Our Thriller Economy
Given my choice on movie night (when my wife gives me one), nothing beats a great thriller, one that keeps you on the edge of the couch and shouting at the characters on the screen. “Marie, please, I’m begging you; don’t go down into that dark basement,” for example. One of life’s great mysteries is what compels anyone would go down a dark set of stairs after half of their friends go missing. Flip the light switch. Grab a flashlight. Nor is it a great idea to investigate glowing red eyes peeking at you from around a corner. It never turns out well.
Not big into the movies? Maybe you get that same thrill from spectator sports. But, no matter how you get your thrills, I’m struck by just how much we’re at that pinnacle suspense point with the US economy. We’ve had our first big jump scare already, when Meta Platforms (nee Facebook) reported slowing user growth and the stock tumbled by close to 30%. For those who only occasionally tune into this game, here are some of the major themes I’m watching.
We’re already expecting interest rates to climb this year. The question is how high they will go and whether they will dampen inflation without killing growth. Banks’ forecasts are, predictably mixed, but the consensus calls for five hikes this year. Bank of America expects seven, while Goldman Sachs is expecting four. 1 Many observers, including me, believe the Fed is a little late to the party. Will its rate hikes go too far?
The Great Resignation
The US gross domestic product, a measure of the goods and services we’re producing, is at an all time high of 19.8 trillion dollars (in 2012 dollars). But, as eager as businesses are to continue expanding, they can’t find enough workers. Much of the growth is due to workers’ continuing to be ever more productive. 2 At some point, those gains will slow. Or will workers return as stimulus checks and loan deferrals dwindle?
With interest rates expected to rise, many yield seeking investors will return to the bond market, and much of that money will come from the stock market. Higher rates will also discourage speculative investors from borrowing money to buy additional stock (“going on margin”), which will also dampen demand. Higher borrowing costs also pressure profits of debt-dependent companies.
One last question on the broad market I’ll bring up is how much of the market’s recent run was built on speculative froth; will novice investors persevere or are they unprepared for a longer and broader decline than, say, the Pandemic Crash. Will those investors pull their money out at the wrong time and miss the good part that has always followed?
And the biggest cliffhanger of all
Are you sitting at the edge of your seat yet, dear reader? We’re at an interesting—no, riveting-- point in our economic history. There is any number of reasons to be concerned about some near term and intermediate term volatility (and, here’s a secret: there always will be).
As interesting as all those questions might be, I’ve saved the most important for last. The more dislocated the markets, the more opportunities there are for savvy investors to find great buys or some other timely moves. So I’ll close with this: what opportunities will you find?
Stay curious, my friend. And enjoy the movie.