Rambling Thoughts On Where The Economy Stands And How Investors Should See The Situation -- June 22, 2023

If the market turns green today …

Locator: 45007ECON. 

I was delayed in blogging this morning for a variety of reasons. 

I'll get to the Bakken in a few minutes, but after going through the usual business sites, political sites, etc., earlier this morning, these are my thoughts on investing and the US economy.

Three overriding points:

• the US is in an incredibly good place;
• stay-flation, not stagflation.
• expect a very, very scary summer.

Expanding on these thoughts:

• the US is in an incredibly good place in terms of an expansive economy and full employment.
• JPow and the Fed will have more success in bringing the stock market down (bad news?) than in any success in bringing down inflation.
• if the Fed wants to "destroy" the stock market, they just need to keep doing what they're doing;
• hawkish talk
• raising rates
• my hunch: four more hikes this year, not two -- or at least credible threats to raise four more times.
• inflation will get worse before it gets better
• the market will really, really scare investors in August, and perhaps as early as July as the "bottom" appears to fall out of the market, going well below the "floor" most investors can handle emotionally or psychologically;
• once the market starts to fall, it will seem to go into free fall
• first, NASDAQ, then the Dow;
  
• the market's downward move will be at odds with an expanding economy
• the downward move will be driven by computer algorithms and misplaced emotions by humans
  
• once the downward move begins, talking heads on CNBC will continue "to talk the market down"
• it may or may not be a recession but for investors it will feel like a recession
  
• recovery of the stock market won't be in the cards for months
• the autumn of discontent
• stay-flation: not stagflation
• by the "true" definition of the word, this will not be stagflation:
• stagflation has three components including high (=10%) unemployment
• the other two components: contracting economy (negative GDP); high inlation
• in other words, inflation is just one of the three components of stagflation
• high unemployment is the big driver for government action in the EU and UK
  
• high unemployment does not carry the same weight in the US
• for the US, "inflation" drives government action
  
• this won't be "stagflation": this will be "stay-flation" -- one component: unrelenting inflation
  
• expanding economy
• unremitting inflation with a reset to a new normal (4% to 5%)
• low unemployment
• as usual, things will be made worse by "the government's" action, rather than by inaction
• just as with Covid-19: the government's response made things much worse than they would have been had the government stepped back a bit, rather than going the full Monty to stop the pandemic which was pretty much impossible regardless what the government did
• likewise, the harder JPow and the Fed try to reach the 2% inflation target, the worse they will make things
• folks will ask whether a hard landing (or worse) was worth it to get to 4% inflation as the new norm, once politicians / Americans see the impossibility of 2% inflation when the Fed is acting alone.
• the Fed acting alone, cannot get inflation to 2%
• too much money chasing too few goods
• too few goods: supply chain woes
• supply chain woes will be aggravated by the Fed raising rates
• pilots will understand this analogy: a flat spin --> is made worse by (inaccurate) pilot input --> fatal flat spin
• US economy is on fire, doing great; too many folks (e.g., JPow and the Fed) see a risk of the US economy going into the equivalent of a flat spin, and with by injecting inappropriate actions (i.e., "pilot error") will put the economy into a "flat spin" (hard landing)
• my hunch: there are Nobel laureates out there strongly advising JPow and the Fed to back off, let the economy take care of itself.
  

For investors:

• huge buying opportunities between now and end of September as the market resets
• long-term: investors will do just fine as long as they stay the course.