Notes on the Week Ahead

Where have all the workers gone?

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

Small Paddle, Big Rapids: What the Economy Could Do to the Fed

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.

Getting Going on Monetary Tightening

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

Ukraine and the U.S. Economy

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.

The Financial Backdrop as Ukraine Waits and Worries

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.

Ukraine: The Investment Implications of a Loser’s Game

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.

Interest Rates: How High and How Fast?

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.

Feddle

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.

Housing and the Fed

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.

The Recession Scenario

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.