Welcome to 2024! Today is our second annual forecast where I say things that will not happen in the future. This is a very popular tradition this time of year amongst sports bettors, market analysts, economists, and astrologers. Oh boy, I think I just lost our Capricorn crowd, but we must push on. In preparation for today, I went back and read this same episode last year and sadly my dream for smaller government has not come true yet. Some stuff did and some stuff didn’t, but my general takeaway is that the can got kicked down the road yet again. We have been so deep in the weeds recently trying to decipher this everything rally, that I wanted to be less specific and more general today. We are sitting on unresolved issues, but our leaders are saying not on my watch. I watched a documentary once where they were interviewing George Bush, the W, not the HW, and he was scared that the financial crisis might turn into a meltdown, and he said something to the effect that if the choice was between Hoovervilles and printing money he would choose the not Hoovervilles. That’s a perfectly reasonable decision to make. He cared about his people. A president is also always concerned with their legacy, and I understand why he made the choice that he did. This was when Hank Paulson went on bended knee to Nancy Pelosi because without funding the banks’ ATMs were going to run out of money on Monday. This was 16 years ago, and we have only grown that little $700 billion “temporary” government nudge into $8 billion give or take a couple hundred billion. We crossed $34 trillion in debt yesterday, so we have that to be thankful as well. What if by caring Bush made a mistake. It is easy to say that he had to do this, or he had to do that, but I remember just two years ago and there was no one thinking that the US economy wouldn’t blow up with 4 or 5% interest rates. But here we are? What if Jerome Powell would have cared and said I can’t do that. Would America have been better off if we took our medicine in 2008, when the debts were smaller? It reminds me of the Civil War surgeons tasked with cutting off limbs to save the patient. Instead of a wooden leg, I am afraid we got the gangrene now.
Let’s look at the last year, I thought real estate market would have cracked and instead it froze. Transactions were down drastically because no one could afford the 8% mortgage rates, but no one was forced to sell either because of forbearance programs that hadn’t yet run out, credit lines that didn’t have to be rolled over yet for investors, and commercial real estate investors just held on for the Powell pivot to save the day. Powell hasn’t yet pivoted, but he has dropped hints. A frozen market is a market that hasn’t yet dealt with the pain that is needed to fix the market. No one wants to start the avalanche, not on my watch.
The stock market rallied last year with most indexes up double digits and the magnificent seven drove the chuckwagon through most of the year. What has been most interesting about this rally is that it has been multiple expansions meaning the price has grown more than the earnings with some AI exceptions etc. Case in point, look at Apple with flat to down revenue for 4 quarters yet the stock rose all year. I have mentioned it before but what happens when earnings fall? The P/E ratio grows some more, and the stock really looks overvalued. However, in today’s markets it feels, and this is a feel, from decades of observations, it feels more computer driven than ever before. The fear seems to not be present. If a market could take Zanax, then this is it. It just stumbles and bumbles around and isn’t concerned with wars, bond sell offs or elections. The last 2 months have been a sensational rally- over 20% in just two months and I was listening to the financial media say what are the chances of a blow off top? I thought to myself, what have we been watching?
Maybe I am mistaken and behind every computer and algo there is a human just as fearful and greedy as before, but what I do know for sure is that the data that people are using to make decisions is not good. The jobs reports are being revised down with little fanfare months later, the birth/death models are inaccurate, and the CPI well let me tell you about the CPI. I consume a fair amount of information each week and there are a couple analysts that are quite sharp on the surface and they make good logical analyses but then I see what they are using and they are like see, there was no change in the CPI. Every time I think, check your assumptions per Atlas Shrugged by Ayn Rand. Every time. If Americans are eating $10 steak and steak is in the CPI and inflation goes up and no one can afford a $20 steak, so they switch to eating $10 hamburger according to the CPI, there is no inflation. It is like measuring how many gallons are in a pool with a ruler. It never ceases to amaze me people using CPI. When you hear CPI, just double it. If you go to John Williams’ shadow stats, he does great work and just doubling it is pretty close. When people tell you that there was no inflation from 2008 to Covid, just look and you will see that it ranged from 7-10%. How do I know? When I used to take a flight I got a blanket, a meal, some booties for my feet and a friendly complimentary beverage, but now I get a plastic skin of a seat and an angry sky Karen demanding I pay attention in the video. Both cost $200 and the CPI says that inflation is flat. I expect more lies to come out of the data in the future because if the truth comes out then they can’t kick the can down the road anymore and today’s elected officials say that can’t happen on my watch.
What could happen is deflation for a while. If the CPI tells us anything, it is that we need growth because we must grow to pay our debt. Individual, corporate, municipal, state, and federal debts must be fed. The one thing that did happen last year was money supply shrank a bit, the Fed reduced their balance sheet a trillion dollars, and banks got themselves in trouble and they are hurting for deposits. Lending money into existence is what banks do and that has gotten more difficult and projects that work at 5% SOFR plus 3.5% ( a commercial lending interest rate) are few and far between compared to the ZIRP, zero interest rate policies of the near past. A small percentage of rich people own more and more of the productive assets in the country today. Wealth inequality has gotten more extreme so what can be done about it? Deflation. Politicians, economists, and banks are terrified of the word, but I have enjoyed lower gas prices this year versus last. I can even afford to splurge for an egg or two. The majority of people that don’t own assets would benefit from a housing crash, a stock market crash, and higher interest rates. Millennials can’t afford a first home when it is up 50% versus 2019, and lower rents would allow them to save more for a down payment. It is wise to buy good quality securities at low p/e ratios so a stock market crash would allow more people an opportunity to buy at lower prices. If a recession happens usually interest rates get cut, but if our government is having trouble selling debt because we are about two Chiquitas away from becoming a banana republic, then rates might have to stay high. If some poor person stumbled into their local bank and got a higher rate on a cd would that be such a bad thing?
Do you know who wouldn’t like it? Baby boomers with two houses, a bellyful of bonds, and a fat stock market portfolio. Banks that have loans that can’t be repaid would hate it. Private equity, which is hollowing out our businesses with their treacherous leveraged buy outs, would despise it. Governments that can’t balance a budget would also hate it because they might have to reduce spending. Businesses engaged in malinvestment would have to cease operations and capital could be deployed in a more productive way and they would hate that because credit rich entrepreneurs want to follow their passions and not their fiscal disciplinary needs. No, I would have to say most things got kicked down the road this year including my faith of Jerome Powell as our last Jedi. He pivoted or so they said about 3 weeks ago, but when the dot plot got released I saw a couple of stray dots off doing their own thing. They were much higher for longer. They would require pain if realized. If they belonged to old JP then he could make that happen and higher for longer and pain is what he promised us. People have been saying that politics got to Powell and that he is not going to do anything rash in an election year. They think he is beholden to Biden. I don’t think that is true at all. Powell is a rich man, and he didn’t need to come back for a second term, but he did because I think he wants to help America. I also think his nomination was held up by Biden as the democrats tried to get Lael Brainard in his position. That is the reason why he was late to start raising rates, but he started pivoting to higher rates and QT the day he was confirmed by the Senate. I think he thinks that Biden hurt his legacy. I think he is going to be stubborn this year. I think he will bluster and say we will wait to cut a bit longer and a bit longer. I think he has watched this stupid exuberance in the markets and rolled his eyes. He sees valuations after he has been warning about this for two years, and I think he sees families suffering from inflation and he is determined to wipe it out. I think he will take higher unemployment to do it, and I think he will become the most unpopular person in America by this time next year. But he will have my respect because that will take courage, gumption, and grit. Unlike George Bush, he will save the patient and cut off the leg. He will say the inflation and spending and gangrene stop now. Not on my watch.
Sincerely Yours,
C Thomas Printer
On this date in history…47 years ago to be exact, Apple computers was incorporated by Steve Jobs and Steve Wozniak.
Also born on this date, two legends of the entertainment industry, Italian filmmaker Sergio Leone, and television’s Winnie Cooper, Danica McKellar.
The Dow Jones finished trading at ….37,715.
The 10 year Treasury bond is at …3.94
The price of Brent Crude is …75.87
The price of gold is …2,071
The price of silver is …23.89
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.