Are we Really Transitioning?
The Covid Pandemic that we have just experienced has changed the World in innumerable ways. From the permanent loss millions of families have felt to the economic upheaval we are still experiencing. You would think the World has seen enough of these defining moments but yet, we have another one. Along with Russia’s invasion of Ukraine, the news just doesn’t get much better. Day to day we are witnessing atrocities than most of us have never seen before (or failed to actually look).
The thing that ramps up the frustration is the fact that we have no actual control over events that may directly or indirectly effect our lives.
The rising inflation we are dealing with is a tiny bit more manageable since we do control what we purchase and how much of it we actually need. Families budgets are straining and some things will just have to wait and while it stinks, it is something we can control. You have a 100 dollars to spend during normal times and it goes towards X, Y, and Z. Now, with inflation, you buy X and Y and maybe half as much as Z. Not pretty, but most of us are working and most of us have income to spend. It just is being used a little differently.
Having lived through one other inflationary cycle I can tell you that we all survived. We all bitched incessantly, but we did survive. So, while it is not the best scenario, we can figure it out.
In this inflation cycle wages are rising at the fastest rate since God knows when. Those wage rises may not be keeping up with inflation completely but it is something.
Personally, I drive a tiny bit less, I go to Costco and buy the 50 gallon jug of pickles instead of the regular jar at the supermarket. So what if I toss 45 pounds of pickles in a year. I beat pickle inflation! The point is, inflation is here, we deal with it. The root causes have been explained over and over again and the bottom line is, those causes will be here for a while longer and we will just have to make the best of it.
The Fed’s efforts probably will work at some point in 6 to 9 months and I have made a case for rising interest rates in a rising inflationary cycle possibly having a negative effect on inflation so we will have to wait and see if their policies will be effective. My gut tells me that inflation ( and the prices they bring) would reach a tipping point with or without Fed intervention just because dollars eventually run out and people stop buying. Yup, recession.
We will be rolling into a recessionary period at some point just because the economy is like everything else, a pendulum, it swings too fast to growth, swings back to contraction or little growth. Been happening since the beginning of time and no matter who is at the helm it will happen once again.
The transition between a growth cycle and a recessionary cycle is usually described in the past tense. You never really know where that point is. So, you realize that you are in some sort of recession way after it has begun.
Inflation is more present. You feel it immediately and then you have guys like me that tell you that this real inflation (over a year and a half ago) when it is happening. A recession is not that simple and it takes months of data releases to realize, we are in one.
Thats why I think that that transition will be coming sooner rather than later and “soft landing” or not it will be here before you know it. I don’t have a crystal ball and I am not going to predict this transition precisely but my guess is that by the third quarter of this year we will start to see some signs and I imagine by 2023 the Fed will be fighting a new war.
It is inevitable however. I may be wrong but I don’t think there has ever been an inflationary period that didn’t end with some sort of recession.
Politically, this will be a disaster for the Democrats. Inflation has impacted their base more than the Republicans base. A recession will impact the Democratic base first and that should play out right around election time.
At the end of the day voters vote based on their economic situation.
But wait, you say. Trump was ousted during one of the most prosperous periods in American history (or it was up until the Pandemic came). I think that was more about a dislike for Donald Trump rather than a need for change in direction in the country. Had a more appealing candidate been on the Republican Presidential ticket, Joe Biden would be slinging hash at his beach house on the Delmarva Peninsula. The mid terms will end up proving this theory about the economy and voting preferences.
November is a long way off and things can change fairly quickly in this present landscape but save this column and look back later this year and see if what I said doesn’t play out just as I said. Timing may be off a bit but I do believe we will see that economic pendulum swing to the next phase of economic history.