Notes on the Week Ahead

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.

When future historians reflect upon the current age, they might call it “the worry years”. As America emerges from the pandemic, there are still serious health concerns, a yawning political divide, rising autocracy around the world, a brutal war in Europe and the highest inflation in 40 years. Moreover, anxiety triggered by these genuine problems is being amplified by cable channels and social media which ever more efficiently gather their audience by appealing to fear and outrage.

On Saturday, Sari and I made our annual pilgrimage to Kimballs for lobster roll. Kimball Farm, which started as an ice-cream stand in Westford, Massachusetts, has ballooned into a huge enterprise over the years and there was a big crowd lined up in front of us when we arrived. Undaunted, we traced our way to the back of the line and hoped it would move fast. It did not.

Whatever else anyone may say about Jay Powell’s much-awaited speech in Jackson Hole, it had two distinct virtues. It was clear and it was brief, running to just 1,300 well-chosen words. In the same spirit, and despite a sharp 1,008 point slide in the Dow Jones Industrial Average on Friday, it is important to be succinct in discussing both where the economy is and potential Fed policy going forward. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

The phrase “drawing a line in the sand” has an unhappy history. In the U.S., it is said to have originated with Colonel William B. Travis, who drew a line in the sand at the Alamo declaring his willingness to fight and die rather than surrender. In 2008, following the takeover of Bear Stearns earlier that year, federal authorities drew a line in the sand and let Lehman Brothers go bankrupt. And in recent weeks, Fed officials have seemed to draw a line in the sand on inflation. For the podbeam description, can we add the following line towards the end: “For additional insights from Dr. David Kelly, listen to the Insights Now podcast.”

Normally, the great challenge in talking about the global economy is finding a theme. The economic fortunes of nations are usually driven by such a disparate array of political, financial, demographic and environmental cross-currents that it is impossible to establish a framework for analysis. Twice however, in this still young century, events have unfolded to provide just such a theme as the world battled the global financial crisis in 2008 and the global pandemic in 2020. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

After weeks of steamy hot temperatures, a cold front is set to move through the Boston suburbs on Tuesday. While the relief will be nice, in truth, the temperature will only edge down from the low 90s to the low 80s. However, it is the start of something and, as we are well aware in this part of the country, longer-term forces will bring us much colder weather before too long.

The long history of financial markets, like most classic novels, is full of misunderstandings, miscalculations and mistakes. Despite all of this, the story normally twists and turns its way to a happy ending. This may yet be the case for investors in the very unusual economy that has unfolded following the pandemic recession and recovery.

When engaged in the more mundane tasks of my job, I often have classical music playing in the background. A piano concerto, in the hands of a great orchestra and soloist, is a delight to the ears as the rush and energy of the first movement gives way to the softer pace of the second. And when the conductor downshifts the tempo, the musicians follow with effortless precision.

Last Friday’s strong jobs numbers came as a relief to many who feared that the U.S. economy was quickly sliding into recession. On its face, the June employment report seems to support further aggressive Federal Reserve tightening, leading to higher U.S. interest rates and a further appreciation of the dollar, and offsetting forces impacting U.S. equities. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

One minor side effect of this terrible pandemic is that we have all become more educated on our own immune system. Looked at objectively, it is a masterpiece of evolutionary excellence. The outward signs of infection are normally easy to see – coughing, sneezing and obvious fever warn other humans to keep away, while our own exhaustion makes us less mobile and thus less likely to infect. The extraordinary havoc wrought by Covid-19 is primarily due to the virus’s ability to make someone contagious even before these symptoms appear. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

In times long gone by, a popular event at town fairs and school sports days was the sack race. The competitors would assemble at the starting line, each encased up to the waist in a burlap bag and gripping firmly onto its sides. At the gun, they would hop furiously in the direction of the finish line, 100 yards ahead. As a sporting contest, it lacked dramatic tension, with most of the competitors biting the dust in the first 50 yards. But it was entertaining to speculate on which brave athlete would roll over first. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

I refuse to believe, despite gathering evidence to the contrary, that I am getting older. This being my mindset, I am perpetually astonished by the increasing youth of my colleagues. According to the Census Bureau, the median age of an American today is 38 years which doesn’t, on its face, sound extraordinary. However, what it does mean is that most of the people I work with have only experienced two recessions in their adult lives – the recession of 2007-2009 and the recession of 2020. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

I have been on many delayed flights recently and have a certain sympathy for the pilots who, having repeatedly told us that we would be taking off shortly, have to continually backpedal due to weather or staff or equipment. They always thank us for our patience but in reality they are the patient ones. We, the passengers, are seething, and what’s more, we have suddenly become vocal experts on dodging weather, managing staff and fixing planes. But to get us safely to our destination the pilots have to keep their cool.

Following a solid jobs report last week, investors this week will turn their attention to inflation which, to say the least, has been more of a problem this year. We expect this Friday’s CPI report to show a 0.6% increase in prices overall and 0.4% excluding food and energy. On a year-over-year basis, we are looking for headline inflation to fall from 8.2% to 8.1% and for core inflation to drop from 6.1% to 5.7%.

My father, otherwise a very accomplished man, never learnt how to type properly. However, he compensated for a lack of skill with an intensity of application. As children, we would hear him behind the door of his study, pecking away at his Remington typewriter using only his two index fingers. In the afternoons, it would be a gentle, relaxed clicking, interrupted every 20 seconds or so by the merry chime of the carriage return bell.

Last Wednesday, the Treasury Department announced a record monthly budget surplus for April of $308.2 billion. The report elicited no noticeable market reaction, as investors continued to fret about high inflation today and slowing growth in the months ahead. However, a Federal Reserve recognition of the economic implications of a fast-falling budget deficit could hold the key to a recovery in recently battered stock and bond markets.

In the movies, in order to convey the passage of time, a director will sometimes film a scene as the seasons quickly pass before your eyes. With wistful music playing in the background, the snow melts from trees, buds blossom, leaves rustle in the summer sun and then turn yellow and red as fall arrives. It all, of course, seems a bit quick, but no doubt the movie has places to go and hopefully things will settle down for a while and allow the plot to evolve. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

In any given year, four big exogenous forces tend to have the most impact on portfolio returns, namely, earnings, interest rates, taxes and the dollar. While the tax environment appears to be stable, in all other respects, 2022 is shaping up to be a difficult year with slowing earnings growth and fast-rising interest rates. In addition, the dollar has risen significantly so far this year, as it did in 2021 and this is having negative impacts on both portfolio returns and economic growth. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Economic data in the week ahead should highlight a stumble in economic growth and a surge in inflation in the first quarter. While second quarter numbers will likely partly offset both of these trends, they will remind investors of the challenges faced by the Federal Reserve in trying to return the economy to a path of steady growth and moderate inflation. While some Fed officials have advocated very aggressive tightening, both the likelihood of near-term moderation in growth and inflation and longer-run disinflationary forces suggest it would be wiser for the Fed to take a slow and steady approach in battling inflation. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

A number of years ago, as part of a team-building exercise at an overseas conference, I got bullied into taking a ride on a particularly fearsome roller coaster. For someone who suffers from vertigo and is an admitted control freak, the next 90 seconds were not pleasant. Once the ride stopped, I stumbled out of the contraption. However, I could not proceed with our merry band of team-builders until I had done a serious inventory of the state of the world, starting with some rather fundamental questions. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Last Thursday, as I headed home from a conference, the car I’d booked to take me to the airport didn’t show up. Luckily there was a taxi nearby so I hopped in and discovered that, in addition to a comfortable ride to my destination, the fare entitled me to a free lecture on the state of the labor market. “The reason your car didn’t show up”, opined the retired police sergeant at the wheel, “is you can’t find drivers anymore. It’s the millennials - they just don’t want to work”. For additional insights from Dr. David Kelly, listen to the Insights Now podcast

Despite their best intentions, the Federal Reserve sometimes appears to be trying to steer a big boat, through violent rapids, armed only with a small paddle. The reality is that forces well beyond their control will mostly determine the fate of the economy. However, the energy with which they paddle could have a major impact on investments. For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

At 5:30AM on Saturday morning, Coach Jack posted on the team Facebook page – the training run was a go. Just as well. The Boston Marathon is now five weeks away and as a proud member of the gasping geezers division of the Dana-Farber Marathon Challenge team, I knew we needed to get in a long run. Between Covid and the weather, training has not exactly been easy. On Saturday, the forecast was for rain with the possibility of torrential downpours. But getting wet on Saturday was a better choice than waiting any longer for ideal training conditions. Sometimes, despite adverse conditions and uncertainty, you just have to get going. For additional insights from Dr. David Kelly, listen to the Insights Now podcast

In the week ahead, the world’s attention will continue to be focused on the horrific human consequences of the Russian invasion of Ukraine. However, American investors will also be considering what it means for financial assets. While the most severe economic consequences will likely be felt in Europe, the most important effects on U.S. portfolios depend on the implications of Ukraine for the U.S. economy.

Every winter, here in eastern Massachusetts, we are visited by Nor’easters. Each storm is plotted on weather maps days in advance. A low pressure area swoops down from the Rockies, gathers moisture in the Gulf of Mexico, rides up the east coast over the warm waters of the Gulf Stream and then stalls in the Gulf of Maine, churning itself into its full intensity. Every storm has the potential to turn into a blizzard. But whether it does or not depends on two things: First, what is the exact track of the center of the storm and second, how much cold air is in place before the storm arrives? For additional insights from Dr. David Kelly, listen to the Insights Now podcast.

Financial markets sold off last week as investors worried about a possible Russian invasion of Ukraine. Before engaging in any analysis of what this could mean for long-term investors, three broad points are worth emphasizing.

So far this year, the 10-year Treasury yield has risen from 1.52% to 1.93%. This increase has been accompanied by broadly lower equity markets, with value outperforming growth and international stocks outpacing their U.S. counterparts.

In the last few weeks, it seems everyone is playing Wordle. Each morning, a UK website posts a new game and you get six attempts to guess the five letter word. If you guess the right letter in the right square, the square turns green. If you get the right letter in the wrong square, the square turns a mustard yellow. If you get it all done in four tries the program says “splendid!” If it takes you six tries, it says “phew”. It’s a nice distraction in what we all desperately hope are the waning days of the pandemic. It’s also not particularly difficult, provided the right answer doesn’t include too many rare letters.

n Saturday, at an average home, on an average road in Maplewood, New Jersey, the realtors staged an open house. Even for a January, this was a rare event and parking was at a premium as dozens of mostly young couples lined up outside, braving cold and Covid. There was a whiff of desperation in the air as the multitude assessed its own numbers. The more experienced in the crowd, though well-armed with bank pre-approvals and hefty down payments, shared in the general pessimism, knowing that the property would go quickly and for well above asking.

Our baseline view of the world does not include a U.S. recession in the next two years. However, it is certainly possible, and investors would be well advised to consider what it might mean for their portfolios. With that in mind, it is worth thinking about what could cause a U.S. recession, the implications of such a recession for financial markets, inflation and monetary and fiscal policy and how assets would fare in its wake.

There is an old and much-quoted saying by the Greek philosopher Heraclitus: “A man never steps in the same river twice” – because it is not the same river and it is not the same man. A very similar observation could be made about investors considering their portfolios as the pandemic, hopefully, begins to wane. Covid-19, and the policy choices it triggered, changed the economic and financial landscape in a significant manner. However, it also changed investors, leaving them, for the most part, with larger portfolios but also with portfolios that are more seriously out of balance.

Growing up in Dublin, my parents were of the firm belief that the streets of the city were safer without David behind the wheel of a car. Consequently, I first learnt to drive in my early 20s on the backroads and highways of Michigan, with my future wife, Sari, as my instructor. There were a number of perils associated with this including my tendency to ignore all traffic signs when focused on the task of steering the car or my habit of stalling out due a chronic inability to synchronize the application of the clutch and the accelerator. It didn’t help that Sari would burst into a fit of giggles at the moments when I put us in the greatest and most imminent danger and was in particular need of quick and level-headed advice.

When our children were very young and they committed some transgression, we had a rule in our house. It wasn’t enough to say sorry. You had to say what you were sorry for. That way, we had some hope that they wouldn’t make the same mistake again.

Despite a disappointing gain in non-farm payrolls in November, numerous recent data points show an extraordinary excess demand for workers. This excess demand won’t persist forever. However, it’s important to understand its causes as this can provide some guidance on two crucial questions, namely, how long might it last and how will it be resolved. The answers to these questions can also help in assessing which asset classes could outperform in 2022 and beyond.

Financial markets tumbled last week as reports spread of a new, highly-mutated variant of Covid-19 which could be more contagious than the Delta variant and which could evade some of the immunity built up around the globe over the past year through vaccinations and infections.

The week ahead will, of course, be dominated by Thanksgiving, leading, appropriately, to less focus on financial markets. That being said, this should also be a week of greater clarity on fiscal and monetary policy. This clarity should reinforce the view that Washington aid will become considerably less generous in the year ahead, reducing inflation fears but posing some threat to recently very strong profit growth.

Financial market commentary in the week ahead will likely center around the question of inflation. The headlines speak for themselves. CPI inflation jumped to 6.2% year-over-year in October, its highest reading in 31 years.

My first summer job as a teenager was in the mailroom of a Dublin law-firm. The more intellectual duties of this position involved substantial paper-folding, envelope-licking and a daily fight with the franking machine. However, the important part of the job was buzzing around Dublin on my 10-speed bike (with the dropdown handlebars), delivering the mail directly to various law offices and clients and thus eliminating the inevitable delays of the Dublin postal service.

It feels like so long ago, but back in 2019, the economic and financial environment was remarkably placid. Real GDP growth was plodding along at 2.3% pace, unemployment drifted down to end the year at 3.6% and corporate profits were growing slowly from very high levels. Consumption deflator inflation was still running below the Fed’s 2% target and, in recognition of this fact, as well as market volatility at the end of 2018 and a sluggish global economy, the Fed cut the federal funds rate three times to end the year in a range of 1.50%-1.75%. While the political weather in America was stormy, the investment environment was remarkably calm.

Every summer since 1960, the World Lumberjack Championships have been held in Hayward, Wisconsin, a small community in the north west of the state. Among the featured events in this and similar gatherings is logrolling, where two competitors scamper furiously on top of a very wet and smooth log, floating on a shallow, muddy lake.

On Monday, I have the privilege of running the Boston Marathon for a third time on behalf of the Dana Farber Cancer Institute. I love being part of the team – despite many difficult personal stories, the volunteers, organizers and runners are a very warm and positive bunch to train with. Moreover, the research conducted by Dana Farber is critical to winning more of the millions of individual battles which constitute the war on cancer.

I remember the day when I first appreciated the importance of the American consumer. It was the winter of 1982 and I was huddled around a table with some fellow econ students in the cavernous restaurant of University College Dublin, gulping down the sinister brew which the authorities labeled as “tea”. As undergraduate students, we were fed a narrow diet of theory and math. But the Irish economy was once again floundering helplessly in the heavy wake of an overseas recession and the only relevant question was: when would the American consumer bounce back? I remember being very impressed when someone at the table started reciting the latest U.S. 10-day car sales numbers and asserting that a recent turn up in these data meant that better times were surely ahead for the global economy.

Like most people, I suppose, I get my hair cut every four weeks. If, either by consulting the calendar or the mirror, I am “due” for a haircut, I head off and get one. The passage of time or the growth of my hair since my last visit, is a very reliable predictor of the timing of my next one.

There is an old house with a box of dynamite in the attic. Every few years, for as long as anyone can really remember, the children of the house have brought the box downstairs and played games with its contents. The owners have never seemed very concerned – after all, so far, it has never exploded. But each generation of kids seems just a little more reckless and irresponsible than the last and it takes just one mistake……

The parking lot of our local high school is fortified by great ranges of speedbumps. These ancient mounds of asphalt were erected in the distant past by school authorities, presumably in tribute to the precision and focus demonstrated by our town’s youngest drivers.

Investors, in the week ahead, will have little time for financial analysis. The headlines will be dominated by the U.S. withdrawal from Afghanistan and the terrible impact of Hurricane Ida in Louisiana. Meanwhile families will be trying to stretch out summer days, while making all the adjustments necessary for a return to work and school in a still-untamed pandemic.