Notes on the Week Ahead

The Remarkable Resilience of Corporate Margins

Last Wednesday, the University of Michigan released its final reading on consumer sentiment for November, with the index coming in at 61.3, up from its flash reading but down from October and worse than 92% of monthly sentiment readings since 1978. Meanwhile, the “misery index” for October, calculated as the sum of the unemployment rate and the year-over-year CPI inflation rate, came in at 7.1%, better (or that is to say, lower) that it has been 79% of the time over the same period. We continue to have a bottom decile attitude about a top quartile economy.

This general gloom may account for part of the recent buildup in retail money-market funds which have risen by almost 50% over the past year to over $2.2 trillion. While some of this is the result of outflows from bank deposits, much of it represents long-term savings that investors are unwilling to commit to long-term investments.

Falling Tensions in a Cooling Economy

If you do a quick google search on the phrase “tensions rising”, you get 230,000 hits. If you search the phrase “tensions falling” you get 3,700 hits. One of the cardinal rules of journalism is to only report on rising tensions and never improvement.

However, in recent weeks, there has been a quiet decline in tensions across a number of dimensions. This is being matched by falling inflation pressures and signs of moderating economic growth. After a turbulent few months, the economy seems to be back on the soft-landing track, a path that should support both the stock and bond markets and also allow the dollar to resume its stalled out decline.

Tracking the Inflation Slide

One almost unnoticed innovation in our modern world is the tracking app. Whether you’re booking a car service, enduring a long flight or just waiting for a pizza, with a click or two, you can find out exactly how long it should take the car, flight or pizza to reach its destination. These apps are useful for planning purposes and provide a level of reassurance that you are, in fact, headed to where you should be headed. A similar monitoring of the downward path on inflation can provide some reassurance that inflation is, indeed, on track to hit the Fed’s 2% target ahead of schedule.

Slowdown Delayed; Cooldown Ahead of Schedule

On August 16^th, 1858, the first telegraph message was transmitted across the Atlantic on a cable newly laid on the ocean floor. The line speed was slow and the cable failed a few weeks later but it was a start. By the late 1860s, a second cable, made of better material, was in operation and telegrams began to be sent more regularly, cutting the time required for transatlantic communications from weeks to minutes.

The Addicted Consumer

“We just came for one thing, too”.

Sari and I were meandering toward the checkout in a crowded Costco on Saturday morning and I was reflecting out loud on our accumulation of a substantial and diverse pile of goods, although we had come to buy just one thing. But we were not in the same league as the woman who’d overheard me. She may have come for just one thing too, but the lower rack of her cart was loaded, the little area at the front for babies or purses was full and the main body of the cart was stacked so high above her line of sight that her daughter was helping direct the vehicle to a checkout lane. Clearly the next innovation in cart design needs to be the installation of a periscope.

Investing in World of Increasing Complexity

Investors in the week ahead will likely be most focused on the aftermath of the terrible attacks in Israel over the weekend. The consequences of this violence are, of course, first and foremost a human tragedy for all the families affected and they are in our prayers at this time. However, an initial rise in the dollar and oil prices in response to these attacks serves as a reminder of the potential for conflict in the Middle East to impact the global economy and investors will need to keep a close eye both on the evolution of the conflict and its economic implications.

The Investment Implications of a Rising Federal Deficit

In an idealized world of medical practice, you would go to the doctor, describe a few symptoms, undergo a few tests and then listen carefully to the doctor’s diagnosis, prognosis and prescription. The diagnosis might well be due to something entirely out of your control and the prescription would often be a pharmaceutical. However, very frequently, the prescription would be in the form of advice on life-style changes. In an idealized world, you would take that advice and implement it.

The View from the Top of Tightening Mountain

To tell the truth, I haven’t done much hiking up mountains recently.  I did scale a few minor peaks, years ago, when our sons were in boy scouts.  However, it was always hot weather heading up and, between separating those young gentlemen who decided to fashion light sabers from tree branches and attempting to corral those whose first instinct was to chase into the woods after squirrels, it was a somewhat trying business.  The reward, for all, of course, was the view from the top and it was always breathtaking.  However, as you stood on the summit, things would cool off pretty dramatically and you had the sober knowledge that safely descending from the top is always a trickier proposition than getting there.

Worrying about Oil

My father worried out loud, broadcasting his concern about a wide range of issues, ranging from the suspicious surplus of toothbrushes in the upstairs bathroom and his children’s acquisition of strange accents to declining standards in public education and the ominous state of the government’s finances.  My mother fretted more quietly, sparing her vocal chords at the expense of her sleep. 

 

Unemployment and Wage Inflation

Finally, traditional indicators also may be missing the mark in predicting persistent inflation.  In particular, in the June Summary of Economic Projections, most members of the Federal Reserve’s Federal Open Market Committee in effect professed that an unemployment rate of 4% or higher was necessary to attain the Fed’s long-term objective of 2% inflation.  However, the unemployment rate has now been below 4% for 21 straight months and, yet, since March of last year, year-over-year wage growth has drifted down from a peak of 5.9% to 4.3% last month.