False Flag of Stagflation and the Goldilocks Economy

Stagflation, that delightful economic conundrum where growth grinds to a halt while prices soar, has a rich history. First whispered in the corridors of Britain in 1965, it truly hit its stride in the groovy 1970s stateside. The ’70s, a time when bell-bottoms were in vogue, disco ruled the airwaves, and the Gold Standard was kicked to the curb as demand went bonkers thanks to a surge in baby boomers hitting their spending prime. As the ’70’s US economy adjusted to supply shortages and prices shocks of a rapidly depreciating US Dollar, we suffered violent economic swings with persistently high inflation during periods of economic contraction.

Fast forward to today, and we have a chorus of Chicken Littles squawking about stagflation, plucking headlines like ripe cherries to stoke fear and boost readership. Credit card defaults, rising unemployment claims, and bouncing producer prices – these are the latest harbingers of economic doom, they say. But hold your horses, for the sky is not falling just yet. We see no hint of inflationary stagnation ahead as the rate of price increases are returning to normal and the economy continues to grow at a healthy pace. In fact the biggest push on inflation has been housing, which is being pushed up due to the higher for longer interest rate policy of the Fed that is keeping the majority of home inventory off the market.

Last week the concern du jour was focused upon the spike in unemployment claims reaching 8 month highs. Unemployment claims may have spiked like a bad soufflé, but let’s not lose our heads. The job market and unemployment rate have been as snug as a bug in a rug for nearly 29 months. Even with a recent uptick in jobless claims, we’re far from hitting the panic button and remain in a Goldilocks economy.

Zooming out a bit, we find that initial claims are still singing a historically low tune. We’d need a real doozy of a spike over 350,000 before we start dusting off our recession handbooks. The more critical continuing claims are behaving themselves too, hinting that job seekers are getting back on the horse in no time.

 The 4 week average of continuing claims would need to move close to the 2.8 million level before we would wave a recessionary red flag. The water in the labor pool is shallow, so it would be normal to see job hiring slow down as the quality and quantity of workers degrade, even in a strong economy. So, let’s not get too worked up over a few ripples in the labor market pool.

 Job vacancies are dwindling, but at 8.5 million, we’re still a a couple million workers short of a full deck. Wages are marching to their own beat, with hourly earnings strutting their stuff at a healthy clip. The Federal Reserve might prefer a slower dance of 2% core PCE, but hey, Powell has moved the inflation needle 80% towards its target. Nothing to be alrmed by, right?

As mega-cap companies ride the AI wave to glory, spare a thought for the little guys. Small businesses are feeling the squeeze too, with tight labor conditions and wages on the up and up. But fear not, for the horizon holds promises of labor normalization and wage moderation. Fed Chair Powell’s crystal ball seems to be on point – inflation’s on a downward slide, and rate cuts are on the horizon.

 As our past reports have illustrated, services and owners’ equivalent rent (OER) are propping up current inflation metrics like sturdy pillars. However, the winds of change are blowing according to the falling apartment rent index proxy which implies that OER will keep falling. When OER falls far enough, the Fed will ready its rate cutting scissors. Lower rates will swell exisitng home  inventories and pressure home prices lower (2025/2026). 

With the Fed swearing off rate hikes like a dieter swears off carbs, and a healthy economy keeping wallets plump, investors can breathe easy. A 10%+ stock market panic is statistically expected over the next 12 months, but there are numerous profitable tailwinds to move our portfolios higher. A trillion in Corporate stock buyback money is sloshing around like a tipsy sailor, consumers are sitting on a $6 trillion mountain of cash, and household net worth has shot up like a $13 trillion rocket over the past 2 years. So, enjoy the show – the economic rollercoaster never fails to entertain. Next week, all eyes will be on Nvidia that will lead the market around by it’s collective nose. Don’t be surpised by another upward climax as NVDA heads for a $3 trillion value or a flood of buyers coming in after a quick sell-off. 

 

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