October 7, 2022

Different Perspectives

    Well, it’s out. The monthly employment data came out today and as is clear above, the actual percentage of Unemployed was lower than expected and the increase in Payroll was higher, not the best outcome. But what if it’s a better outcome than can be perceived without getting pushback? Namely, the markets, and participants (myself included), have been focused on the Fed’s explicit goal to hurt employment and thereby hurt inflation. In short, theses numbers suggest that the Fed is going to continue on its course to aggressively increase interest rates and continue on track to sell the bonds (Quantitative Tightening) bought during the pandemic. But is this time more different than the narrative suggests? Yes, as officially stated, the pandemic is over, but what part of the pandemic? That part that got people sick, but what about the part that created the volatile economy that we’re experiencing today? Lots of questions, answers could possibly come from looking at events from different perspectives.

 Inflation began to rise from two distinct tailwinds. Post pandemic stimulus in the pockets of the consumer made for easy over consumption. The second has been the supply chain disruptions, made worse by the demand for inventory to consume as the economy began to open up. Although it’s a good thing that stimulus capital is no longer being directly distributed. It would be nice if the politicians would stop with the alternative spending plans, each given a warm and friendly name, which, in my opinion, are stimulus packages in disguise. Any sign that spending decreases would slow down the discretionary spending that has dried up a bit as inflation has risen. It would also give time for the deficit to stop increasing. Supply chain disruptions are slowly lightening up as evidenced in the well-known retail names claiming overstocked shelves are in need of discounts to help keep sales moving forward. Each of these could have a direct impact on the core measures of inflation, even as employment remains compact.

 Inflation received a boost from the increase in the price of oil and natural gas, coming from the outbreak of war in the Ukraine, but also from the decision of the West to allow the opening of the Russian natural gas pipeline, leaving Europe exposed to Russian mischief. The impact of fossil fuels on inflation has historic measure. The difference is in today’s fight to end the use of fossil fuels, the actions being taken by the Western Democracies have been slow and, in my opinion, awkward. The situation could worsen since the consortium of producing countries referend to as OPEC decided to cut production, thereby creating a boost to oil prices. As we enter the winter months, higher prices for gas, gasoline and oil could very easily draw capital away from discretionary spending, which would have an impact on the core measures of inflation, even as employment remains compact.

 The problem is history has shown us that workers start with a problem and create a solution, but politicians start with a solution and create a problem. In my opinion, that won’t change anytime soon. What will change is the continued opening of the global economies, including China, and the potential reintroduction to political gridlock. For now, all of the other events, certain and uncertain, disruptions are a natural part of the world destined for the attention that has been distracted by the pandemic and its aftermath. The further we get to that place, where the Fed has raised rates, economic slowdown materializes, in spite of near full employment, the markets will welcome the only solution, common sense. And the best strategy for that is to be prepared. 

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