Notes on the Week Ahead

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The Economic Impact of Banking Turmoil Mar 20, 2023

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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.

The Investment Implications of a Demographic Bounce Mar 06, 2023

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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.

Investing Beyond The Profit Squeeze Feb 27, 2023

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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.

A Seasonal Surge (and its Implications for Jobs, Growth, Inflation and Rates) Feb 22, 2023

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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.

The Lurking Slowdown Feb 06, 2023

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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.

A Turning Point for the Economy Jan 23, 2023

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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.

Debt-Ceiling Danger Jan 17, 2023

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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.

Resolution and Confidence Jan 03, 2023

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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.

The Challenged Consumer Dec 19, 2022

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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.

The Investment Implications of the Oil Slide Dec 12, 2022

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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.

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Notes on the Week Ahead

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