1st Quarter Update: Do Politics Really Affect the Economy?

We last wrote that the economy seems to be on a stable and moderate growth path. This remains the case despite the recent volatility in the markets caused by political pronouncements of fairly extreme upcoming policies. In the past I have repeatedly said that “politics” generally have little effect on the economy because the economy is vast and relatively immovable in the short term. Policy changes have a greater impact on the markets which tend to be very excitable. But, ill advised political policies tend to be self correcting over time as they morph into beneficial actions that positively affect the economy based on economics and real time feedback as the economy responds.

Having said that, the markets have been very volatile in reacting to the President’s policy announcements regarding trade and his envisaged role of government. His relatively extreme initial views have been modified and normalized due in part to reactions and feedback from the markets, his constituency and when the Courts curtailed some of his plans based on various legalities. It is not always bad to shake things up as long as one can gravitate towards positive reforms.

Year End Summary 2024 – Ongoing Modest Growth

Last quarter we wrote that the economy was sound on a solid growth path. Now despite recent volatility, we believe the markets too will continue to grow, that volatility will subside and growth will be modest. The sector rotation out of the high P/E growth tech stocks and into the smaller stocks in the broad market is ongoing, however, tech is, and always will provide higher growth ‘over time’. Inflation is slowly approaching the two percent target and interest rates are slowly falling, but as described below may remain at these levels for some time. Absent a credit crunch on the horizon, we no longer see a return to the historically low levels of the past decade.

2nd Quarter Update: Interest Rates Turning Down

The markets have entered a new period of high volatility and economists and market analysts are having a hard time coming up with a reason for it. We began the month of July with the markets racing ahead with 6% to 7% gains reaching an all time high, only to fall back drastically erasing most of the gains of both June and July. Our accounts all still have sizeable gains on average near 40% so far this year. We believe the markets will stabilize barring any major disruptive economic developments. We expect relatively modest market growth through the remainder of this year. There is evidence of market sector rotation happening whereby institutional investors are rotating out of the high P/E, high growth tech giants and back into smaller stocks in consumer, financial and utility sectors. The current market is probably not like the vulnerable tech boom of the late 90’s (yet) as this market, despite the recent high valuations has much more support from higher and growing revenues and earnings.

2nd Quarter Update Summary – Will it be Soft Landing or No Landing?

The markets and the economy seem to have completely shaken off the trauma of the dramatic increase in interest rates of last year. The market, and our accounts, since last October have shown excellent performance by recovering all of the 2022 losses while reaching new highs. Each week and each month, there is very little new and earthshaking news that would alter a strong and positive economic trajectory. The economy continues to perform moderately well. There is very little that would exacerbate inflation or cause a slowdown. Labor and employment remains moderately strong as ongoing job creation continues while historically low unemployment is barely rising. Housing remains moderately strong as housing starts, building permits and existing home sales have all been very steady even with elevated mortgage interest rates. Consumer liquidity and consumer demand continue to support ongoing durable goods and consumer goods.

1st Quarter Update Summary – Deficits and Infrastructure

The economy at present is finally emerging from our pandemic constraints. During March, employment was remarkably strong as unemployment continued to fall. The lowest interest rates in a century together with massive pent-up demand backed up by stimulus liquidity is creating a perfect storm for rapid short-term recovery and growth. There is little uncertainty that the pandemic will retreat. Our scientific knowledge base of mRNA techniques will grow and our producers will quickly refine and distribute vaccines for emerging covid variants as necessary. We may be looking at upcoming annual booster vaccine shots for these variants along with the seasonal flu.

Many people have expressed concern that the huge deficits will cause inflation and a subsequent collapse of the dollar. However, these massive deficit spending policies have successfully been deployed in our past but under very different circumstances, so let’s briefly review them.

Massive deficits (or money printing) were of necessity liberally deployed in the service of Continue reading 1st Quarter Update Summary – Deficits and Infrastructure

Do Deficits or National Debt Really Matter? No, But Yes Only in Rare Circumstances.

Anytime a given economy has excess unused labor or plant capacity, deficits and federal spending are essentially mandatory to revive and expand the economy. The greater the excess capacity, the greater federal spending (deficit) is required to employ that excess. The is especially crucial in times of economic stress where private money creation (bank lending) is either dormant or in collapse. In addition, the only constraint on money creation ought to be, and must be, inflation. And inflation, in monetarily sovereign economies generally is not evident in economies with excess labor, plant and resources.

Here’s some background to help you understand a little better:

During the Great Depression, a small recovery had begun in 1936. Unemployment had dropped from Continue reading Do Deficits or National Debt Really Matter? No, But Yes Only in Rare Circumstances.