Charts for the Beach – 2022

It’s time for our annual August report, “Charts for the Beach.” Each year we highlight five of our favorite charts we think consensus is currently overlooking. Load up the cooler, get your towel and chair, and enjoy the charts! And, watch out for those sharks!!

The “mathematical” recession

We’ve often suggested investors ignore politics. Politics is about what should be, but investing is about what is. Dispassionate portfolio positioning based on fundamentals, not politics, is critical to being a good investor. The current political debate whether the economy is in recession or not seems one of those irrelevant topics to which investors are paying too much attention.

There is no doubt the economy is in a “mathematical recession” because GDP growth has been negative for two quarters (assuming no revisions to the current data), but there is also no doubt that the economy is strongly creating jobs. That is an unprecedented combination.

Our first chart (courtesy of The Daily Shot) shows the contributors to real GDP growth. The primary drivers of a mathematical recession have been 1) retailers’ poor inventory management when consumers rapidly changed their buying patterns after being locked-down, and 2) trade because relatively few consumer goods are actually produced in the US.

With employment still growing strongly, investors need to consider whether the mathematical recession will provide the weakness in demand needed to curtail inflation. We’re skeptical.

The Fed is historically behind inflation

The real Fed Funds rate (i.e., the Fed Funds rate less the inflation rate) has historically been a reliable measure of the tightness of monetary policy. A positive real Fed Funds rate suggested the Fed was tight, whereas a negative one implied monetary policy was easy.