I did a radio interview this week.
I don’t do a lot of these things because it’s easier and more comfortable to talk about things in my podcast, but this sent me a great list of questions that I liked earlier.
Here are 6 of the best questions with some thoughts on each:
(1) What is your reaction to the latest CPI report and your view of inflation?
Inflation was basically flat from June to July.1
This is the first good news we’ve had about pricing in a while. You can see the power components finally soften significantly (via BLS):
Inflation at 8.5% over the past 12 months remains uncomfortably high, but it will take some time for that rate to recede, even if prices continue to slow in the coming months.
Clearly a single data point does not constitute a trend but the Fed’s moves along with some easing in supply chains seem to have helped stem the continued rise in prices.
Gas prices are down like 60 days in a row. Oil prices are falling. Used car prices are finally dropping.
We can build on this (I hope).
(2) Where does the Fed go from here?
It’s hard to know exactly what the Fed will do without knowing what inflation data will look like in the coming months.
Back in the summer of 2020, The Fed said they are comfortable with letting inflation escalate For a while if that means a more robust labor market recovery.
The job market is certainly in a better place than it was in 2020, but inflation is running above its 2% target.
Federal Reserve officials I’d say they haven’t finished raising the prices yet and I’m inclined to believe them (for now):
Minneapolis Federal Reserve Bank President Neil Kashkari said on Wednesday he stood by his view that the US central bank would need to raise its policy rate another 1.5 percentage points this year and more in 2023, even if it causes a recession.
Kashkari said at the Aspen Ideas Conference that the Fed is “far, far from declaring victory” on inflation, despite the “welcome” news in the CPI report earlier in the day that inflation may be starting to subside.
Kashkari said he did not “see anything to change” the need to raise the Fed rate to 3.9% by the end of the year and to 4.4% by the end of 2023. The rate is currently between 2.25% and 2.5%.
The Fed has waited too long to act and doesn’t want to look like fools again.
They care more about inflation than the job market right now, so they’ll probably keep raising rates until we get a few low inflation prints.
If they go too far, that should pose a risk to both the stock market and the economy.
(3) What does a soft landing look like?
Let’s start with what a hard landing looks like and work backwards.
Two months ago I looked at him What happened to the unemployment rate? During previous recessions:
The average increase is more than double from the lows. That could take us over 7% from the current 3.5% unemployment rate.
For me, a soft landing would see inflation below 4% or so without a proportionate rise in the unemployment rate. Its all-time low during previous slowdowns is just over 6%.
I would say anything of 5% or less for the unemployment rate would be a win if we could get inflation back to 3% or so.
What is the scenario in which this could happen?
The job market is in a strange place right now because there are more jobs than people looking for a job:
Those slots fell a bit, from 11.7 million to 10.7 million. The soft landing scenario that the Fed dreamed of would see these slots drop by 4-5 million but the unemployment rate does not exceed 4-5%.
Is this really possible?
History says no but employers have been dealing with a challenging employment market since the start of the pandemic.
Sam Ro wrote a thought-provoking article this week about the concept of Labor hoarding This is worth considering:
So what explains the current reluctance to lay off workers?
Perhaps the last experience has something to do with it.
Much of the ongoing economic recovery has come with an ongoing labor shortage. Employers have not been able to hire fast enough to keep up with the increasing demand for their goods and services.
At least, some employers who see business as slow now remember how hard it has been to hire talent over the past couple of years and would rather stick with employees, even if it comes to bearing costs.
In terms of convenience, it’s of course easier to hold on to workers during a slowdown or slump if you expect the contraction to be short and shallow.
Millions of people have been abandoned or shelved in 2020, making it difficult to re-employ once demand returns faster than businesses are used to.
What if employers retain more employees than in previous recessions if they assume the next employee will be a moderate?
What if companies don’t want to go through the hiring process again after a recession?
This is likely the best case scenario for a soft landing if the Fed causes a significant downturn in economic activity to control inflation.
(4) What is your general outlook for markets and/or recessions?
I wish I had a good answer to this question. Me, no.
We could go into a recession while the stock market hits all-time highs.
Or we can see the stock exchange tank even if the economy improves from here.
Sometimes these things don’t make sense.
My overall view has never helped my business much.
Sometimes my thoughts on the economics/markets have served me well. Other times, my thoughts about the economy/markets would have ruined my portfolio.
Here are a few secrets about investing that the professionals will never admit – you don’t have to predict the future to be successful in the markets.
Prospects are more beneficial to your ego than your performance in most cases as long as you have a reasonable investment plan.
(5) What can we learn from this downturn?
Since the beginning of 2020, the US stock market has fallen 34%, gained 120%, fallen 24%, and is now gaining nearly 17%.
In less than 3 years, I feel like we’ve lived every cycle imaginable – 1918, 1929, 1999, the ’70s, maybe the ’60s and some other parallel that I might miss.
everything In the markets periodically.
Things that never happened before happen all the time.
The biggest risks are always the things you don’t think about or prepare for.
(6) Have we reached the bottom in the markets?
I stabbed you in this Two weeks ago, the markets have risen further since then.
If inflation continues to improve and there is no external shock to the system, I wouldn’t be surprised to see new highs by 2023 (maybe sooner?).
But the risks of Fed policy error may never have been higher, so I wouldn’t be surprised to see more volatility in the coming months either.
If this is the bottom, it will be clear once we know for sure.
If the stock flipped again, that would also seem obvious.
This is the type of market we are in.
If stocks drop further, this could present a good opportunity to rebalance the pain.
If stocks continue to rise, you will just have to wait for the next correction to buy at lower prices.
Down or not, volatility is a feature of the stock market and will return at some point.
In-depth reading:
Every time it is guessed
1Technically it was 0.02% lower but I’m not a fan of decimals with economic data.