[jmaccallum]

Recession or No, Where do We go?

Inflation is up to 9%. The Fed is hiking rates to slow the economy and slow demand. Unemployment is down to good levels. Wages are up significantly after the Pandemic. Supply chain deficiencies continue to plague, yet many corporate sales numbers are up, though profits are squeezed or gone. Consumers still have cash in their pockets from various stimulations. So, where do we need to go?

In the 70’s, inflation ran wildly free to mortgage rates of 18%. Nixon enacted his wage and price freeze only to have both jump dramatically when the freeze ended. Nobody wanted a recession, and so politicians were like a deer in the headlights. Paul Volcker, chairman of the Fed at the time, finally drove the country into not one, but two, major recessions at the time in order to break the cycle of inflation. Probably one of the biggest reasons Jimmy Carter never saw a second term.

The Fed, today, is seeking fiscal management that will result in a “soft landing.” An admirable ambition, but is it possible?

After the Pandemic, labor shortages were acute, requiring hiring incentives to include higher wages and bonuses. Where would this increase in business expense come from? Nowhere but higher prices. It has to. Unlike the government, businesses must make a profit in order to survive. We all know that, or do we?

Economics is complicated, but also simple. Supply versus demand drives a free market economy. However, manipulations are entirely possible. Hence the price of gas today.

Americans were handed a lot of money, in the form of Pandemic stimulus, with really no where to spend it. Everyone was locked down at home. So some remodeling was done, a dishwasher here and refrigerator or washer and dryer there. Things that could be ordered online and delivered with assurances of sterilized delivery. But the bulk of the on-hand cash sat pent up waiting for the “great re-opening.” And society re-opened. Consumers wanted to spend the cash burning a hole in their pocket. The only problem was, that as consumers had been locked down, so had businesses. Employees were gone, factories sat idle. Raw material orders had been put on hold or even canceled. Nobody cared to think that as long as it took to shut things down, it would take that long or longer to revamp the supply chain.

A perfect storm. And not many saw it coming. Higher wages, hiring bonuses, ample cash in the hands of consumers, people ready to get out and spend, shuttered supply chains that couldn’t supply goods to spend the money on. How could there not be inflation? Economics is complicated, but also simple. Demand outstripping supply. Inflation.

So what do we do now? Inflation is rearing it ugly head. Consumers have cash to spend. The fickle stock market is crying that the sky is falling, and the inverse yield curve for bonds is a reality. It does hurt that our portfolio that was worth $1.5 million is now worth $1 million, or less.

I say, let there be a recession of sorts. Cool the market and cool demand. Raise interest rates and slow the whole thing. Slow the housing market now and slow all other demand. It’s the only way to bust inflation. Sales will decline, wages will drop, unemployment will increase somewhat, and maybe consumers will continue to save rather than spend, just a little. But as with the other 37 recessions our economy has survived, we will survive this one, too.

The biggest question will be fuel prices. That’s a hard one to bust. Prices will probably never return to pre-level prices. Consumers will either absorb or look for alternatives. Hello, electric cars! Which brings a whole new fuel supply need and resulting debate. But maybe we’ll see Long Haul Truckers begin to be a dinosaur of a career that grandparents tell their grandkids about, as we look toward more communal distribution systems such as high efficiency rail, and local off-loading. Anyway, if it happens, it will happen in the background with few consumers involved nor aware. All of us just want the shelves filled at Walmart.

Any thoughts, and given the parameters, how to invest?