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The stock market has been pricing in the possibility of the Fed cutting interest rates – a Fed “pivot “, which, presumably, could drive higher stock valuations. However, the bond market is clearly pricing in a serious economic recession ahead. Signs that unemployment has hit bottom, and is now rising, have begun appearing in recent economic data, which, historically (since 1948) spells trouble for stocks, particularly in the first three months of rising unemployment. Here is the most recent chart for US job openings from the St. Louis Fed:

When businesses cut job openings, layoffs often coincide. Another leading indicator of unemployment, temporary help services, have been d...

2022 was a year that focused on inflation’s potential impact on financial markets and asset prices. It was twice as bad as the global financial crisis in 2008; nearly $40 trillion in stock and bond value disappeared.

2023 will be a year in which the second-round effects of that inflation and subsequent rate hikes actually materialize.

This will come at a time when central banks around the world are raising interest rates to slow their economies to tame inflation, and shrinking their balance sheets from having over-stimulated economic activity for the past 14 years. The global money printing press stopped in 2022; we should now expect growth and inflation to fall.

To fight inflation, the U...

The Fed is acting aggressively to control inflation, which came in far above expectations yesterday at an annualized 9.1% for the month of June. By raising interest rates in amounts larger than expected, they are hoping to cool off the economy by aggressively slowing it. This bodes for a lower stock market in the third quarter.

Unfortunately, the inflation we are experiencing is a supply issue, which the Federal Reserve cannot control. Even former Fed Chairman Bernanke said recently that “factors beyond the Fed’s control can contribute to inflation… Supply side forces are, indeed, important today – not only the increases in global energy and food prices...but also pan...

The first quarter was impacted by a hawkish Federal Reserve, a war in Ukraine, global supply shocks causing rampant inflation, and global risks intensifying.

The Federal Reserve’s tightening cycle is now fully underway, with the futures market predicting as many as 5 more rate hikes this year following a one-quarter point rake hike on March 15^th. The Fed is tightening monetary conditions into a U.S. slowdown, which is quite the contrary of what happened between 2016 and 2018.

Furthermore, the Fed announced an end to their “quantitative easing” program, which means that they will be draining $95 billion of assets from their balance sheet every month starting in May and reachin...

The predominant theme in the second quarter was inflationary pressure in the financial markets, and how this might impact the Federal Reserve’s policy decisions on interest rates. The inflation rate in May was 5% compared with a year earlier. Year-on Year price increases in almost all commodities have been very elevated, evidenced by the copper market (+51%), wheat (up 21%), US median home prices (up 23%), and oil (up over 50% this year).

The Federal Reserve believes that this inflation is transitory, and appears elevated due to the “look-back” effect, i.e., the fact that the basis of comparison was so low last March, April, and May.

In June, the Fed raised its expectations f...

Investors wondering why the stock market continues to rise as we face the worst economic conditions since the Great Depression need only look at the Federal Reserve’s balance sheet, which has increased in size by $3 trillion since February.

That represents printed money which the Fed is using to purchase Treasury bonds, mortgage bonds, corporate bonds, and asset backed securities, which brings the total amount of printed money to $7 trillion. In doing so, they have driven bond yields down, which justifies a higher multiple for stocks.
This is currently the only reason for a rising stock market. Markets have become completely divorced from reality, and stocks in particular are ignoring th...

2019 is likely to be volatile, but it is unlikely that the U.S. falls into recession. The one thing that could change that is if the partial U.S. government shutdown lasts long enough.

The shutdown is becoming more expensive than the very reason for the shutdown. The U.S. President signed legislation this week promising back pay for Federal workers when the shutdown ends. The problem is that the American taxpayer will then be paying for services which never took place at a rate of $200 million per day, or around $5 billion so far, which equates to the price of the border wall. Economists estimate the partial government shutdown is costing 0.1% of GDP growth to the U.S. every two weeks. We are...

The Sleep of Reason Produces Monsters- Francisco Goya, 1799

Investors enter the fourth quarter with elevated and asymmetrical downside risk until after the elections, likely subsequent interest rate hike, and probable market shakeout. There will be ample opportunity to reinvest at lower levels.

The U.S. election should be seen as binary, as the outcome is still uncertain despite any outrageous recent findings about the candidates. The financial risks of a Trump presidency are large, and Wall Street is underestimating the influence of the anti-establishment sentiment which may not be reflected in the polls. If Trump wins, there be sharp adverse effects on the stock market due to:

• His at...

S&P Global Ratings downgraded its forecast for U.S. growth this year, due to the Brexit vote and lower-than-expected first quarter growth. Chief Economist Beth Ann Bovino announced that she now expects U.S. real GDP to grow by 2.0% in 2016 (down from 2.3% in March) and 2.4% in 2017 (down from 2.5%). S&P now feels that the risk of recession over the next 12 months is now between 20% to 25%, up from 15% to 20% in March. S&P has revised its forecast downward many times for 2016 growth since last year, and yet, the stock market remains expensive due to Central Bank intervention. It should be noted that S&P’s outlook is still higher than the consensus view.

Brexit will certainly bring more...

(Artist: PepperAna, used with permission)

The economic landscape has become extremely complex, beyond the understanding of even many famous economists, so I will attempt in this letter to keep things very simple and brief.

The Federal Reserve and most other central banks have spurred an unparalleled rise in borrowing since 2009, and the debt has been used for unproductive purposes such as stock buybacks and mergers instead of research, development, and capital expenditures.

This is true in the U.S., Europe, Japan, and China.

As a result of these central bank policies, we have negative real interest rates in much of the developed world, which is without historical precedent, even going back to...