Notes on the Week Ahead

At his press conference on November 2nd, Fed Chairman, Jay Powell opined that the window for a soft landing had narrowed.  This was very much in line with his messaging for many months which has emphasized that the Fed regards inflation as being much too high and is willing to put the economy in recession, if necessary, to return it to its 2% target.  However, it also underscores the economic problem caused by “supply-shock” inflation: it simultaneously boosts inflation expectations, inducing a more restrictive monetary policy, and drags on economic growth.

At 8:30AM, on the first Friday of every month, the Labor Department releases the monthly jobs report.  By 8:35AM, the network scriptwriters deliver a verdict to the teleprompters – jobs either “sky rocketed” or “plunged”.  The job market is either “red hot” or “stalling out” and, either way, investors need to be worried.  No middle ground will keep an audience.

For many people, I suspect, 2022 will be a year to forget.  However, for millions of home-builders, home-sellers and home-buyers, it will be remembered for the speed with which a housing boom turned into a housing bust.  The reason, of course, has been a surge in mortgage rates.  These rates look likely to stay high, at least over the next year, contributing to sharp declines in housing starts and home sales and a negative impact on GDP.  Eventually, this could motivate the Federal Reserve to reverse course and cut rates.  However, mortgage rates are unlikely to fall to anything like the levels they maintained for the 14 years prior to 2022, while limited housing supply will probably prevent a collapse in prices.  Given this, it appears we are now entering an era when the decision to buy a house should be focused more on the finding the right home in which to live than the right asset in which to invest.

Markets bounced higher last week in a justifiable show of enthusiasm as the latest CPI data confirmed that inflation is indeed receding.  However, even as investors worry less about inflation they may well worry more about recession.  The risk of a near-term recession is climbing.  However, such a recession would be more like sliding into an economic swamp than falling off an economic cliff.  While a “swamp” recession wouldn’t be very deep, the economy would likely struggle to get out of it.  The good news for investors is that a prolonged period of economic swampiness should snuff out inflation and force the Federal Reserve to reverse a significant part of their 2022 tightening.

Among the many challenges of parenthood is trying to get your kids to eat healthy food.  As the children get older, the school lunchroom becomes one of battlefields, with some kind of weekly menu posted online or sent home with the kids.  Many of these menus appear to imply that the three essential food groups are sodium, fat and sugar.  However, some schools employ a little more imagination both in providing healthy choices and evoking some interest in the fare to come.  This week the lunchrooms in our own local schools will feature “Rocking Roll Ups” on Monday, “Healthy Half Days” on Wednesday and “National Sandwich Day” on Thursday, with vegetarian options available daily.  I’m not quite sure what all of that means but it does sound interesting.      

At the peak of the railroad boom of the late 19th century, the Framingham and Lowell line was incorporated to transport goods and passengers up and down the western outskirts of Boston.  Over the years, the traffic dwindled, the line was sold and resold and eventually abandoned.  However, for more than three decades now, some enterprising local citizens have pursued the construction of a bike trail along the old abandoned line, which is now, finally, mostly complete.

On many occasions in my adult life, I have made New Year’s resolutions to become fitter.  As the days of the old year gradually dwindled and my girth gradually expanded, I would commit myself to exercise more and eat less.  However, experience has taught me that both of these noble aspirations must be approached with moderation.  Any attempt to starve myself while running more miles leads inevitably to physical slowdown or breakdown.  Moreover, if I simply refuse to eat more, the exercise comes to a screeching halt.  

The Federal Reserve maintains strict rules prohibiting FOMC members from commenting on the economic outlook or monetary policy in the 10 days preceding an FOMC meeting or on the following day.  Thereafter they are free to speak and over the last two weeks many have opined on both subjects.  Their opinions show remarkable unanimity.  They are focused on bringing inflation back down to their 2% target.  They acknowledge the uncertainty in the economic outlook, and, as a consequence, they profess themselves to be “data dependent” and frequently quote, with furrowed brows, the year-over-year increases in CPI and consumption deflator measures of inflation.

A famous Sherlock Holmes story concerns the abduction of a race horse and a guard dog that didn’t bark.  For those who haven’t read the story, I’ll skip over the reason for the dog’s silence.  The point is he didn’t bark – no alarm was raised – no actions were taken - and the horse disappeared.

Entering the fourth quarter of 2022, the U.S. economy is teetering on the edge of recession.  However, it is a recession that has been delayed and potentially softened by an excess demand for labor, the lack of over-building in the most cyclical sectors of the economy and healthy bank balance sheets. 

In weighing the value of any security, the scales of financial markets are supposed to maintain a fine balance between fundamentals and price.  The plate of fundamental factors is piled high with macro trends, geopolitical issues, weather and environmental events, policy decisions and individual security attributes.  The other plate is far more sparsely occupied – price stands alone, accounting for half of any assessment of the opportunity and risk in the purchase of an asset.