made a sterner vow that I would never be fool enough to do this again, which made the first resolution seem irrelevant.
A good set of brakes is a very comforting thing. A gentle tap of the foot should produce a quiet and gentle deceleration, as brake pads press up against disc rotors, in a smooth but firm action. When I drive these days, I take this technology for granted.
However, the vehicles I drove as a young man offered far less assurance. There were times when applying the brakes unleashed a cacophony of shrieking, squealing and grinding noises as worn-out pads battled with rusty rotors. The braking action would be either be frighteningly nonexistent or of a sudden, whip-lash intensity. Of course, in those vehicles, the acceleration wasn’t great either. However, any temptation I might have had to drive more quickly was quickly squashed by doubts about my ability to slow the car back down again when I needed to.
One obstacle to assessing the direction of the American economy is the difficulty in getting a handle on how many people live in this country and how fast that number is growing. It would seem to be a very elementary problem – surely the Census Bureau provides timely data on the size of the population, as well as births, deaths and net migration? But it does not. So far as I know, there is no official consistent measure of any of these numbers on a monthly, (or for that matter an annual basis), going back over the decades. Moreover, the last time the Census provided a projection of the future path of these vital statistics was back in 2017.
Over the years, my standard approach to analyzing corporate profits has been to think of them as the last slice taken from a big national income pie. The growth of the pie itself is important. But so is the size of the other slices, such as labor costs, interest costs and corporate taxes. Once every one else has had their slice, what’s left over is corporate profits.
It’s a useful model for analytical purposes. However, it has one glaring flaw, namely that it assigns to corporations a purely passive role, meekly accepting the slice left after all the other factors of production have taken theirs’. In reality, American corporations are muscular and sharp-elbowed, growing profits by enhancing productivity but also by beating back the demands of labor, lobbying for a more favorable tax and regulatory environment and seducing customers into buying more goods and services than they really should, based on sober calculation.
It was 60 degrees in Acton yesterday, as our normally frigid Massachusetts winter continued to be a no-show. Not that I have any problem with this, since running, rather than skiing, is my exercise of choice. But this weirdly mild season is leaving nature very confused with streams gurgling, buds swelling and birds twittering loudly, presumably about their nest-building plans.
There is a slowdown lurking. It is currently hiding so well, in the long grass of statistical anomaly, that many observers, including the Federal Reserve, don’t seem to notice it at all. However, investors need to recognize it and have a clear view on the outlook for economic growth, jobs, inflation and profits, how the Federal Reserve may react to a slowdown, and what this could mean for investment returns over the next few years.
In investing, as in life, it is important to learn from the past, appreciate the present and plan for the future. This is particularly true at turning points.
In the early weeks of the New Year, we do appear to be at an economic turning point. Fourth-quarter GDP and consumption deflator data, due out this week, may give the impression of continued solid growth with still strong year-over-year inflation. However, a more real-time assessment of the economy suggests a significant cooling in both, with monetary and fiscal tightening contributing to the slowdown. That being said, it should be recognized that an environment of slow growth, low inflation, low interest rates and strong profit margins is likely to re-emerge in 2024, providing support for higher asset prices. While there are too many short-term risks to justify a very aggressive strategy today, it still likely makes sense to prepare for this environment rather than trying to time market swings in what will likely be a very volatile 2023.
Last Friday afternoon, amidst the lengthening shadows of a winter sun, the Treasury Secretary delivered an ominous warning: By this Thursday, the U.S. federal debt will reach its legal limit, requiring her to take extraordinary measures just to keep paying the bills.
Secretary Yellen’s warning was, perhaps, a little premature and she suggested that, with some adjustments, our real rendezvous with disaster might be postponed until June. But even this date is considerably earlier than many assumed in the middle of last year, due, in large part to the budgetary effects of the Federal Reserve’s aggressive tightening.
The word “resolution” has multiple meanings. The most obvious at this time of the year, is a decision to behave differently going forward. In many social sciences, “resolution” refers to a problem that is somehow mitigated or eliminated. Or, taken at its most literal, “resolution” could simply mean coming up with new answers to old questions – that is to say – “re-solving” them.
My first job out of graduate school, in the early 1990s, was as the consumer economist for the economic consulting firm of DRI/McGraw-Hill, in Lexington, Massachusetts. One weekend each month, we would run a U.S. macroeconomic forecast. (It always had to be over the weekend, as this was the only time when we could get our own clients off our mainframe computer.) Anyway, on Saturday afternoon, having produced some preliminary numbers, we would gather around a huge conference-room table and discuss how the forecast was shaping up.
My colleagues were smart and seasoned economists and very patient with someone clearly just waking up to how forecasts are constructed in the real world. However, I believe they did somewhat resent my position as “the consumer guy”. Because then, as now, consumer spending accounted for roughly two-thirds of GDP and they would spend much of the weekend vainly trying to offset what they saw as my undue optimism by hacking away at their forecasts for investment, trade and government spending.
At his press conference on November 2nd, Fed Chairman, Jay Powell opined that the window for a soft landing had narrowed. This was very much in line with his messaging for many months which has emphasized that the Fed regards inflation as being much too high and is willing to put the economy in recession, if necessary, to return it to its 2% target. However, it also underscores the economic problem caused by “supply-shock” inflation: it simultaneously boosts inflation expectations, inducing a more restrictive monetary policy, and drags on economic growth.
At 8:30AM, on the first Friday of every month, the Labor Department releases the monthly jobs report. By 8:35AM, the network scriptwriters deliver a verdict to the teleprompters – jobs either “sky rocketed” or “plunged”. The job market is either “red hot” or “stalling out” and, either way, investors need to be worried. No middle ground will keep an audience.
For many people, I suspect, 2022 will be a year to forget. However, for millions of home-builders, home-sellers and home-buyers, it will be remembered for the speed with which a housing boom turned into a housing bust. The reason, of course, has been a surge in mortgage rates. These rates look likely to stay high, at least over the next year, contributing to sharp declines in housing starts and home sales and a negative impact on GDP. Eventually, this could motivate the Federal Reserve to reverse course and cut rates. However, mortgage rates are unlikely to fall to anything like the levels they maintained for the 14 years prior to 2022, while limited housing supply will probably prevent a collapse in prices. Given this, it appears we are now entering an era when the decision to buy a house should be focused more on the finding the right home in which to live than the right asset in which to invest.
Markets bounced higher last week in a justifiable show of enthusiasm as the latest CPI data confirmed that inflation is indeed receding. However, even as investors worry less about inflation they may well worry more about recession. The risk of a near-term recession is climbing. However, such a recession would be more like sliding into an economic swamp than falling off an economic cliff. While a “swamp” recession wouldn’t be very deep, the economy would likely struggle to get out of it. The good news for investors is that a prolonged period of economic swampiness should snuff out inflation and force the Federal Reserve to reverse a significant part of their 2022 tightening.
Among the many challenges of parenthood is trying to get your kids to eat healthy food. As the children get older, the school lunchroom becomes one of battlefields, with some kind of weekly menu posted online or sent home with the kids. Many of these menus appear to imply that the three essential food groups are sodium, fat and sugar. However, some schools employ a little more imagination both in providing healthy choices and evoking some interest in the fare to come. This week the lunchrooms in our own local schools will feature “Rocking Roll Ups” on Monday, “Healthy Half Days” on Wednesday and “National Sandwich Day” on Thursday, with vegetarian options available daily. I’m not quite sure what all of that means but it does sound interesting.
At the peak of the railroad boom of the late 19th century, the Framingham and Lowell line was incorporated to transport goods and passengers up and down the western outskirts of Boston. Over the years, the traffic dwindled, the line was sold and resold and eventually abandoned. However, for more than three decades now, some enterprising local citizens have pursued the construction of a bike trail along the old abandoned line, which is now, finally, mostly complete.
On many occasions in my adult life, I have made New Year’s resolutions to become fitter. As the days of the old year gradually dwindled and my girth gradually expanded, I would commit myself to exercise more and eat less. However, experience has taught me that both of these noble aspirations must be approached with moderation. Any attempt to starve myself while running more miles leads inevitably to physical slowdown or breakdown. Moreover, if I simply refuse to eat more, the exercise comes to a screeching halt.
The Federal Reserve maintains strict rules prohibiting FOMC members from commenting on the economic outlook or monetary policy in the 10 days preceding an FOMC meeting or on the following day. Thereafter they are free to speak and over the last two weeks many have opined on both subjects. Their opinions show remarkable unanimity. They are focused on bringing inflation back down to their 2% target. They acknowledge the uncertainty in the economic outlook, and, as a consequence, they profess themselves to be “data dependent” and frequently quote, with furrowed brows, the year-over-year increases in CPI and consumption deflator measures of inflation.
A famous Sherlock Holmes story concerns the abduction of a race horse and a guard dog that didn’t bark. For those who haven’t read the story, I’ll skip over the reason for the dog’s silence. The point is he didn’t bark – no alarm was raised – no actions were taken - and the horse disappeared.
Entering the fourth quarter of 2022, the U.S. economy is teetering on the edge of recession. However, it is a recession that has been delayed and potentially softened by an excess demand for labor, the lack of over-building in the most cyclical sectors of the economy and healthy bank balance sheets.
A famous Sherlock Holmes story concerns the abduction of a race horse and a guard dog that didn’t bark. For those who haven’t read the story, I’ll skip over the reason for the dog’s silence. The point is he didn’t bark – no alarm was raised – no actions were taken - and the horse disappeared.
Entering the fourth quarter of 2022, the U.S. economy is teetering on the edge of recession. However, it is a recession that has been delayed and potentially softened by an excess demand for labor, the lack of over-building in the most cyclical sectors of the economy and healthy bank balance sheets.
In weighing the value of any security, the scales of financial markets are supposed to maintain a fine balance between fundamentals and price. The plate of fundamental factors is piled high with macro trends, geopolitical issues, weather and environmental events, policy decisions and individual security attributes. The other plate is far more sparsely occupied – price stands alone, accounting for half of any assessment of the opportunity and risk in the purchase of an asset.
When future historians reflect upon the current age, they might call it “the worry years”.
As America emerges from the pandemic, there are still serious health concerns, a yawning political divide, rising autocracy around the world, a brutal war in Europe and the highest inflation in 40 years. Moreover, anxiety triggered by these genuine problems is being amplified by cable channels and social media which ever more efficiently gather their audience by appealing to fear and outrage.
On Saturday, Sari and I made our annual pilgrimage to Kimballs for lobster roll. Kimball Farm, which started as an ice-cream stand in Westford, Massachusetts, has ballooned into a huge enterprise over the years and there was a big crowd lined up in front of us when we arrived. Undaunted, we traced our way to the back of the line and hoped it would move fast. It did not.
Whatever else anyone may say about Jay Powell’s much-awaited speech in Jackson Hole, it had two distinct virtues. It was clear and it was brief, running to just 1,300 well-chosen words.
In the same spirit, and despite a sharp 1,008 point slide in the Dow Jones Industrial Average on Friday, it is important to be succinct in discussing both where the economy is and potential Fed policy going forward.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
The phrase “drawing a line in the sand” has an unhappy history. In the U.S., it is said to have originated with Colonel William B. Travis, who drew a line in the sand at the Alamo declaring his willingness to fight and die rather than surrender. In 2008, following the takeover of Bear Stearns earlier that year, federal authorities drew a line in the sand and let Lehman Brothers go bankrupt. And in recent weeks, Fed officials have seemed to draw a line in the sand on inflation.
For the podbeam description, can we add the following line towards the end: “For additional insights from Dr. David Kelly, listen to the Insights Now podcast.”
Normally, the great challenge in talking about the global economy is finding a theme. The economic fortunes of nations are usually driven by such a disparate array of political, financial, demographic and environmental cross-currents that it is impossible to establish a framework for analysis. Twice however, in this still young century, events have unfolded to provide just such a theme as the world battled the global financial crisis in 2008 and the global pandemic in 2020.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
After weeks of steamy hot temperatures, a cold front is set to move through the Boston suburbs on Tuesday. While the relief will be nice, in truth, the temperature will only edge down from the low 90s to the low 80s. However, it is the start of something and, as we are well aware in this part of the country, longer-term forces will bring us much colder weather before too long.
After weeks of steamy hot temperatures, a cold front is set to move through the Boston suburbs on Tuesday. While the relief will be nice, in truth, the temperature will only edge down from the low 90s to the low 80s. However, it is the start of something and, as we are well aware in this part of the country, longer-term forces will bring us much colder weather before too long.
After weeks of steamy hot temperatures, a cold front is set to move through the Boston suburbs on Tuesday. While the relief will be nice, in truth, the temperature will only edge down from the low 90s to the low 80s. However, it is the start of something and, as we are well aware in this part of the country, longer-term forces will bring us much colder weather before too long.
The long history of financial markets, like most classic novels, is full of misunderstandings, miscalculations and mistakes. Despite all of this, the story normally twists and turns its way to a happy ending. This may yet be the case for investors in the very unusual economy that has unfolded following the pandemic recession and recovery.
When engaged in the more mundane tasks of my job, I often have classical music playing in the background. A piano concerto, in the hands of a great orchestra and soloist, is a delight to the ears as the rush and energy of the first movement gives way to the softer pace of the second. And when the conductor downshifts the tempo, the musicians follow with effortless precision.
Last Friday’s strong jobs numbers came as a relief to many who feared that the U.S. economy was quickly sliding into recession. On its face, the June employment report seems to support further aggressive Federal Reserve tightening, leading to higher U.S. interest rates and a further appreciation of the dollar, and offsetting forces impacting U.S. equities.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
One minor side effect of this terrible pandemic is that we have all become more educated on our own immune system. Looked at objectively, it is a masterpiece of evolutionary excellence.
The outward signs of infection are normally easy to see – coughing, sneezing and obvious fever warn other humans to keep away, while our own exhaustion makes us less mobile and thus less likely to infect. The extraordinary havoc wrought by Covid-19 is primarily due to the virus’s ability to make someone contagious even before these symptoms appear.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
In times long gone by, a popular event at town fairs and school sports days was the sack race. The competitors would assemble at the starting line, each encased up to the waist in a burlap bag and gripping firmly onto its sides. At the gun, they would hop furiously in the direction of the finish line, 100 yards ahead. As a sporting contest, it lacked dramatic tension, with most of the competitors biting the dust in the first 50 yards. But it was entertaining to speculate on which brave athlete would roll over first.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
I refuse to believe, despite gathering evidence to the contrary, that I am getting older. This being my mindset, I am perpetually astonished by the increasing youth of my colleagues. According to the Census Bureau, the median age of an American today is 38 years which doesn’t, on its face, sound extraordinary. However, what it does mean is that most of the people I work with have only experienced two recessions in their adult lives – the recession of 2007-2009 and the recession of 2020.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
I have been on many delayed flights recently and have a certain sympathy for the pilots who, having repeatedly told us that we would be taking off shortly, have to continually backpedal due to weather or staff or equipment. They always thank us for our patience but in reality they are the patient ones. We, the passengers, are seething, and what’s more, we have suddenly become vocal experts on dodging weather, managing staff and fixing planes. But to get us safely to our destination the pilots have to keep their cool.
Following a solid jobs report last week, investors this week will turn their attention to inflation which, to say the least, has been more of a problem this year. We expect this Friday’s CPI report to show a 0.6% increase in prices overall and 0.4% excluding food and energy. On a year-over-year basis, we are looking for headline inflation to fall from 8.2% to 8.1% and for core inflation to drop from 6.1% to 5.7%.
My father, otherwise a very accomplished man, never learnt how to type properly. However, he compensated for a lack of skill with an intensity of application. As children, we would hear him behind the door of his study, pecking away at his Remington typewriter using only his two index fingers. In the afternoons, it would be a gentle, relaxed clicking, interrupted every 20 seconds or so by the merry chime of the carriage return bell.
Last Wednesday, the Treasury Department announced a record monthly budget surplus for April of $308.2 billion. The report elicited no noticeable market reaction, as investors continued to fret about high inflation today and slowing growth in the months ahead. However, a Federal Reserve recognition of the economic implications of a fast-falling budget deficit could hold the key to a recovery in recently battered stock and bond markets.
In the movies, in order to convey the passage of time, a director will sometimes film a scene as the seasons quickly pass before your eyes. With wistful music playing in the background, the snow melts from trees, buds blossom, leaves rustle in the summer sun and then turn yellow and red as fall arrives. It all, of course, seems a bit quick, but no doubt the movie has places to go and hopefully things will settle down for a while and allow the plot to evolve.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
In any given year, four big exogenous forces tend to have the most impact on portfolio returns, namely, earnings, interest rates, taxes and the dollar. While the tax environment appears to be stable, in all other respects, 2022 is shaping up to be a difficult year with slowing earnings growth and fast-rising interest rates. In addition, the dollar has risen significantly so far this year, as it did in 2021 and this is having negative impacts on both portfolio returns and economic growth.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
Economic data in the week ahead should highlight a stumble in economic growth and a surge in inflation in the first quarter. While second quarter numbers will likely partly offset both of these trends, they will remind investors of the challenges faced by the Federal Reserve in trying to return the economy to a path of steady growth and moderate inflation. While some Fed officials have advocated very aggressive tightening, both the likelihood of near-term moderation in growth and inflation and longer-run disinflationary forces suggest it would be wiser for the Fed to take a slow and steady approach in battling inflation.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
A number of years ago, as part of a team-building exercise at an overseas conference, I got bullied into taking a ride on a particularly fearsome roller coaster. For someone who suffers from vertigo and is an admitted control freak, the next 90 seconds were not pleasant. Once the ride stopped, I stumbled out of the contraption. However, I could not proceed with our merry band of team-builders until I had done a serious inventory of the state of the world, starting with some rather fundamental questions.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
Last Thursday, as I headed home from a conference, the car I’d booked to take me to the airport didn’t show up. Luckily there was a taxi nearby so I hopped in and discovered that, in addition to a comfortable ride to my destination, the fare entitled me to a free lecture on the state of the labor market. “The reason your car didn’t show up”, opined the retired police sergeant at the wheel, “is you can’t find drivers anymore. It’s the millennials - they just don’t want to work”.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast
Despite their best intentions, the Federal Reserve sometimes appears to be trying to steer a big boat, through violent rapids, armed only with a small paddle. The reality is that forces well beyond their control will mostly determine the fate of the economy. However, the energy with which they paddle could have a major impact on investments.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
At 5:30AM on Saturday morning, Coach Jack posted on the team Facebook page – the training run was a go. Just as well.
The Boston Marathon is now five weeks away and as a proud member of the gasping geezers division of the Dana-Farber Marathon Challenge team, I knew we needed to get in a long run. Between Covid and the weather, training has not exactly been easy. On Saturday, the forecast was for rain with the possibility of torrential downpours. But getting wet on Saturday was a better choice than waiting any longer for ideal training conditions. Sometimes, despite adverse conditions and uncertainty, you just have to get going.
For additional insights from Dr. David Kelly, listen to the Insights Now podcast
In the week ahead, the world’s attention will continue to be focused on the horrific human consequences of the Russian invasion of Ukraine. However, American investors will also be considering what it means for financial assets. While the most severe economic consequences will likely be felt in Europe, the most important effects on U.S. portfolios depend on the implications of Ukraine for the U.S. economy.
Every winter, here in eastern Massachusetts, we are visited by Nor’easters. Each storm is plotted on weather maps days in advance. A low pressure area swoops down from the Rockies, gathers moisture in the Gulf of Mexico, rides up the east coast over the warm waters of the Gulf Stream and then stalls in the Gulf of Maine, churning itself into its full intensity. Every storm has the potential to turn into a blizzard. But whether it does or not depends on two things: First, what is the exact track of the center of the storm and second, how much cold air is in place before the storm arrives?
For additional insights from Dr. David Kelly, listen to the Insights Now podcast.
Financial markets sold off last week as investors worried about a possible Russian invasion of Ukraine. Before engaging in any analysis of what this could mean for long-term investors, three broad points are worth emphasizing.
So far this year, the 10-year Treasury yield has risen from 1.52% to 1.93%. This increase has been accompanied by broadly lower equity markets, with value outperforming growth and international stocks outpacing their U.S. counterparts.
In the last few weeks, it seems everyone is playing Wordle. Each morning, a UK website posts a new game and you get six attempts to guess the five letter word. If you guess the right letter in the right square, the square turns green. If you get the right letter in the wrong square, the square turns a mustard yellow. If you get it all done in four tries the program says “splendid!” If it takes you six tries, it says “phew”. It’s a nice distraction in what we all desperately hope are the waning days of the pandemic. It’s also not particularly difficult, provided the right answer doesn’t include too many rare letters.
n Saturday, at an average home, on an average road in Maplewood, New Jersey, the realtors staged an open house. Even for a January, this was a rare event and parking was at a premium as dozens of mostly young couples lined up outside, braving cold and Covid. There was a whiff of desperation in the air as the multitude assessed its own numbers. The more experienced in the crowd, though well-armed with bank pre-approvals and hefty down payments, shared in the general pessimism, knowing that the property would go quickly and for well above asking.
Our baseline view of the world does not include a U.S. recession in the next two years. However, it is certainly possible, and investors would be well advised to consider what it might mean for their portfolios. With that in mind, it is worth thinking about what could cause a U.S. recession, the implications of such a recession for financial markets, inflation and monetary and fiscal policy and how assets would fare in its wake.
There is an old and much-quoted saying by the Greek philosopher Heraclitus: “A man never steps in the same river twice” – because it is not the same river and it is not the same man. A very similar observation could be made about investors considering their portfolios as the pandemic, hopefully, begins to wane. Covid-19, and the policy choices it triggered, changed the economic and financial landscape in a significant manner. However, it also changed investors, leaving them, for the most part, with larger portfolios but also with portfolios that are more seriously out of balance.
Growing up in Dublin, my parents were of the firm belief that the streets of the city were safer without David behind the wheel of a car. Consequently, I first learnt to drive in my early 20s on the backroads and highways of Michigan, with my future wife, Sari, as my instructor. There were a number of perils associated with this including my tendency to ignore all traffic signs when focused on the task of steering the car or my habit of stalling out due a chronic inability to synchronize the application of the clutch and the accelerator. It didn’t help that Sari would burst into a fit of giggles at the moments when I put us in the greatest and most imminent danger and was in particular need of quick and level-headed advice.
When our children were very young and they committed some transgression, we had a rule in our house. It wasn’t enough to say sorry. You had to say what you were sorry for. That way, we had some hope that they wouldn’t make the same mistake again.
Despite a disappointing gain in non-farm payrolls in November, numerous recent data points show an extraordinary excess demand for workers. This excess demand won’t persist forever. However, it’s important to understand its causes as this can provide some guidance on two crucial questions, namely, how long might it last and how will it be resolved. The answers to these questions can also help in assessing which asset classes could outperform in 2022 and beyond.
Financial markets tumbled last week as reports spread of a new, highly-mutated variant of Covid-19 which could be more contagious than the Delta variant and which could evade some of the immunity built up around the globe over the past year through vaccinations and infections.
The week ahead will, of course, be dominated by Thanksgiving, leading, appropriately, to less focus on financial markets. That being said, this should also be a week of greater clarity on fiscal and monetary policy. This clarity should reinforce the view that Washington aid will become considerably less generous in the year ahead, reducing inflation fears but posing some threat to recently very strong profit growth.
Financial market commentary in the week ahead will likely center around the question of inflation. The headlines speak for themselves. CPI inflation jumped to 6.2% year-over-year in October, its highest reading in 31 years.
My first summer job as a teenager was in the mailroom of a Dublin law-firm.
The more intellectual duties of this position involved substantial paper-folding, envelope-licking and a daily fight with the franking machine. However, the important part of the job was buzzing around Dublin on my 10-speed bike (with the dropdown handlebars), delivering the mail directly to various law offices and clients and thus eliminating the inevitable delays of the Dublin postal service.
It feels like so long ago, but back in 2019, the economic and financial environment was remarkably placid. Real GDP growth was plodding along at 2.3% pace, unemployment drifted down to end the year at 3.6% and corporate profits were growing slowly from very high levels. Consumption deflator inflation was still running below the Fed’s 2% target and, in recognition of this fact, as well as market volatility at the end of 2018 and a sluggish global economy, the Fed cut the federal funds rate three times to end the year in a range of 1.50%-1.75%. While the political weather in America was stormy, the investment environment was remarkably calm.
Every summer since 1960, the World Lumberjack Championships have been held in Hayward, Wisconsin, a small community in the north west of the state. Among the featured events in this and similar gatherings is logrolling, where two competitors scamper furiously on top of a very wet and smooth log, floating on a shallow, muddy lake.
On Monday, I have the privilege of running the Boston Marathon for a third time on behalf of the Dana Farber Cancer Institute. I love being part of the team – despite many difficult personal stories, the volunteers, organizers and runners are a very warm and positive bunch to train with. Moreover, the research conducted by Dana Farber is critical to winning more of the millions of individual battles which constitute the war on cancer.
I remember the day when I first appreciated the importance of the American consumer.
It was the winter of 1982 and I was huddled around a table with some fellow econ students in the cavernous restaurant of University College Dublin, gulping down the sinister brew which the authorities labeled as “tea”. As undergraduate students, we were fed a narrow diet of theory and math. But the Irish economy was once again floundering helplessly in the heavy wake of an overseas recession and the only relevant question was: when would the American consumer bounce back? I remember being very impressed when someone at the table started reciting the latest U.S. 10-day car sales numbers and asserting that a recent turn up in these data meant that better times were surely ahead for the global economy.
Like most people, I suppose, I get my hair cut every four weeks. If, either by consulting the calendar or the mirror, I am “due” for a haircut, I head off and get one. The passage of time or the growth of my hair since my last visit, is a very reliable predictor of the timing of my next one.
There is an old house with a box of dynamite in the attic.
Every few years, for as long as anyone can really remember, the children of the house have brought the box downstairs and played games with its contents. The owners have never seemed very concerned – after all, so far, it has never exploded. But each generation of kids seems just a little more reckless and irresponsible than the last and it takes just one mistake……
The parking lot of our local high school is fortified by great ranges of speedbumps. These ancient mounds of asphalt were erected in the distant past by school authorities, presumably in tribute to the precision and focus demonstrated by our town’s youngest drivers.
Investors, in the week ahead, will have little time for financial analysis. The headlines will be dominated by the U.S. withdrawal from Afghanistan and the terrible impact of Hurricane Ida in Louisiana. Meanwhile families will be trying to stretch out summer days, while making all the adjustments necessary for a return to work and school in a still-untamed pandemic.
On March 23rd of last year, at the start of the coronavirus pandemic, the S&P500 briefly traded below 2,200. Since then it has more than doubled, surfing on a wave of corporate profits, in a sea of central bank liquidity. However, investors should recognize that this wave will face challenges going forward while the tide of monetary easing should turn. As this happens, a focus on valuations should be more rewarding than has been the case in recent years.
Much has been written about the mutating virus and how its more contagious Delta variant has spurred a surge in cases, hospitalizations and fatalities.
However, the economy is also mutating and adapting. These adaptations are reducing the ability of pandemic waves to slow the economy. They are also boosting productivity and profits. However, a failure to recognize this resilience is promoting inappropriately easy monetary and fiscal policy, potentially setting the stage for higher inflation and interest rates and a significant rotations in asset class performance.
Every few years our talented colleagues in marketing tell us we need a new palette for the Guide the Markets. They’re right of course – staring at the same colors, year after year, gets boring. But a new palette requires us to change almost every color on every page which is fairly labor intensive work. Moreover, if we do it right, the new chart will just convey the same message as the old one.
The week ahead will be a quiet one for economic data and a busy one for corporate earnings. It could also be a pivotal one in Washington as the Biden Administration tries to advance its agenda in Congress.
My wife, Sari, was born with a lead foot.
By all rights, she should have accumulated a bountiful harvest of speeding tickets over the course of her career. But she understands how the system works.
If she is, for example, buzzing along at 75 in 55 mile-an-hour zone and sees the state police ahead, she dons a sunny smile and gently taps on the brakes. This action, of course, still leaves her well above the limit. However, for some reason, the police seem to appreciate the gesture as a respectful acknowledgement of the majesty of the law. Speeding more slowly is apparently regarded as akin to not speeding at all.
When my wife, Sari, was 9 years old, a tornado touched down in Grand Rapids, Michigan and destroyed most of her home.
Luckily she and her family were at her grandparents that evening and so weren’t there when the storm hit. But the next day, when they all drove back to the neighborhood, it was barely recognizable with many houses destroyed or badly damaged. Her great concern, at the time, were the family pets who thankfully managed to ride out the storm unscathed. But her parents must have been traumatized by the destruction they saw all around them, wondering how long it would be before everything could get back to normal and whether there were some things that would just never be the same.
After a long period of absence, I’ve visited New York multiple times in the last month. Each time, the city has seemed more bustling than the week before, with fewer masks, more crowded restaurants and more New Yorkers expressing their emotions by their habitual cheery and liberal use of their car horns. As cases of Covid continue to fall, it is as if springtime has arrived in the city and in the nation.
Some months ago, as the snow melted off the lawn, a rabbit appeared at the end of our back yard. Our twin shih tzus, Buddy and Bruiser, spotted the intruder and, barking furiously, headed off in pursuit. The bunny, having given our fearless duo a head start, then bounced off into the undergrowth, cotton-tail waving in the air, leaving them barking at each other as if to say “Where’d he go? Where’d he go?”
Next week, the Federal Reserve holds its fourth FOMC meeting of the year. After the meeting, they will release a statement, very likely communicating no change in policy. Fed Chair, Jerome Powell will likely emphasize the same message in his post-meeting press conference. However, for investors, the most important information will be delivered in numbers rather than words, as the Fed discloses the median forecasts of FOMC members in their June Summary of Economic Projections.
I recently read a book, entitled The Code Breaker by Walter Isaacson, about a revolution in gene editing prompted by the discovery of something named CRISPR in bacterial DNA. I won’t delve into the details except to say that the book is a great read and made me appreciate, once again, the relative simplicity of the economic systems I spend most of my life pondering compared to the extraordinary structure and machinery within a single human cell.
In 1895, at the age of 60 and in some financial difficulties, Mark Twain embarked on a speaking tour of the British Empire to pay the bills. He later published an account of his travels in a book entitled: Following the Equator.
The all-boys Catholic school where I spent my formative years was a traditional establishment. The air was thick with chalk dust and a steady tension between a rebellious student body and an establishment which resorted to corporal punishment to maintain discipline. However, a second line of defense for the authorities was the issuance of report cards every six weeks. Twice a quarter, the Headmaster would stride into the class room brandishing a batch of colored cards to be signed by parents and returned. A rare pink A-Card, containing all 8s and 9s would be a cause of domestic celebration. A B-Card, colored blue, would contain some 7s and would generally receive little comment from my parents. A green C-Card, was a more serious matter requiring more elaborate explanations at home. For most of my school career, it was B-cards, but the Headmaster seemed to enjoy my nervousness as he toyed with the cards before revealing my fate.
Last Friday’s April Jobs report was clearly much weaker than expected. On average, analysts expected a payroll job gain of 1,000,000, with the unemployment rate falling from 6.0% to 5.8%. In the event, non-farm payrolls rose by just 266,000 and the unemployment rate rose to 6.1%.
On May 22nd, my wife and I plan to eat dinner at a restaurant.
In normal times, such a news item would not exactly make the family headlines. But since the pandemic struck, we have taken a cautious approach and eaten at restaurants only once or twice and then only if outside dining was available. For the last six months, a New England winter has deprived us of even that option.
However, on Wednesday, Sari got her second shot and I get mine on May 8th. And so, two weeks later, I can already see myself perusing an oversized menu at a favorite restaurant. Everything will look good and my only problem will be maintaining some restraint. While the bread, the wine, the appetizers, the salad, the steak, the pommes frites and the molten chocolate cake will look equally appealing at the outset, I fear their cumulative implications for a digestive system which has only a distant memory of such bounty.
Memories of the great inflation of the 1970s have faded in the public’s consciousness. Half of today’s population wasn’t even born when inflation stalked the land and, in the decades since, the failure of inflation to reappear has naturally eroded interest in the subject.
On Friday, I had the privilege of speaking at the annual strategic investment symposium run by the College of Charleston in South Carolina. Sadly, like everything else over the past year, the conference was virtual and so I couldn’t revisit Charleston itself. Just to rub it in, the host let me know that it was sunny day in Charleston, with a high expected in the mid-to-upper 70s.
The economy is experiencing the first effects of a powerful double-dose vaccine of broad inoculation and fiscal stimulus. The reality is that forecasts remain very uncertain. The pandemic recession had no modern precedent and so we have no good road map on the speed at which the economy might naturally recover. In addition to this, we have no example of the impact of fiscal stimulus of this scale, aimed primarily at low and middle-income consumers. What we can say is that early signs show the recovery is accelerating, suggesting a faster return to “normal” than many had dared to hope a few months ago. While this is very good news in general, it brings with it challenges for investors in making sure their portfolios are positioned for the very different financial landscape of a post-pandemic world.
It has been, by any reasonable measure, an eventful first quarter. At the start of the year, the pandemic was raging and vaccines had barely begun to roll out. Today, despite a recent tick up in cases, the light at the end of the tunnel is looking brighter and closer. At the start of the year, a very contentious election seemed destined to be followed by political gridlock.
In recent months, falling political uncertainty, two powerful rounds of fiscal stimulus and the rollout of covid-19 vaccines have resulted in a long-anticipated rotation in markets. Since early November, value stocks have outperformed growth, small caps have outperformed large and international stocks have outperformed their U.S. counterparts, with each of these moves reversing a multi-year trend. U.S. long-term interest rates have been at the center of this move, with 10-year Treasury yields rising by almost a full percentage point between the day after the 2020 elections and last Friday.
The pandemic has had an unfortunate impact on my piano practice.
In truth, I have never been a promising student - my musical efforts have always rather resembled roadwork on an overused urban highway - that is to say, not so much an exercise in inventive construction as one in increasingly inadequate repair. Still, for some years, my piano teacher would relieve the general ear strain by suggesting some new tune for me to work on.
As a hungry child, growing up in a large family, some forays into cooking were essential. My early rice-making experiments, however, were exercises in frustration. I would start with a large sloshing pot of icy water and, having transported it to the stove with wobbly hands, I’d dump in a bag of rice and wait for results. It seemed to take ages for the water to heat up, as I peered down hopefully at the submerged pile of grain. Eventually, things would begin to bubble and steam, but long before the rice came close to “al dente”, the water had boiled down, exposing an island of uncooked rice, with an acrid burning smell emanating from the bottom of the pot.
The week ahead will be a busy one for market-moving events and economic data. However, beyond the noise, investors will continue to mull two crucial questions: First, how far could interest rates rise and, second, what could that mean for equities?
Long-term interest rates have risen sharply in 2021 so far, with the yield on the 10-year Treasury bond climbing from 0.93% on January 4th to 1.34% by last Friday. This move is a logical reaction to better news on the pandemic, encouraging data on how the economy has weathered an early-winter surge in covid cases, and rising prospects for significant fiscal stimulus. However, given this positive news flow, the bond market may have under-reacted so far, suggesting that investors need to be positioned for further increases in rates as economic springtime turns to summer.
In a year when everything has been different, it was comforting to watch an almost normal Super Bowl with Tom Brady, albeit wearing the wrong uniform, winning yet again. It wasn’t that close a game – Tampa Bay established a lead in the first half and just did what they needed to do to hold that lead to the end.
This Friday, February 12th, marks the start of the Chinese New Year and the Chinese people, like the rest of humanity, will say a hearty good riddance to the last year with hopes for easier times ahead. The Year of the Ox should be better, with vaccines gradually allowing for a return to normal life and China should be able to build on its early economic recovery and resume its very long trend of strong economic growth.
In two weeks, in Daytona Beach, Florida, 40 cars will compete for the most coveted prize in NASCAR. As the cars slowly circle the track in the pace laps before the green flag drops, the noise of engines revving will give notice to all of the speed to come. In a similar fashion, while the U.S. economy has slowed to a crawl over the winter, there are growing reasons to expect a sharp acceleration in the months ahead.
In most decades, there are dramatic events that interrupt the course of history and the last twenty years have seen at least three obvious examples of this. However, more often than not, it is the reaction, in public attitudes and policy, rather than the event itself, that shapes the path taken by society in its aftermath. The horror of 9/11 laid the groundwork for wars in Afghanistan and Iraq. The global financial crisis led to an era of much tighter oversight of financial institutions that, in turn, curtailed lending, contributing to the slowest economic recovery in modern U.S. history.
Last Thursday, ahead of the inauguration, President-elect Biden outlined proposals which, if implemented, could have profound social and economic effects as well as impacts on the broad direction of fiscal and monetary policy.
At the start of a new week and a new year, investors have plenty to think about. Despite the rollout of vaccines, the pandemic has worsened in recent weeks, dragging on the global economy. U.S. stock markets ended at record highs on Friday and both bond and equity valuations look lofty. And in the week ahead, the Congress will certify the election of Joe Biden as President, although with an unusual degree of political acrimony.
In Newgrange, just north of the River Boyne in County Meath, Ireland, there exists a giant burial tomb, constructed, it is estimated, around 3200 BC and measuring over an acre in area . Little is known about the people who built it. However, we can surmise that they had some knowledge of both astronomy and engineering since each year, only at dawn on this day, the Winter Solstice, a beam of sunlight shines through a specially contrived opening above the tomb entrance, illuminating carvings on the walls of an inner chamber.
No parent can ever forget the day their child was born. From that moment on, you’re completely responsible for another, entirely helpless, human being. And so you do everything you can to love them, to nurture them, to teach them and to help them grow. At the start, their problems are little ones and usually you can help them surmount them.
A week ago, President-elect Biden hurt his foot while playing with Major, one of his rather rambunctious dogs. Following a CT scan of his injury, it was determined that he had suffered a hairline fracture and his doctor suggested an orthopedic boot. While it is, no doubt, an awkward piece of footwear, the course of treatment was not controversial. If, however, his doctor had told him to just walk it off and instead prescribed caffeine and steroids, his competence would have been called into question. Mr. Biden was clearly injured and in need of support, rather than tired and in need of stimulus.
Following knee-jerk flight-to-safety bounce as the pandemic struck, the U.S. dollar has fallen in recent months and is now down over 6% year-to-date against the euro and over 4% year-to-date against the yen. This is a small start on a welcome journey. While some politicians and editorial writers will always proclaim their pride in a “strong dollar”, the truth is that an over-valued currency has been wreaking havoc on the U.S. economy for years, undermining our manufacturing sector, depressing demand for our exports and encouraging protectionist policies which inevitably retard economic progress both here and abroad.
Currently, a 7-day moving average of the number of confirmed cases of Covid-19 exceeds 170,000 while a 7-day moving average of fatalities is above 1,500. While most people are very worried about this, spotty compliance with mask-wearing and millions of families getting together over the holiday season could well boost these numbers in the days ahead. This will sadly lead to traumatic scenes in hospitals and will also have a significant impact on the economy.
Of all the challenges facing investors in this blighted year, maintaining a long-term perspective may be the hardest. In recent weeks, markets have swayed back and forth in reaction to case counts, vote counts, vaccine news and stimulus views, obscuring longer-term trends on economic growth, inflation, earnings and interest rates. It has also been tempting to ignore the crucial importance of current valuations in driving long-term returns or to underestimate the potential for recently unloved assets to reduce current portfolio volatility and enhance long-term returns.
There was a time, long before GPS or the need to select the accent of the artificial being that would bark driving directions at you, when people consulted road maps. On trips abroad, my wife, Sari, who’s more gifted with fast reflexes than geography, would take the steering wheel while I would unfold an oversized map on my lap, crinkling and tearing at the seams. However, as we buzzed along the road, no matter how urgently Sari would request information, there was always one unavoidable step in providing directions – namely, to first figure out where the heck we were.
A few years ago, just when I’d started training for a big race, I strained my Achilles tendon. Being an Irishman, I couldn’t, of course, bring this evidence of age and infirmity to the attention of an actual physician. However, I consulted the oracles of the internet and they were, for once, very consistent in their advice: “Wait a few days until the pain has faded and then work steadily on ankle strengthening exercises. Most importantly, lay off running for at least 3 weeks.”
It always requires discipline to look beyond the next few weeks and months and take a long-term view. In the short run, investors remain focused on election uncertainty and how the once-again worsening pandemic, combined with stalemate over further fiscal stimulus, threatens to dramatically slow the pace of economic recovery, following a strong third-quarter bounce.
Turbulence defines today’s investment environment, with great waves of uncertainty surging from the pandemic, the election, fiscal policy and a slowdown in what had been, to this point, a sharp recovery from a very deep recession. But amidst the tumult, investors should not neglect the crucial role of interest rates. The waves of uncertainty should fade in 2021 and, as they do so, the primary role of interest rates in determining asset class returns should reassert itself.
For most Americans, November 3rd can’t come soon enough.
U.S. presidential election campaigns are always hideously long and this one has felt particularly painful, with such a deep divide between the supporters of the rival candidates. However, recently there has been increased speculation about the grim possibility of the election outcome being contested. Quite apart from the further division this would inflict upon our bruised democracy, many investors are wondering what this could mean for the economy and markets.
For most of the last 40 years, the United States, like most developed economies, has suffered from a lack of demand for goods and services. This has contributed to a steady slide in inflation. More importantly, it has indirectly triggered recessions by funneling money towards assets, feeding bubbles which have inevitably burst. A lack of aggregate demand has also slowed the recovery from those downturns, inflicting hardship on millions of workers and small business owners.
This week, I, like about 20,000 others, will attempt to complete the virtual Boston Marathon. I had signed up again with the Dana Farber Marathon Challenge team to run it in April, after a rather ragged performance in 2019. But then the race, like so much this year, first got postponed and then went virtual. And so, next Saturday morning, I will nervously walk out my front door, turn left and jog off, on my own, into the dawn’s early light.
English, as spoken in Ireland, is full of colloquialisms, phrases which are plain and clear to the local population and entirely mysterious to visitors. Of course, Irish people don’t realize this and, over the years, I’ve become used to the bemused smile of Americans who clearly hear what I say but, equally clearly, have no notion of what I mean.
Washington Hawks flourished in the late 1970s and 1980s, when deficits and inflation were seen as significant threats to the nation. However, their numbers have dwindled in recent years due to persistent low inflation and the rise of populism. The current pandemic recession appears to have dealt a death blow to the species and its traditional habitat has now been taken over by swirling flocks of red and blue doves.
The title of these weekly articles often starts with, “The Investment Implications of…..”
This is usually appropriate since almost all big issues have investment implications and the focus of these articles has always been to see the investment environment with clarity.
Apparently, the hard-working analysts at the Congressional Budget Office threw in the towel on Friday afternoon. They were scheduled to release their estimates of the budget deficit for July but, late in the day, the CBO website announced that the numbers would be coming out today instead.
New GDP data released last week confirmed that the 2020 recession has been the deepest in over 70 years, with a peak-to-trough decline in real output of 10.6%. This, of course, was already evident in monthly data on consumption, employment, trade and inflation and has been reflected in a very sharp decline in corporate profits.
Last week, I was preparing for a zoom call with some of our client advisors at JPMorgan Asset Management, by reviewing a list of questions they had kindly supplied in advance, and I came across a particularly awkward one: what has been my biggest investment mistake?
In life before the pandemic, (and it seems like years ago), Sari and I would often drive from our home in Massachusetts to New York for the weekend. The destination was always fun – seeing the kids, exploring new restaurants, catching a Broadway show and sometimes running a road race the next morning to burn off the extra calories. But we had to get there first.
In the week ahead, as has been the case for most of the year, markets will likely take their cues from medical rather than economic data. The key question is whether America will see a second wave in the Covid-19 pandemic. The answer to that question has, of course, profound human and social consequences. However, it also has implications for the economy, for fiscal and monetary policy, and, ultimately, for investment strategy.
In recent weeks, as stocks have rebounded strongly from their March lows, many have asked if the market has come too far, too fast. Thursday’s sharp selloff may have been an expression of that concern.
In the week ahead, America will be focused on the killing of George Floyd and its aftermath. These are difficult days for our country, beset as we are by a pandemic, a deep recession, political division and racial tension.
In the early days of her marriage, my mother tried to achieve the almost impossible goals established by society for a 1960s wife. Apart from tending to the needs of my somewhat Victorian father, she did her best, on an inadequate allowance, to keep herself and a growing family fed and clothed.
On Friday, the Bureau of Labor Statistics will release the Unemployment Rate for April, which will undoubtedly be the single ugliest economic statistic of my lifetime. We estimate that, based mainly on continuing unemployment claims, the number will come in at 15.5%. We also estimate that roughly 19 million Payroll Jobs were lost in the month.
In the classic Roadrunner skit, the Coyote buries one ACME box of dynamite beneath a pile of birdseed, strings the wires to a detonator hidden behind a rock, waits for our hero to arrive and start pecking, and then forcefully pushes down on the plunger.
Every summer when I was growing up, we would spend a week or two on holiday in the West of Ireland. These trips would always start in discomfort, as I was one of a large number of children squished into the back of a small car.
In this uniquely repetitive era for all of us, Saturday marked a first for my wife, Sari, and I. Armed with a sharp pair of scissors and with a manic gleam in her eye, she attacked the task of cutting my hair.
Last week, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a huge package of federal spending and tax cuts, primarily aimed at helping the economy weather the recession triggered by our “social distancing” response to the COVID-19 virus.
The problem with COVID-19 is that it is both sufficiently contagious and sufficiently lethal to exact a terrible human toll. This toll, as can be seen from the mortality figures from China and Italy, can be made substantially worse when the health care system is overwhelmed.
The spread of COVID-19 continues to have a dramatic impact on lifestyles, economic activity, monetary and fiscal policy, and financial markets.
2020 has quickly become the year of the virus. It should, of course, first be recognized that, for some families around the world today and, sadly probably many more in the months ahead, issues of economics, politics and finance will be but a small footnote to personal tragedy.
Springing to life nearly a mile above sea level, the Zambezi River gathers strength, speed and tributaries for more than two hundred miles before hurtling over the Chavuma Falls in Western Zambia.
Despite a strong January jobs report, real economic growth is continuing to decelerate in the first quarter of 2020 and could fall below 2% year-over-year for the first time since 2016.
Last week, I decided to avoid shaking anyone’s hand. It’s not that I have a virus. It’s just that my job, which involves lots of plane travel and hand-shaking, make me particularly susceptible to getting one. And I would really rather not be ill.
Among the card games of my misspent youth was a game called Pontoon. The rules of Pontoon are very similar to Blackjack – the object is to get as close to 21 as possible without going over.
On economic news, the December Jobs report generally suggested stable growth. The payroll job gain, at 145,000, was slightly weaker than consensus but not alarmingly so.
25 years ago, I had the privilege of working with a very smart and well-respected strategist at a Wall Street sell-side firm.
My wife, Sari, and I have a long-standing disagreement about how warm our home should be.I contend that a man shouldn’t have to wear an overcoat in his own house just to ward off frostbite.
There’s an old saying that the reason some people bash their heads against the wall is because it feels so good when they stop. Many economists would see last week’s trade news in the same light, judging that Brexit, the threatened abandonment of NAFTA and the trade war with China were all populist-driven negatives for the global economy.
For investors, the market environment seems to be in a holding pattern, with little movement in economic fundamentals and a slow melt up in equity prices. For those trying to while away the time until there is some genuine change, there are some key questions that will be addressed by events in the week ahead.
The week ahead will be a busy one for economic data, with global PMI numbers on both manufacturing and services and U.S. readings on Light-Vehicle Sales, International Trade and Consumer Sentiment. However, as is usually the case in the first week of the month, the most important numbers will be contained in Friday's Jobs report.
This week, most Americans will be hopefully be focused on family and food rather than the economy and markets. However, at some stage over the long weekend, a few may decide that they have had a sufficient helping of both pie and relatives and be looking for a distraction.
America’s finances have been deteriorating for almost two decades. In October 2000, the Treasury Department announced a budget surplus for the just-ended fiscal year of $236 billion or 2.3% of GDP. The federal debt amounted to just over $3.4 trillion or 34% of GDP.
My weight never changes. For pretty much all my adult life, I have looked down at the same small range of numbers on the bathroom scales. ... Much the same could be said of inflation in recent decades.
Last week, the U.S. economy saw a sudden and definitive transition and settled into a path of slower growth.
The next few days will see a blizzard of news impacting financial markets. For investors, the most logical approach may be to look at the headlines one at a time and then see how they can be linked together in constructing a view of the investment environment.
The Tax Act of 2017 was a bit like a pair of speedy running shoes for U.S. corporate earnings. It allowed for a short-run burst of strong year-over-year gains. However, since the start of this year, these gains have plateaued and earnings growth is likely to be very slow going forward.
Entering the fourth quarter of the year, nothing seems easy for investors either and there are a number of issues that are making it difficult for markets to move higher from here. However, it is important to recognize any softening in these impediments to progress.
The financial environment facing U.S. investors in the year ahead will involve some very close calls.
My eyesight isn’t what it used to be.It’s not quite as bad as my wife thinks it is, but if I’m watching a football game or trying to read slides from the back of a room, I now don a pair of specs.
On Wednesday, the Federal Reserve will conclude its September policy meeting. Futures' markets have priced in a high probability that they will cut the federal funds rate by 25 basis points and this is likely what they will do. However, there are at least six good reasons why they shouldn't.
In my admittedly conservative opinion, modern rackets have diminished the game of tennis as a spectacle. Booming serves from both opponents have led to fewer competitive games, with many sets turning into a rather dull march to six-all, ending in a tiebreaker. Now, there isn't any need for a tiebreaker in analyzing the long-run prospects for the U.S. economy since it really isn't a close call.
In America today, there is an obsession with how to stimulate demand, with fiscal policy, monetary policy and currency policy all being deployed to rev up the economic engine. However, America is facing a demographic pothole, and unless we fill it, growth will be mediocre, at best, regardless of how we try to stoke demand.
In days of yore, the sight of seagulls wheeling over an inland forest or fields was taken as a sure sign of a storm at sea. In a similar vein, last week, many investors took the sight of an inverted yield curve as a sign of impending recession.
I have always been a middle-distance runner. I think this serves me well today as, while many strategists and financial advisors talk about investing as a marathon, it is essentially a middle-distance discipline.
The economic recovery that began in 2009 has proven its endurance many times and is now the longest expansion in history. Our base case forecast is that it will continue into 2020 and probably beyond.
The week ahead, like last week, will be crammed with important market-moving events and data points. The challenge for investors will not be in predicting instant market reactions to this new information but rather in understanding how it could change the investment landscape going forward.
The formula in Hollywood today lacks imagination. It's all about remakes and sequels. Financial markets, too, are seeing a series of sequels and a few are opening this week.
In the financial landscape of 2019, the Federal Government and Federal Reserve are playing the parts of over-indulgent grandparents, the markets are cast as the over-stimulated grandkids and investors are left with the role of responsible adults, having to make rational choices and knowing that they will eventually have to deal with the consequences of too much stimulus.
On Wednesday and Thursday of this week, Fed Chairman, Jay Powell, will deliver his semi-annual testimony to Congress on the outlook for the economy and monetary policy. As he prepares, while he will focus on the clarity of his message, he may well be distracted by the potential reaction of political and market audiences.
My wife, Sari, is an excellent cook and sometimes, when I return from a long day, I'm met at the front door by the delicious scent of freshly-baked chocolate-chip M&M cookies. The problem is, with a pair of cookies eaten but a big pile of them still smiling up at me, can I stop at just two? The Federal Reserve faces a similar dilemma when it comes to rate cuts.
I should state, at the outset, that I do not profess to have any deep understanding of quantum mechanics. However, the U.S. bond market and the U.S. stock market seem to coexist in alternative realities today.
On Wednesday, the Federal Open Market Committee (FOMC) of the Federal Reserve will hold its fourth meeting of the year. The Fed is not ready to change interest rates yet.
Following Friday's May jobs report, and in reaction to slower growth, lower inflation and trouble in the global economy, the Fed is clearly taking a more dovish stance, making at least two rate cuts likely by the end of 2019.
Commercial interests dictate that the public must always be shocked or scared out of their complacency and so the "worst case scenario" will always get top billing.
Despite a better than expected outcome from earnings season, the economy once again appears set for a slowdown with second quarter economic growth potentially coming in at less than 1% annualized. Numbers due out in the week ahead should help clarify whether the slowdown is for real this time.
I ran in a local 5K race over the weekend. As the assorted participants milled around at the start, I noticed just how many of them looked on the young side. But this happens more often these days –every year there are more runners younger than me and fewer that are older. And so I huffed and puffed my way around the course, breathing in the dust kicked up by the heels of some young teenager in front of me.
One of the great lessons of history is to avoid slavishly applying the lessons of history. A particularly tragic example of this relates to the First and Second Gulf Wars. The relative ease with which U.S. and Allied forces dislodged Saddam Hussein from Kuwait in 1991 emboldened the U.S. to undertake the far more difficult task of overthrowing Hussein altogether and occupying Iraq 12 years later. Apart from its terrible human toll, the negative results of that second conflict are still being felt today, both in the U.S. and throughout the Middle East.
The U.S. economy of 2019 is, for the most part, a very healthy one and this is fully reflected in the valuations of stocks and bonds. However, it is a complex environment for the implementation of monetary policy.
The week ahead will see a flood of data which will amount to an all-systems check on the investment environment. The numbers are likely to be positive. However, for investors this should not be seen as a "go for market launch" but rather as a cautious OK for a more pedestrian advance.
Just over eight years ago, HBO launched its very successful series, "Game of Thrones," set in the mythical medieval kingdom of Westeros. The first episode was entitled "Winter is Coming," and we were warned that winters in Westeros were particularly harsh and could last for years.
For most of the United States, April 15 is the day when annual tax returns are due and every year, at around this time, the Tax Foundation announces "Tax Freedom Day." The idea behind Tax Freedom Day is to recognize that every year a sizable chunk of Americans' income goes to pay federal, state and local taxes.
In a narrowing road, it is best to stick to the middle. And in the spring of 2019, the U.S. economy is moving steadily down the middle of a narrowing road.
After a downhill cascade in the fourth quarter, global risk assets have staged a steep assent in the first quarter of 2019 and, this being the case, as we move into the second quarter, it seems like a good time for investors to think about the outlook.
In the golden age of Hollywood, before the era of special effects, the success of a movie depended to a large extent on the storyline. One frequently used construct was the wrongful arrest of an innocent person.
All my life, I have been running against clock and calendar. I pretend to hate the frenzy and wish for more flexibility. But the truth is, I couldn't really work any other way. Deadlines force decisions. Deadlines require efficiency. Deadlines provide clarity.
Friday's Jobs report was essentially "wheels down for landing" on this long economic expansion, as the economy tries to navigate a smooth transition from 3% growth to a more sustainable 2%. However, given the volatility in the data, the passengers are understandably nervous.
Should an overweight man, with elevated cholesterol, eat a 32-ounch steak? Probably not, you might say. Provided he stays comfortably seated in his chair, no short-term problems may ensue. However, in the long run, it is clearly risky and, even in the short run, some obviously negative effects are being masked by the fact that he is sitting, rather than engaging in vigorous exercise.
One of Charles Dickens’s most lovable characters, Mr. Micawber, offered a young David Copperfield sage advice on personal financial management. Spending sixpence under your income causes no problems, but spending sixpence over can set you on the road to ruin.
In the last scene of Sydney Pollack's beautiful movie "Out of Africa," two lions gather on the hero's grave and look out at the cattle on the plain below. It is a princely scene — an assumption that the animals below are somehow the property of the lions, to consume whenever they feel hungry. For some reason, I was reminded of this scene this week, as politicians from both parties decried what they saw as corporate bad behavior and proposed measures to fix it.
It is possible, I am told, for a person to function perfectly adequately for an entire day without caffeine. For myself, however, I need a large cup of Joe first thing in the morning, followed soon after by a second. In 2018, the American economy received a very strong cup of coffee, extra-bold Colombian, in the form of a tax cut.
Last weekend, I installed a new microwave in our kitchen. Based on the directions, it was going to be easy -remove the old microwave from the wall plate, replace it with the new one, and then use two anchor bolts to secure the unit to the cabinet above.
In his Notes on the Week Ahead, Dr. David Kelly examines the economic implications of the government shutdown, the peak of the earnings season, the January employment report, Chinese trade talks, weakening global PMIs and the first Fed meeting of the year.
There is a famous old John Wayne movie, set in Ireland, called The Quiet Man. It is, to be honest, not a particularly authentic portrayal of my native land, but the plot is strong and includes a long drawn out brawl between Sean Thornton (played by Wayne) and his brother-in-law, Squire Danaher.
The week ahead will be dominated by fourth-quarter earnings reports and increasing concerns about the damage being inflicted upon the economy by the government shutdown.
Last summer, as part of my long-standing goal to get more cultured, I read the novel War and Peace by Leo Tolstoy. While many people make fun of its extravagant length, it is actually a great yarn, full of wisdom, intrigue and the flavor of old Russia.
Every stock market correction is different, but the equity market swoon of the fourth quarter of 2018 seems particularly unusual in the disconnect between the fundamental forces driving markets and the change in markets themselves.
We wanted to wish you a happy holiday season from all of us here on the global Market Insights strategy team. Please tune in again next week for a new Notes on the week ahead.
Rudyard Kipling’s first qualification for manhood could equally be applied to the nerve required of the members of the Federal Open Market Committee, who meet this week to decide whether to hike interest rates for a fourth time this year.
Like the fishermen of old, many investors today are looking at relatively crude indicators such as recent market volatility or the shape of the yield curve to forecast the path for the U.S. economy and they have become worried by the behavior of both in recent weeks.
The week ahead will be dominated by a reassessment of risks which, for the most part, appear to be diminishing. In particular, markets should react well to some easing in trade tensions and greater clarity on U.S. monetary policy.
"Hey, Toreador!" Buzz yells. "She signals. We head for the edge … and the first man who jumps is a chicken!" In 1955's "Rebel Without a Cause", the most celebrated movie in James Dean's short career, two troubled teenagers drive stolen cars through an alley of headlights and off a bluff near Los Angeles.
This week, families and friends all over America will be sitting down together to celebrate Thanksgiving. In many homes, there is a tradition of going around the table, with each person saying what they are thankful for. In most homes, I suppose, the answers will be genuine, sometimes funny and sometimes profound. However, if at any table, prosperity is mentioned as a blessing, it should be recognized that this is, in large measure, due to low inflation.
The October unemployment rate, at 3.7%, is at its lowest level since December 1969. Continued unemployment claims last week, at 1.623 million are at their lowest since July 1973. And job openings at the end September totaled over 7 million, which, except for August, amounted to their highest level on record going back to 2000.
The week ahead will be a busy one as investors process the implications of recent strong economic reports, the Federal Reserve holds its seventh FOMC meeting of the year and the nation votes in mid-term elections on Tuesday.
A financial nor'easter blew through global stock markets in October. Through last Friday, the S&P500 had fallen 8.7% for the month, the MSCI EAFE had declined by 9.9% and the MSCI EM had dropped by 10.3%.
Last Friday, as we often do on Fridays, my wife and I had dinner at Legal Sea Foods in the Burlington Mall and afterwards, we strolled around the mall, ice cream in hand, watching the comings and goings.
It’s early Monday morning and I have writer’s block. This is a little frustrating because I should have lots to write about. Last week saw a surge in volatility with the S&P500 falling by 5% on Wednesday and Thursday combined. Even with a rally on Friday, large cap U.S. stocks have now fallen in seven of the last eight sessions.
The great detective stands in front of the drawing-room fire, twirling the ends of his moustache as he ponders the Case of the Rising Rates. He knows who committed the crime – but what to do about it? He surveys the four suspects arrayed on the sofas before him, Inflation, Growth, The Deficit and The Fed. He clears his throat.
I have flown enough over the years to have experienced most normal things that happen on planes. From time to time, I’ve been on smaller, regional jets and when, by chance, they are only half full, I know the routine.
It is some years now since I have been a regular patron of our local arcade, but I have always been fascinated by the financial transactions by which it is maintained.
A few years ago, I read a tragic story in a local newspaper about a young man who was walking along the train tracks with his earphones blasting loud music. Far ahead, he could see a train hurtling towards him and people on the side of the tracks were yelling and waving to get his attention. He ignored them, he had plenty of time to move … and then he was instantly killed by a train coming the other way. As we head towards the mid-term elections, America is bitterly divided politically, and many investors worry that "Chaos in Washington," variously defined, will cause the market to crash.
I was in a meeting recently discussing asset allocation when a much-esteemed British colleague suggested that a certain strategy was like "fixing the roof while the sun shines." Growing up in agricultural Ireland, I had always heard something slightly different, namely that you should "make hay while the sun shines." Truth be told, the sun so rarely makes an appearance in the British Isles, that when it does, the temptation is to down tools, grab a book and a beer and soak in the rays.
Like most people, I have my minor obsessions, and one of them is a never-ending quest to run faster. A few weeks ago, I saw a story about some running shoes that would let you run 4% faster (or rather use 4% less energy when running which amounts to roughly the same thing). I had to get a pair.
I get to fly far more than I would like for my job and air travel today in the United States is no picnic. Everyone talks about the hassle of the security lines. But the real problem is the boredom – sitting for hours in a seat with little contact with the outside world or useful distractions. However, the one advantage of a long flight is that it does give you time to think.
When I was in school, one of the most agonizing periods was the time between taking an exam and getting it back. This strange, uncomfortable time would end in one of two ways. If I did well, it would generate a sort of positive momentum for my studies. On the other hand, if I did poorly, there would be an element of discouragement that weighed on my desire to engage. The U.S. economy submitted its July exam a few weeks ago; this week, we’ll get our first peek at whether the solid U.S. growth momentum seen in the second quarter carried over into the third, and what it might suggest for the broader trajectory of global growth.
I am, I suppose, somewhere in the middle of the pack when it comes desk organization. Somewhere, that is, between a "compulsive." whose desk is clean except for a small symmetrical pile of papers beside a cup of well-sharpened pencils, and a "chaotic." whose workspace looks like the emptied-out contents of a half dozen waste-paper baskets. The problem, of course, is how to impose some organization on the mountain of things you really should read or think about. I mean, where do you even start? I used to have the same problem when it came to describing the U.S. financial environment.
My father was, for want of a better description, an Irish Victorian Dad. As such, although he cared deeply about all his children, he usually shied away from direct conversation about personal subjects and tried to get his point across in other ways.
The key to a successful career in economics, as in weather-forecasting, is never to be too precise. In the middle of winter, you won’t hear a meteorologist forecast five inches of snow for Central Park. However, she may well tell you we will get between four and six inches – her forecast thus indicating both what she expects and her personal doubts regarding that expectation.
"Ahem….I'll just leave the bill here, then. No rush at all – please take your time." The obsequious waiter leaves the check on the table but the Sopranos, loudly enjoying an excellent dinner, ignore it entirely and demand more lobsters. Paulie orders some champagne for some women at a table in the corner. There is some question as to who will, in the end, pay the bill. But for now, no one pays attention.
We live in an age obsessed with healthy food choices and I am at an age when I should be making them. However, on Saturday, I threw caution to the wind and walked down to our local pizza shop to pick up dinner.
The week ahead should provide plenty of evidence of a continued heating up of the U.S. economy. The ISM and Markit surveys on Services activity should remain at strong levels while International Trade data, due out on Friday, could add to evidence of roughly 5% real GDP growth in the second quarter. Payroll Employment, also due out on Friday, should show a healthy, roughly 200,000 job gain with the Unemployment Rate potentially falling to a fresh 48-year low of 3.7%. Meanwhile, the Average Hourly Earnings of production and non-supervisory workers could accelerate to growth of 2.9% year-over-year, suggesting that the labor shortage is finally putting some upward pressure on wages.
With most of the planet glued to the World Cup, I’ve been trying in the last few days to revive an interest in the beautiful game that has lain fallow since my childhood. Like baseball, the more you watch it, the more you realize is going on and I sometimes pity the job of the coach who has to drink in and analyze all the action in the first half and then find some way to explain it to the team in a distracted 15 minutes of halftime.
Every year, my wife and I buy increasing amounts of stuff from their shelves but they never seem to want to buy what I have to sell, which is primarily investment ideas and speeches. I should perhaps mention that we also run deficits with Whole Foods, CVS, the cable company, the electricity company, the auto service guys and a myriad of other business.
Marathon running is not, generally, much of a spectator sport. Not a lot happens for over two hours until someone finally crosses the finish line in jubilation. However, well before that point, the race is usually decided by a contest between a hare and the pack.
A number of years ago, I worked for a Swedish asset management firm and this occasionally required me to journey to Stockholm. On these visits, I was generally impressed by the good humor and intelligence of my Swedish colleagues. I was surprised, however, by two things: The quantity of alcohol they could drink at night and the amount of strong coffee they could subsequently consume the next day.
It's 4:30 p.m. and my plane has just landed at Logan. In 15 minutes, I'll be in my car but it could be two hours before I'm home. I live 20 miles from the airport but at this time of day there is just no fast way to my house. In short, my car is fueled for speed but there are roadblocks in every direction. Something similar could be said about the U.S. economy today.
One of the most annoying habits of American retailers is that they never let you enjoy the season you’re in.As the kids go back to school, they’re selling snow shovels.