It has been a bad start to September for the financial markets. The earnings reports portrayed a mixed picture for both the tech sector and the broad economy. Added to that is the upcoming presidential election. Markets do not like uncertainty. There’s plenty of it, and it’s not going away anytime soon.
“Sitting [in my office] on a Sunday afternoon… going to the candidates’ debate…” Read More »
The Fed seems destined to cut interest rates on September 18th. Chairman Powell and his colleagues have stopped talking about inflation and pivoted towards unemployment. What a shock.
The narrative surrounding the latest Powell pivot is squarely focused on what the Fed believes are the weakening prospects for the U.S. economy, with a clear focus on the full-employment component of their dual mandate. Many agree. Many do not.
Perry Capital anticipates an economy that will continue to expand — supported by healthy consumer spending, bolstered by a labor force that continues to grow and which has never been larger, and by a high level of household income, which has never been greater. This, along with robust government support in select portions of the economy, leads us to believe that growth, employment, and inflation pressure will all continue to surprise to the upside.
When the Fed finally started raising interest rates in March 2022, Mr. Powell reminded investors that the Fed’s primary objectives were full employment and stable prices. The Fed is now as close as it has been to achieving those objectives since the pandemic.
A balanced and patient Fed has been a stabilizing force in a chaotic world. Global GDP is rising, and headline inflation pressures in most countries appear to be abating. Perhaps the Fed’s duel mandate is on the verge of being realized.
Mr. Powell’s Fed last hiked rates in July 2023, yet the economy appears to be slowing more quickly now than it has since the Fed paused. Indeed, reporting to Congress last week, Mr. Powell sounded even more dovish than he did at the G7 confab 10 days ago. He seems convinced the Fed is succeeding in reducing inflation and is on track to reach its target objective of 2%. Maybe he’s right.
Being an economic thinker rather than a political one, I will say that all these elections seem to have one thing in common—voters are rejecting the status quo of imposed statism. They are rejecting the policies of excessive indebtedness and deficit sending. Voters know first-hand that slow growth and higher prices are pushing them further and further behind in their quality of life. The famous “misery index” is rising everywhere from Beijing to Tehran, Moscow to Paris, Berlin to London, and Washington. Most major countries across the world are in danger of debt death spirals. Voters everywhere know government bureaucrats are asking them to sacrifice more than they can bear. They want change.
Perry Capital is positioned for slower growth and higher inflation into the Summer. The economy continues to be supported by above-trend consumer spending from asset owners and way-above-trend increases in government spending. The Fed, or the Treasury Department, does not need to stimulate the economy, but it may do so to bolster the present administration’s re-election.
Perry Capital is positioned for slower growth and higher inflation into the Summer. The economy continues to be supported by above-trend consumer spending from asset owners and way-above-trend increases in government spending. The Fed, or the Treasury Department, does not need to stimulate the economy, but it may do so to bolster the present administration’s re-election.
“I didn’t have time to write a short letter report, so I wrote a long one instead.” Read More »
The Fed Won’t Cut Rates This Year. Most economists think they should. (Of course, they do! Most of them work for the government or on Wall Street.) But let’s face it, as calculated by the government, inflation for the average household is up 25% since it started rising in 2021. However, for most households, it feels much higher. The point is that inflation is not going to go down. The Fed doesn’t even want it to! Core PCE is rising at 3.5%, and it’s expected to rise to 4% by the election. The Fed’s stated target is +2%; inflation would have to be negative for a prolonged period to bring any relief to the average household.
“By all means, let’s be open-minded, but not so open-minded that our brains drop out.” Read More »
All three key US equity indices made all-time new highs for the week on the notion that economic data was softer. We saw:
1. A slowdown in housing activity. (Existing home sales were down -1.9 %, and New Home Sales were down -4.7%, albeit from near-record high levels.)
2. Languishing consumer sentiment surveys (which were at 100 pre-pandemic and bottoming at 50 in 2022) have slipped from 80 in Q1/24 and are down to around 68-69.)
3. Slightly lower inflation expectations (1 year from now nudged lower to 3.3%.)
4. But, most interesting is a notable pick-up in U.S. service activity (the PMI services survey jumped to 54.8 from 51.3), which is where the bulk of the inflationary pressure is causing the greatest damage to households and businesses.
Stagflation reigns. Slow growth (2.5%) with rising inflation (4%) — driven by the rising cost of labor (+5%) — is the very definition of a stagflating economy. This forecast remains the dominant theme for the economy, markets, and investors. Stagflation has been the Perry International Capital Partners (PICP) forecast for two years, and we continue to be more worried about rising inflation than we are about slower growth.
“I thought by now you’d realize, there ain’t no way to hide your lyin’ eyes.” Read More »
The extreme performance divergence between sectors on the receiving side of the stimulus is stunning. The businesses best positioned to benefit from spending by the upper and upper-middle class are thriving — just look at the share prices of your favorite credit card company; they are at all-time highs. Those most sensitive to interest rates and, thereby, the worst positioned for tight monetary policy are or soon will be flirting with bankruptcy. If you look at commercial real estate owners and their lending banks, you’ll see that their share prices are at all-time lows.
Economic data continues to surprise to the upside; the Citi surprise index was up again from last week (44.10 vs 39.0) and the January lows (0). It is above pre-pandemic levels, and the labor market is stronger, too. Unemployment is 3.7%, with claims falling and the number of available jobs rising.
The “peak Fed funds narrative” is all the rage. The risk rally off the October 27th lows completely overwhelmed the negative market inputs of persistent inflation, excessive indebtedness, deficit spending, weak political leadership, and increased fiscal and monetary stimulus.
75% of the Perry Capital Portfolio remains in AAA-rated, very short maturity, and very liquid securities.
I remain extremely underweight the equity market.
“You cannot escape the responsibility of tomorrow by evading it today.” Read More »
I remain 75% in liquid cash investments, which have a guaranteed yield to maturity of 4.625%. Given recent
events, and the expectation of forthcoming stimulus, volatility remains extremely elevated, sentiment is
schizophrenic, and investors are fearful.
“Capitalism without failure is like religion without sin. It does not work.” Read More »
I still have small positions in Silver and Bitcoin.
Given recent events, things may get even crazier before they calm down. Monday’s opening and the rest of
next week will be telling. As I cautioned last week, be patient and remain defensive; I suspect that most assets
you might be interested in buying will be available at lower prices.
“What’s the deal with bank runs? I mean, why are they called bank runs?” Read More »
I still have small positions in Silver and Bitcoin.
Play defense. Be patient.
“That men do not learn very much from the lessons of history is the most important…” Read More »