When Georgia won the national championship, we all should have known 2022 was going to be a rocky year. Sure, that might be spurious correlation, and it is; however, the country seems to have staggered from one problem to another all year. Now that the first half of the year is finally in the rearview mirror, it is hard to look back and find some good news, in absolute terms.
This morning, my co-worker Janet was kind enough to bring me a cup of coffee as I was updating some spreadsheets our operations department uses. She told me she did this to break the negative mojo in the markets, and to start the back half of the year on a fresh, positive note. While I was sort of unclear on the symbolism, I was happy for the coffee and her kind gesture. So, I thought: “what the [heck], Janet’s cup of coffee WILL be the start of a wonderful turnaround in the markets and the economy!”
If only it were that simple.
Given the current zeitgeist, all news is bad news. If you aren’t exhausted by it, I might suggest you are prone to schadenfreude. Wow. I just properly used zeitgeist and schadenfreude in consecutive sentences. That alone is worth the price you paid for this newsletter.
Regardless, while the headlines have been portentous, the underlying news really hasn’t been. No, it isn’t all good, but it isn’t all bad either. If the definition of success is a “meat lovers” pizza, the recent economic data has been, say, a single-topping pepperoni. Not great, but better than no pizza and much, much better than a plate of liver & onions.
For instance, this morning, the Institute for Supply Management (ISM) released the “June 2022 Manufacturing ISM Report on Business.” ISM Manufacturing. The headline number was 53.0, which was less than anticipated. Further, certain elements of the survey showed signs of weakness, namely New Orders. Undoubtedly, this/these will be the focus of attention, the negative aspects of the report.
Perhaps it is Janet’s coffee working through me, but I found much to like in the data. First off, supplier deliveries are slowing down at a slower pace. In other words, they are improving, which suggests some of the supply chain issues we have been having might be abating. Second, inventories continue to climb, which means wholesalers and retailers are going to have to start unloading them at some point. That will likely lead to lower prices. Third, prices, while still high, are increasing at a slower pace. Finally, the backlog of orders are also showing signs of normalizing.
While all of the things I mentioned in the previous paragraph had a depressing impact on the survey, they suggest, or hint at, a slowing in the rampant inflation we have been experiencing. This is important, because there are two things bothering people: inflation and the Federal Reserve. Just how aggressive will the later be in crushing inflation? However, if inflation starts moderating on its own, the Fed won’t have to be as aggressive, right?
Anything to keep those pesky bureaucrats and their higher interest rates on the sidelines is a good thing. Even if it means having to collect crumbs from the economic table.
As hard as it is to believe when you are grocery shopping, prices will start to either go down or stop going up at their current pace of growth. That is a sure as the nose on my face. Even more, this will likely start happening far sooner than many doomsday prophets are predicting on the television.
I simply cannot fathom continued runaway prices with: 1) bloated inventories; 2) a slowdown in the money supply (M2); 3) an extremely strong US dollar (at close to a 20-year high); 4) the Fed already making money more expensive, and; 5) a tepid US consumer, as evidenced in this week’s 1st Quarter GDP report. GDP.
As a result, let’s just say the rumors about Jay Powell being the next Paul Volcker might be a little premature. Further, he might not have to be. The markets might just do the work for him, which is what they are supposed to do in any event.
All of this makes me feel better about the next 6 months. After all, if we can quell inflation on our own, the Fed won’t have to kill it for us. Ahh, yes. The rose colored tint in my glasses gives everything a nice, pleasant hue.
With that said, this weekend, as you are celebrating our great country’s birth, please take pause to remember its uniqueness among nations, all the more so back in 1776. Our form of government was, and is, unique, as is the heterogeneity of our society. Further, judging the foibles of our Founding Fathers through the lens of 21st Century mores and morals does them, and us, a great injustice.
Without great people, great countries wouldn’t exist. As we know, or should, ours is a great country, and the people who started it were brave and brilliant. Please remember that when you read the Declaration of Independence, which you should make a point to do this weekend. Further, and finally, really think about the wisdom of the words, and ponder how we can live up to their meaning.
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.—That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,—That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect (sic) their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”
That, my friends, is powerful stuff, and extremely good news with which to start the remainder of the year. Who knows, maybe Janet gave those guys coffee too, but I sincerely doubt it.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and thank you, as always, for indulging me this week. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
PS… if Thomas Jefferson can have a ‘typo,’ effect as opposed to affect, please indulge me occasionally. LOL.
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 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.