*** denotes well-worth reading in full at source (even if excerpted extensively here)
Economic and Market Fare:
Why The Fed May Need To Go To 6%
......... In a recent blog post, researchers at the New York Fed led by Katie Baker contended that in the short-run r* “has increased notably over the past year, to some extent outpacing” the aggressive tightening done by the Fed in its current policy cycle.
That implies that “the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates”.
The higher neutral rate posited by the researchers is in sharp contrast to the Fed’s own assumptions as laid out in its June summary of economic projections. The central bank had assumed a real longer-run inflation forecast of 2% and a policy rate of 2.5%, consistent with a real neutral rate of 50 basis points. .....
..... The bottom line here is that if rates on the long end continue to rise, it will un-invert the yield curve…but not in a good way…
… Our conclusion is that we are likely in a longer business cycle than normal because of the record-setting stimulus distributed in the economy during and after the pandemic. The economy and jobs have been good but not at normal economic cycle strength. We believe that higher interest rates for longer will be needed to fight inflation, which typically shows up in waves. We are between waves now, but that doesn’t mean we can celebrate victory. Higher interest rates will eventually slow the consumer, industry and the economy. We continue to believe that a recession or significant slowing is in the future for the U.S. economy.
The “bear steepener” is just one more indication of that event forthcoming.
… The bottom line is that faster growth and persistent inflation are a recipe for the Fed to either move higher than the market now expects or stay at a higher level longer than the market expects, or possibly both.
In turn, we remain convinced that our call from the end of last year that the S&P 500 would finish this year at 3,900 remains a solid forecast. When we plug a 10-year Treasury note yield of 4.30% into our capitalized profits model, it spits out a “fair value” estimate for the S&P 500 of 3,126. We are not predicting a drop that low in stocks, but this method makes us comfortable keeping a target of 3,900.
In addition, we are not waving the white flag on our forecast of a recession and think the conventional wisdom has lurched too far and way too fast against the odds of a recession. Many investors think that with an unemployment rate of 3.5%, the economy is somehow invulnerable to a recession. But we think this theory is wrong; recessions almost always start when the jobless rate is at or near a low.
Recessions are ultimately about mistakes, about too much optimism given underlying economic conditions and the need for economic activity to adjust back downward. Consumers are soon going to be without the temporary extra purchasing power generated by COVID spending programs. Meanwhile, businesses are facing labor costs that continue to escalate faster than justified by productivity growth while business investment looks poised for a correction. ....
More Than Half Of Small Businesses Believe The US Is Already In Recession
Quotes of the Week:
Kelton: Who in their right mind wouldn’t prefer an economy with 3.5 percent unemployment and 3 percent inflation to a collapse in the housing market and a full-blown recession?
MS US Equity Strategy: Our advice remains the same—stay more defensively oriented with a premium on earnings quality, FCF, and operational efficiency. This is not the same strategy as owning growth which appears to be more vulnerable than value at the moment given the aforementioned rise in rates
Charts:
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(not just) for the ESG crowd:
Murphy: Our Time on the River
A post from last year titled The Ride of Our Lives explored the game theory aspect of modernity: those who adopted grain agriculture and new technologies had a competitive advantage over neighbors who didn’t. The “winners” were destined to be those who followed the path that we now call progress.
In that post, I used the metaphor of a gentle stream turning into a swift river—by now a raging class-5 rapid—heading toward an inevitable waterfall as a feature simply built into the landscape from the start. In this post, we will examine this river more closely, pausing to pay tribute to the various tributaries that contribute to its estimable flow. I even drew a map!
Agency plans a ‘case-by-case’ approach that allows for flexibility, but critics say ‘this is not a new definition – it is a lack of definition’
Sci Fare:
Klaus Schwab, the Aspen Institute and others flip the meaning of a word that once meant the empowerment of populations against political elites
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