Tea Leaves
December 2022
“Give me a one-handed Economist. All my economists say ‘on the one hand…’, then ‘but on the other…” Harry Truman.
| Item | YTD Change |
| Dow Jones Ind Avg | -4.81% |
| S&P 500 Index | -14.39% |
| EAFE Foreign Index | -16.78% |
| Emerging Market Index | -21.08% |
| Barclays Agg Bond Index | -12.62% |
| 10-Year Inflation Forecast | 2.43% |
| Unemployment Rate | 3.7% |
*Market index data as of 11/30/2022
Economics is a social science that seeks to analyze and explain the production, distribution and consumption of goods. But unlike chemistry, physics, or biology, economics is a soft science. Whereas there is no disagreement among scientists that a water molecule is comprised of one atom of oxygen bound by shared electrons to two hydrogen atoms, economists can’t seem to agree on something as basic as the definition of a recession or full employment.
While technology, medicine, and astronomy have made incredible advances over the past fifty years, the field of economics seems to have plateaued, or perhaps taken a step or two backwards. The collapse of the Soviet Union and contrasting success and prosperity of western capitalism ought to have been the coupe de grace for socialism. However, Karl Marx’s ideas are alive and well in American universities as evidenced by a near-equal approval rating (with a free market) among millennials and Gen-Z. In fairness, their lack of confidence in western economic policies was likely further shaken when the top policymakers, Fed chair Powell, and Treasury secretary, Yellen, were not just completely wrong in their inflation forecasts, but seemed incapable of explaining the root cause. How can you possibly fix a problem when you don’t understand the underlying cause? And for the record; it’s the money supply.
Beginning in 2020 government mandated lockdowns jettisoned 23 million Americans from the workforce. Not surprisingly, industrial production collapsed by 17%, yet in the following two years household net worth increased by a remarkable 37%. How is this possible, you might ask? What sort of wizardry could increase wealth while simultaneously slashing the workforce by 14%?
Rahm Emanuel famously said, “You never want a serious crisis to go to waste,” and US policymakers clearly heeded his advice. It’s always in the nature of government to grow and the COVID virus provided the cover bureaucrats needed to do just that. In the three years prior to COVID, the federal deficit (revenues minus spending) averaged $.81T/year. However, between 2020–2022 the annual deficit tripled, averaging $2.43T/year, for a total of $7.28T. Furthermore, the Federal Reserve expanded the money supply by $6.3T or 41% during the same period. Thanks to the benevolence of Uncle Sam and Uncle Jerome, Americans felt richer despite policies that were antithetical to wealth creation. But what does any of this have to do with tea?
Truth be told, economists are generally about as successful at predicting the future as palm readers. However, I’d wager that over the past two years palmists fared better than the most seasoned veterans on Wall Street. But in defense of my peers, economists rely on certain indicators by which to assess the present as well as forecast the future. Keynesian government stimulus intended to counter the deleterious effects of the lockdowns overshot the mark, and not by a little. Excessive federal spending and money printing, which funded the $2.2T CARES Act, created massive distortions in the labor market, asset prices, interest rates, and perhaps most importantly, behavior. Lockdowns combined with stimulus checks produced pent-up demand not witnessed since the end of WWII, a phenomenon economists dubbed consumption shock. Consumers redirected dollars normally earmarked for restaurants, travel, concerts, sporting events, and the like initially to online merchandise, but then quickly shifted to home fitness equipment, home entertainment/streaming video services, home improvement, new cars, and most surprisingly, real estate. Periods of uncertainty generally produce a risk-off attitude, but as the old saying goes, don’t fight the Fed, and investors had no intention of being disagreeable.
In addition to changes in consumer behavior, the labor market was also affected. When you reward something you get more of it, when you punish something you get less of it. Hence, when unemployment benefits exceeded wages, people chose to stay home. While tens of millions of Americans collected unemployment, employees and employers ironed out the bugs of working remotely, effectively boosting wages by reducing commute time and associated costs. Zoom meetings were ubiquitous and casual Friday became casual every day.
Economists closely follow a number of data points, such as interest rates (yield curve), the breakeven rate of inflation, leading economic indicators, commodity prices, stock prices, unemployment rate, etc. Free markets (market forces) do a myriad of wonderful things, one of which is serve as a price mechanism, which allows the forces of supply and demand (as opposed to the government) to determine the price of commodities. Market prices, both spot as well as futures, provide invaluable data that allows economist to forecast economic trajectory. But interventionist government policies affect supply, demand, and ultimately, price levels, which in turn muddies the waters and makes normally reliable indicators less so.
Communism failed for the simple reason that a bureaucrat in the capital city had no idea what to charge for a loaf of bread, a gallon of milk, or a jar of peanut butter. Furthermore, they don’t know whether to bake a loaf of white, wheat, or gluten-free bread. Low-fat, whole, soy or almond milk? Creamy or crunchy? How much should they produce of each? And how would they know how much is a baker, farmer, or engineer is worth? They wouldn’t. But the market does. Except, of course, when government interferes with market forces, which it did in an extraordinary manner over the past two years.
The post-pandemic spike in inflation, price volatility, collapse in real wages, supply shortages, and countless other factors aren’t due to the COVID virus, but rather overzealous government remedies. Which brings me to the point of this month’s missive. Economists struggle to accurately prognosticate the future during “normal” times. Considering government threw everything, including the kitchen sink, at the wall to see what stuck, historically good indicators of economic trajectory are no longer so. Hence, with unprecedented government stimulus still working its way through the system, reading the tea leaves will be extremely challenging, so don’t be surprised to see wildly contradictory economic outlooks for the foreseeable future.
Mark Lazar, MBA
Certified Financial Planner™
Pathway to Prosperity
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