Among the many comments on inflation in the minutes of the last FOMC meeting was the following, rather gloomy, prediction:
Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress on reducing inflation may need to come from further softening in product and labor demand with restrictive monetary policy continuing to play a central role.
Translating from Fedspeak: Several Fed officials worried that they might still have to trigger a recession to get inflation all the way down to their 2% target.
This perspective gained some support in Friday’s jobs report which showed a stalling out in a long trend of falling wage growth.  However, a broader analysis suggests that non-labor-market factors will continue to reduce inflation in 2024, giving the labor market time to normalize without the pain of recession.  While there are plenty of shocks or policy mistakes that could disrupt this path, the mostly likely scenario is a continued slide in inflation to the Fed’s 2% target without a near-term recession – an outcome that should support both U.S. bonds and stocks.

The Inflation Slide Looks Set to Continue

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I have never been blessed with any skill in golf.  However, I do have some imagination and so I can imagine a situation in which I am lining up a long and difficult putt.  With well-justified humility, I wince as I strike the ball, knowing it will miss.  However, even two or three seconds after sending it on its way, I realize that, surprisingly, I’m still not sure how it will miss – I can’t quite tell if it’s going to miss to the right or to the left.  And so, of course, the ball trundles its zig-zaggy way up to the lip of the hole, pauses, and then topples in.
 
Last week’s GDP report ignited angst on both sides.  Some worried that the economy was slowing too much, with recession in the offing.  Others saw too much inflation, requiring an even more aggressive Fed campaign to squash it before it begins to reaccelerate in a serious way.

The Right Track

Since the advent of modern financial markets, bonds have always had the reputation of being conservative – rather like an elderly family lawyer in a leather-bound chair frowning at more jumpy and excitable stocks.  Bonds would never make you rich.  However, they would provide you with a moderate, steady and dependable income. 
This reputation was challenged in the 1970s and 1980s by Treasuries yielding more than 10%, in the wake of high inflation, and the explosive growth of the high-yield market.  In the decades that followed, yields drifted down in parallel with inflation but investor excitement was maintained by a steady stream of capital gains as well as income.  However, once monetary easing hit its peak in the days following the Great Financial Crisis, high-quality bond yields fell to levels that promised very little income and, at best, modest capital losses, assuming yields eventually recovered.

The Causes and Consequences of More Volatile Bonds

Growing up in New England, our sons had a privileged childhood as sports fans and particularly as football fans. Between 2001 and 2020, the New England Patriots, coached by Bill Belichick and with Tom Brady at quarterback, competed in nine super bowls and won six of them -  a truly extraordinary performance in a league of 32 teams.  It is all the more impressive because of the NFL’s efforts to make the league competitive.  These include the salary cap, which forces all teams to spend roughly the same on their rosters, and the draft, which awards the top picks to the worst teams from the year before.
And yet the dynasty continued for almost two decades, with the Patriots winning many games that they should have lost due to their own confidence and their opponents doubts.  And the supposedly eroding effects of low draft picks seemed to have little impact on the team, as relatively unknown players found a way to win.

The Dollar Dynasty

Next Monday, I once again get to lace up my shoes and join my friends from the Dana-Farber team in running the Boston Marathon.  This year will be particularly special, as both of our sons are also running the race.
One of the advantages of being an older member of the team, (and I can testify to plenty of disadvantages), is that you accumulate advice that you can share with younger members, particularly those who are running their first marathon.  One such piece of advice is to drink before you are thirsty and to eat before you are hungry.
By the time you are thirsty, when running a marathon, you are likely severely dehydrated and low on electrolytes, causing, at best, a sharp deterioration of your performance.  By the time you are hungry, your blood sugar will probably be too low, making the rest of the race slow and painful.  In short, in long-distance running, one key is to make decisions before it feels like you need too.

The Right Time to Cut Rates

When I was nine, my father was elected to the Irish parliament and joined the new government.  Not long after that, my history teacher, a man of the opposite political persuasion, was expounding on the Norman conquest of Ireland and the attempts of the local Irish clans to wage war against them….”not like the “wage war” we have with the current government” he said, finding humor in a rather dull subject.  I, being an overly sensitive child, took this as a terrible insult to my father and promptly burst into tears, whereupon he sent me out into the hall for disturbing the peace.

The Inflation Slide Looks Set to Continue

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