Notes on the Week Ahead

The Rollover Race between Growth and Inflation

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.

Recession Risks and Investment Implications

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.

The Keeping Cool Heads amidst Hot Inflation

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.

The Investment Implications of Food and Energy Inflation

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%.

Growth? Inflation? Recession? Principles!

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.

The Investment Implications of a Falling Budget Deficit

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.  

Slowing Growth and the Potential for an Extended Soft Landing

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.

The Dollar in a World of Worries

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.

Killing it Softly: How the Fed should Fight Inflation

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.

The Economy and Markets after a First-Quarter Roller Coaster

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.