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“This reminds me of the late 1960s when we experimented with low rates and fiscal stimulus to keep the economy at full employment and fund the Vietnam War. Today we don’t have a recession, let alone a war. We are setting the stage for accelerating inflation, just as we did in the late ‘60s.”
Paul Tudor Jones

As soon as the GOP followed its long-promised tax cuts with damn-the-deficit spending increases (who cares about the kids, right?), you knew to be ready for the Lyndon B. Johnson reminders.

And it’s worth remembering that LBJ pushed federal spending higher, pushed his central bank chairman against the wall (figuratively and, by several accounts, also literally) and eventually pushed inflation to post–Korean War highs.

Inflation kept climbing into Richard Nixon’s presidency, pausing for breath only during a brief 1970 recession (although without falling as Keynesian economists predicted) and then again during an attempt at wage and price controls that ended badly. Nixon’s controls disrupted commerce, angered businesses and consumers, and helped clear a path for the spiraling inflation of the mid- and late-1970s.

So naturally, when Donald Trump and the Republicans pulled off the biggest stimulus years into an expansion since LBJ’s guns, butter and batter the Fed chief, it should make us think twice about inflation risks—I’m not saying we shouldn’t do that.

But do the 1960s really tell us much about the inflation outlook today, or should that outlook reflect a different world, different economy and different conclusions?

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Author Chris Martenson (The Crash Course, Prosper!) interviewed me last month for the website he runs with Adam Taggart—Peak Prosperity.

Chris and Adam definitely do not have their heads in the sand when it comes to myopic fiscal policies and roller coaster monetary policies, and the interview covered both of those topics, mostly in relation to Economics for Independent Thinkers.

Here’s a link to the interview, which was also picked up by ZeroHedge.

“Ya gadda have a praaacess”
– British portfolio managers mimicking their American colleagues

When long ago a former employer sent me to London to join the other Americans, or mostly Americans, building out its U.K. office, my job was to create a process. In institutional asset management, process was the American way. For sales presentations and especially dealing with investment consultants, you needed process charts that showed information flowing this way and that and, ultimately, morphing through its travels on the page into repeatable investment decisions. Those charts proved your legitimacy as an institutional manager—regardless of whether they described your actual decision making, they let the community know that you weren’t just a “bunch of gunslingers.” Essentially, you couldn’t build a business without your process charts.

But British consultants were different. They didn’t care so much about your process as they wanted you to knock them over with flair. They wanted imagination, story-telling, charisma. The process charts in your pitchbook didn’t matter as much as the command in your voice. In London, gunslinging was nothing to be ashamed of, as long as you slung with style.

So it all came down to process versus flair. Along with baseball caps and mismatched accents, the clash of cultures depended on which of the two qualities was deemed most important. And along with the accents, in particular, the contrasting approaches explained mimicry performed by amused Brits when the conference room door was comfortably shut or when the pub was crowded enough that voices didn’t carry. Ya gadda have a praaacess.

So today, I give you what else but a few pieces of process. Not a complete one, not even close, but I’ll share two dashboards that compare current stock market conditions to the conditions that shaped past market cycles. The dashboards can support your portfolio decisions, in my opinion, regardless of whether you’re a process Kool-Aid drinking septic or a flair fancying Anglophile. (For the same approach applied to the economy, see “Here’s a Strong Signal from the Economic Dashboard.”)

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If 2018 rings in a bear market, it could look something like the Kennedy Slide of 1962.

That was my conclusion in “Riding the Slide,” published in early September, where I showed that the Kennedy Slide was unique among bear markets of the last eighty years. It was the only bear that wasn’t obviously provoked by rising inflation, tightening monetary policy, deteriorating credit markets or, less commonly, world war or depression.

Moreover, market conditions leading up to the Slide should be familiar—they’re not too far from market conditions since Donald Trump won the 2016 presidential election. In the first year after Kennedy’s election, as in the first year after Trump’s election, inflation seemed under control, interest rates were low, credit spreads were tight, and the economy was growing. And, in both cases, the stock market was booming.

Here’s an updated look at Trump’s stock rally versus the Kennedy rally and subsequent Slide:


As you can see, we’ve now reached the chart’s critical juncture—at this time of the calendar in 1962, the post-election rally was ending, and the Slide was about to begin. Our chart begs the question: Will the similarities continue and lead us into a Trump Slide in early 2018?

Or, with less drama, you might like to hear my Q1 stock market outlook.

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We’ve been seeing more and more commentaries discussing bad stuff that can happen when the Fed tightens policy and, as a result, the yield curve flattens. (See, for example, this piece from Citi Research and ZeroHedge.) No doubt, the Fed’s rate hikes will lead to mishaps as they usually do—in both markets and the economy. But most forecasters expect the economy to expand through next year, believing that the Fed and the yield curve aren’t yet restrictive enough to trigger a recession.

We won’t make a full-year 2018 forecast here, but we’ll share one of our “dashboard” charts that supports the consensus view for at least the first half of the year. With one methodological change to a chart we published in August, we’ll look at the following indicators, which together have an excellent track record predicting the business cycle:

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In September, we proposed a theory of the Fed and suggested the FOMC will soon worry mostly about financial imbalances without much concern for recession risks. We reached that conclusion by weighing the reputational pitfalls faced by the economists on the committee, but now we’ll add more meat to our argument, using financial flows data released last week.

We’ve created two charts, beginning with a look at cumulative, inflation-adjusted asset gains during the last seven business cycles:

powell change 1

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