Depressing the Optimists

We normally start our letters on a positive note. Not necessarily because it’s our style or our nature (though that is the case) but because it usually pays to be optimistic. Markets rise over longer periods of time, and most of the time is spent on the upswing. However, though we are devout optimists, we are also realists. And over the last few months, there’s been cause to get real.

The economy took off after the initial lockdowns in 2020. Loose monetary and fiscal policies ignited growth and have resulted in unwanted inflation, just about everywhere.

From the onset of the pandemic until the end of last year, the U.S. money supply grew by 18% annually. And inflation, after a period, began growing by double digits too. This excess money remains in the system, and it will take some time for it to be properly absorbed.

Aggregate demand is now naturally slackening, and in response to inflation, central banks have tightened considerably, resulting in a reversal of the economic picture. The money supply has now stopped growing, which should arrest economic growth.

Stuck in Reverse

Home sales are way down with mortgage rates way up. Price declines should follow. Over 60% of Americans don’t have sufficient savings and live paycheck to paycheck, average bank balances have declined; rents have jumped; phone bills are going unpaid at higher rates; vehicle repossessions are up markedly; credit card debt is way up; buy-now-pay-later plans are everywhere, and consumers will struggle to meet obligations if interest rates rise further. Meanwhile, consumers have shifted noticeably away from durables—e.g., autos (used car prices are now falling) and patio furniture—toward staples.