Here we are, close to the end of another seemingly dysfunctional year. Admittedly, that sentence makes me sound like a grumpy old man. I suspect there is more than a bit of truth to that. After all, 2022 has been one of the, if not THE, most challenging years in my professional career.
I mean that quite seriously. This year has been a struggle in the markets, the economy and the headlines. On more than one occasion, I felt as though the clock had struck 13 somewhere. It is little wonder that so many of us, not necessarily yours truly, retreat into social media and its vacuity. Escapism.
Unfortunately, there is nothing in my crystal ball to suggest 2023 is going to be very different. To that end, I have almost run out of Windex cleaning the thing in hopes of seeing a bright future. I suppose I will have to keep trying.
Don’t get me wrong. There is nothing in the ether to suggest wrack & ruin absent some “black swan” event. The world isn’t going to stop revolving, spinning slowly down to die in 2023. The sun isn’t going to swallow Earth. We hope we won’t stumble into World War III. The U.S. economy will slow but it won’t collapse.
On the flipside, there is nothing currently to suggest the economy and the markets are going to rebound sharply. What is the impetus? An inverted yield curve heading into the New Year? Another 100-125 basis points of Fed tightening on the horizon? Already sluggish growth in the money supply? Conflicting economic and energy policies? After all, what will they be if the GOP wins the White House in 2024?
That is the thing with the U.S. economy. It is like a massive aircraft carrier cruising along in the middle of the Pacific Ocean. The thing doesn’t stop on a dime, and you measure its turn radius in minutes and miles. To that end, it takes about 10 minutes for one to go from full speed to so-called flank speed. In order to do that, you have to put the darn engines in reverse. After all, that is a lot of mass heading in one direction.
Essentially, an aircraft carrier’s propensity is to keep moving forward until something stops it. The same is true of the economy.
That is where we currently are. No one wants to kill the U.S. economy. However, the monetary authorities DO want to slow the growth in consumer prices. To achieve this, they are willing to forego a certain amount of economic growth. Put another way, the Federal Reserve is willingly slowing the economy in order to squash inflation. However, no one at the Fed wants to orchestrate a massive recession or depression in order to do so.
Going back to the aircraft carrier analogy, Jay Powell and his cabal are attempting to slow the thing from a cruising speed of 30 knots to, say, 15. It’ll conserve a little fuel and save the engines some wear and tear. Yeah, that about sums it up.
That’s where we currently are. If you are reading this, you probably already knew it, even if the nautical analogy was a little, um, different.
So, the question you might be asking is: “Why are you being such a downer today, Norris? Come on, man, it’s Friday and the holidays.” Fair enough. I am asking myself the same!
In truth, while investors supposedly hate uncertainty, they also sometimes hate certainty. Bear with me. You see, when the latter is negative, this is a miserable profession and there is no escaping being a moron to someone. Also, when the certainty is blah, so is the job, frankly.
When I turned on the computer this morning, there they were. The same headlines we have basically been reading for months. Sure, they might have said something different, but they told the same story nonetheless: “Stocks on Shaky Ground After Mixed Economic Data,” “US Producer Prices Top Estimates, Supporting Fed Hikes Into 2023,” “Russia May Cut Oil Output in Response to Price Cap, Putin Says,” and so on and so forth.
It was like déjà vu all over again. Is there any hope for change? For stopping or turning this aircraft carrier on a dime?
Fortunately, the answer is yes. An improvement in the so-called “rental equivalency of primary residence” will drive down the core Consumer Price Index (CPI) number. Basically, the Fed will be in a better position to quit tightening the screws on the economy when rents start to abate or go back down. Unfortunately for landlords, but fortunately for everyone else, this appears to already be happening to some small degree.
When this starts making its way into the inflation calculations, we truly might see the data turn over quite quickly. By that I mean it could turn on the proverbial dime and the Fed could be in for another problem: deflation. You read that right. I mean, at some point, the lack of growth in the money supply WILL find its way into the data. That is as clear as the nose on my face, for which I am having surgery at the end of this month for a ridiculously deviated septum. I digress.
So what is it, Norris? The same old same old and boring outcomes? Or a sudden shift in the inflation data that will force the Fed to change tack quickly? That doesn’t sound too boring, even if it DOES sound a bit dysfunctional and challenging!
Fair enough, where is my Windex? No matter what I see in my crystal ball, my hair won’t be turning chestnut brown in 2023.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist & Storyteller
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.