In Homer’s epic “The Odyssey,” the hero Odysseus sets sail on his triumphant journey homeward after emerging victorious from the Trojan War. During his seaborne return voyage, he is confronted by two rapacious monsters in a narrow strait, Scylla and Charybdis. The deadly duo are existential threats each in their own malevolent way. To return home, believing he will resume his old normal life (no spoilers, but he’s in for a surprise), he must defeat each to pass through unscathed.
In the stock market (new all-time highs) and the economy (historically low unemployment), we echo a sense of triumph in overcoming the challenges posed by COVID and its near-depressive impact. Now, our focus shifts to reclaiming economic and market normalcy. Much like Odysseus, we may find ourselves surprised by the post-COVID reality, discovering just how different the new normal truly is. However, before facing this reality, we must first confront our own formidable rapacious monsters: recession and the threat of resurgent inflation—both looming nearby, though appearing to be at a safe distance for now.
In our analogy, Scylla is a recession. A six-headed monster, Scylla was anything but subtle. Given current high stock market valuations and the enormous levels of debt in our economy, I believe a recession would be deadly for the economy and stock investors. We advised against the crowd in 2023 predicting a recession (The Monkees Were A Big Hit In 1966-67. So Was Inflation (forbes.com) and Wanted Ice Cream Scoopers – $23/hr – Yes, The Service Economy Is Booming (forbes.com)), but we can still see that monster. How close is it? Can we sail past and steer clear?
Leading economic indicators, including the shape of the US Treasury yield curve, have been screaming caution for almost a year and a half. In fact, by June, we will be at the exact lead time (22 months) that the “inverted” yield curve (shorter-term interest rates higher than longer-term rates) presaged the 2008 debacle. Some of the economy’s most cyclical sectors are already experiencing job losses, a hallmark of a recession. When combining housing construction, manufacturing, trucking, and temporary help services, the economy has shed 237,000 jobs since its peak in October 2022 through February 2024(¹). This group of workers represents 20 million jobs. Although the recently released Nonfarm Payroll data brought an upside surprise, the household survey, released at the same time, revealed notable job losses. These two surveys—one focusing on businesses and the other on households, which is used for calculating the unemployment rate—suggest a cumulative over or undercount of 2 million. My macroeconomic antennae are on high alert.
So, should we swiftly take evasive maneuvers away from Scylla and recession? The Federal Reserve has taken their foot off the economic brakes and are now hovering over the gas pedal (go pedal for electric vehicles). However, accelerating too quickly could plunge us into the clutches of Charybdis—imagine a whirlpool—deadly but slower to act. That is the specter of reigniting inflation. The United States’ economic and market landscape from 1965 to 1982 was defined by the Federal Reserve’s failure to promptly eradicate inflation. This period painted a grim picture for both the markets and the economy.
Thus far, post-COVID, we’ve experienced a period of “immaculate disinflation.” By this, I mean we’ve managed to decrease the inflation rate from 9% to roughly 3% (a significant disinflation), all while maintaining a robust economy. This has never really happened before. So, again, like Odysseus, we are sailing through uncharted waters. But, even in January’s latest inflation report, we observed that services and housing inflation are still way above the Federal Reserve’s target and prior trendlines. I’ll have further insights on inflation following the February report this morning as well as the impact of Artificial Intelligence on longer-term inflation.
For now, I am still relying on the superpowers we received during COVID. Not only the vaccines, but also the unprecedented amounts of cash injected into the economy by the Federal Government. While this influx won’t endure forever and may likely entail severe long-term consequences, for now, both households and businesses are awash with cash. Sure, there are pockets of distress, but considering the proverbial cash on the sidelines, in aggregate, for both the market and the economy, I’m betting on our ship to continue navigating safely through the narrow straits for now.
Nevertheless, I’ll continue to keep a vigilant watch for both monsters since I can still hear them in the distance. Lastly, I can’t conclude without mentioning that gold (as discussed in Gold Can’t Be Downgraded and It’s No One’s Liability (forbes.com) and When The Gold Dust Settled (forbes.com)) recently reached all-time highs, and I anticipate further increases, along with an upcoming article detailing the reasons why.