How Did That Feel?
After Friday, I wouldn’t blame anyone for feeling some economic anxiety. An across the board selloff is never painless and what makes it even worse is all of the pundits that come out of the woodwork saying: A. They called it. B. Heres why it happened. Enough already with these supposed experts. To be honest, I probably fall in that camp a little since I have been calling for a correction since the Carter Administration and now it’s finally upon us. What a relief I say.
For those short term traders the pain was real and humbling and that is actually a good thing. Markets do not go up forever. They tend to, at some point, retrace levels and start over again. This is normal and healthy for most investors and while you can’t totally ignore it, you have some comfort in knowing that the longer term picture will be ok. I like the longer term so I am not panicked at all.
The pattern and the action we have seen so far this year will continue for a good part of the summer into the fall and you just need to heed the advice of professionals and keep one eye open for bigger signs.
Ah! Bigger signs. That is a broad, undefined term and like everything else I bring up, it needs defining.
In terms of bigger signs and larger economic issues, I think what most people are thinking about is the possibility of a recession coming on the heels of the Feds now more aggressive stance. Keep in mind that the Federal Reserve is meeting this week and the expectation is for a 50 basis point rate rise. Anything less will send a very bad signal about the Fed’s ability to deal with inflation. Anything more will send the exact opposite message and that might be devastating to the economy and market in particular. I don’t see anything like that happening but it could.
Ok, with the Fed’s move underway what will that actually mean for the economy and will it work to slow inflation? Generally, interest rate rises do eventually slow growth but it takes a while for that brake to actually impact growth and inflation will stay a bit longer.
Right now, pricing pressure is more to the side of the producer and as I have said numerous times, producers are taking full advantage of this environment and all the power is in their hands. Higher interest rates tend to reduce demand and return the pricing power back into the hands of the consumer and therein lies the next problem the economy will face.
The transition between a producer controlled economy to a consumer controlled economy is never easy. While the Fed may talk about a “Soft landing”, I really don’t think it actually exists because every previous transition from that high inflation period has produced a thud. Hard landings and recessions. It is going to happen, no doubt in my mind.
With a possible recession staring at us right in the face there is one very important factor that is mentioned in the periphery but is never actually linked to a recession. Housing. Keep an eye on all of the housing numbers and if a pattern emerges rest assured the bigger economy will feel its impact.
I brought this fact up over two years ago. There has never been a full blown recession when the housing market is strong. Watching housing starts and rental rates month over month you can see where the economy is going and until you see consecutive drops, you won’t have a recession.
We are starting to see that softening now. Mortgage rates are rising quickly. Yes, Housing price in many metropolitan areas are still rising but the rate of those increases are slowing. This is not an overnight event. It takes months to really get that true feel but it is worth keeping a keen on.
Now there are a number of readers who will come at me and say “You can’t have a recession with 3.6% unemployment and growth is still strong, excluding exports”. True, this will be a strange recession for sure. At first, some sectors will slow down and over time most of the economy will strop growing altogether. However, I don’t see this being an extended recession by any means. The factors causing inflation and the Fed delayed response will have mitigated and what some might call “Normal economic conditions” will return and that will be the end of that recession.
Oh, there is one major wild card as well, China. With lockdowns in major cities, production at the those factories that keep Walmart and Target humming is slowing down and that will continue to keep pressure on prices and supply. Another factor that gets very little attention is shipping in China. It seems that even if those factories are humming, the producers are having a hard time getting their goods to the ports because the lockdowns have been keeping drivers off the roads. It may turn out to be a blip but I think its worth keeping an eye on as well.
There will be some positives, sort of, to a recession. The first one will be the return of that generation that decided during the pandemic that they were better than their current jobs. This generation will realize like every generation before them, that to live the life they want to live takes money. Being on the sidelines searching for that influencer role in the South of France is a dream and the reality is, their parents want them out of the house and being productive. There is nothing productive about looking while unemployed. Reality sucks.
Another positive may be the creation of new businesses and new technologies to make the World a better place. I know this is a bit Pollyannish but one of the things about recessions and higher than usual unemployment is the amount of great ideas that come afterwords. Smart people do smart things and they create. A lot of that creativity comes when times are leaner than normal and maybe we will once again see an uptick in American ingenuity.