In the ten years prior to the onset of COVID, the consumer prices index rose at an average annual rate of 1.7%. Since the onset of COVID the overall CPI has risen at a 4.2% annual rate. Inflation peaked at about 9.0% back in 2022 but is still hovering between 2.5 and 3.0%, which is above the Federal Reserve’s official target of 2.0%.
Many of you may have recently seen a chart circulating on the internet suggesting a nationwide collapse in home prices is on the way, that we are in the “biggest bubble in history,” the collapse is “inevitable and nothing can stop it.”
Clearly, policies which boost individual freedom, not government engineering, work best. And as usual, the arguments of one political party are often designed to hide the fact that their policies are the very thing they claim to detest in the other.
With the next deadline at the end of January, well past Christmas, another shutdown and spending battle is brewing early next year. Investors will need to watch the next one closely to see if policymakers who want to control deficit spending are able to make progress.
History is absolutely clear – Capitalism is the best system ever developed (actually evolved by human experiment) to boost living standards. At the same time, Socialism has a seriously lousy record.
Regulatory changes and productivity gains could push growth to move even faster in the years ahead. But we are also still dealing with the uncomfortable process of moving away from government stimulus and massive deficit spending that have boosted growth numbers in the post-COVID era but were unsustainable.
A small part of the federal government took a short break from being shut to make sure the Labor Department could deliver the September Consumer Price Index.
As we recently argued, investors don’t need to worry about the federal government shutdown showdown causing a recession. Before the current shutdown, the federal government had been shut for eighty days in the prior thirty years, with none of those days during a recession.
Over the past two and one-half decades the federal government has buried taxpayers under a mountain of debt, now approaching $38 trillion.
No one, that we know of, is saying Artificial Intelligence (AI) isn’t an amazing new technology that will have an important impact on life, investing, and the economy.
Economic data are all over the place. GDP keeps growing in spite of signs of weakness in the labor market. Tariff policy is volatile, immigration has slowed, monetary policy tightened in 2023-24, with the M2 measure of money declining and “real” short-term interest rates consistently higher than at any time since 2010.
The stock market surged to new highs after the Federal Reserve cut the federal funds rate last week and the futures market has priced in more cuts to come. However, these cuts have not helped reduce long-term interest rates and the price of gold has surged to over $3,700 an ounce.
The Federal Reserve cut rates by 0.25% today, citing a rising risk to the employment side of their dual mandate. While that was no surprise, there were many questions on where the Fed would go from here, and what it would take to accelerate or slow the pace of policy adjustment.
In spite of what appeared to be relatively good data, many polls throughout the 2024 election cycle showed more than half of all voters rated the economy as “poor.” That left the Biden/Harris team often wondering why they couldn’t get credit for what official statistics said was a robust economy.
Over the past twenty years, in spite of incredible new technologies, US real GDP growth has averaged just 2.0% at an annual rate. By contrast, in the twenty years prior to the most recent twenty – from the mid-1980s thru the mid-2000s – real GDP grew at a 3.2% annual rate.
For the past two years, we have been warning that the stock market is overvalued. While our capitalized profits model is simple, it is more complex than just looking at price-earnings or price-sales ratios.
Last Friday, Jerome Powell gave the Fed Chief’s annual speech at the Kansas City Fed’s 2025 meeting in Jackson Hole, WY.
Recently, due to deals President Trump is making, some are saying the United States has embarked on a version of Chinese-style “state capitalism” – directly entangling markets and government.
At the last meeting two weeks ago, Chairman Jerome Powell got the Federal Reserve to stand pat on interest rates, but not without a struggle.
It certainly seems hyper-politicization has come to every piece of economic data. Last week’s data are poster children for this, and the overbroad interpretations of the data by investors, the general public, policymakers, and politicians sow confusion.
The Federal Reserve held rates steady for a fifth consecutive meeting, though murmurs have begun in the Fed ranks that the time for more cuts is approaching.
President Trump announced higher tariffs were on the way almost as soon as he took office. As a result, businesses focused on buying foreign goods in advance, to front run those tariffs, putting some of their purchases from domestic producers on the backburner.
Every year the Per Jacobsson Foundation hosts and publishes a lecture on Monetary Policy. Back in 1979, Arthur Burns delivered the annual lecture in Belgrade, Yugoslavia (link). He titled the lecture “The Anguish of Central Banking” and he came clean about the Federal Reserve’s inflationary policies in the 1970s.
In the immediate aftermath of Friday’s much anticipated Employment Report it seemed like the judgement from analysts, talking heads, and even markets was unanimous (or nearly so) that there was good news to celebrate.
In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."
Looking back on it, the first quarter of the year was a complete anomaly. Real GDP declined at a 0.2% annual rate, and the left side of the political spectrum said this proved current policies were a disaster.
The Federal Reserve held rates steady today, while also projecting slow economic growth, higher unemployment, and higher inflation. And while the Fed signaled that two further rate cuts are still their base-case for the remainder of 2025, the timing of those cuts remains up in the air.
The United States consumes a large share of its GDP; China, not so much. The result is Yin and Yang. On net, China produces and the US consumes.
Back during the Financial Panic of 2008, clickbait media kept screaming “Hyperinflation.” We consistently pushed back against this theme, and argued inflation would not accelerate.
Conventional wisdom was that the tariffs imposed by the Trump Administration would cause higher inflation and slower growth – stagflation as far as the eye could see. But this past week brought economic news that defied this prediction.
Moody’s finally downgraded US government debt on May 16th to Aa1, its second highest rating. With the US $36 trillion (and rising) in debt, it’s not hard to see why. But Moody’s was late to the party with S&P and Fitch (the other two major ratings agencies) having done so long ago.
Milton Friedman, Art Laffer and other market-believing economists had their long day in the sun during the 1980s and 1990s. Tax rates fell and government spending declined relative to GDP. But – ironically, in the long run, and long after he passed away – John Maynard Keynes got his revenge.
Back on January 10, 2025, it cost $1.024 to buy one Euro. Last Friday, the $/Euro exchange rate was $1.125 – a drop in the value of the dollar of about 10%. Similar moves in the value of the US dollar versus the British pound, Japanese yen, and Canadian dollar also occurred.
The Federal Reserve held rates steady today, while emphasizing that elevated uncertainty has clouded the path forward. If, when, and how much tariff policy will change in the months to come will play a large part in dictating the next move for the Fed.
Noise about tariffs, business uncertainty, a constitutional fight, and a drop in stock prices had already created fear of a recession. When real GDP declined in the first quarter of 2025, some started to question if a recession is already here. Let’s take a deep breath and consider the facts.
As we have written…The Era of Easy Everything is ending. Part of this involves bringing inflation back to the Federal Reserve’s target of 2.0%. We could debate that number, but the Fed is getting closer.
We’ve expected a recession for more than a year now. Simply put…the Era of Easy Everything is Over. Expanding deficits and easy money (that have lifted the economy since COVID) are no longer with us. At the same time, tariff negotiations have created an unbelievable amount of uncertainty.
In this week’s installment of “Three on Thursday,” let’s explore some of the dynamics surrounding the United States dollar. In an era of inflation, massive debt, large deficits, and threats of tariffs, there are persistent rumors circulating that the dollar is at risk of losing its reserve currency status.
We think it’s important for the Fed to move gradually. The US dollar has weakened lately, and, as a result, there is little case for a drastic loosening of monetary policy. The Fed could let up somewhat on bank regulations and capital requirements, which would help the struggling bond market.
The Federal Reserve started raising short-term interest rates three years ago and the M2 measure of the money supply – what Milton Friedman said to focus on – soon started declining, hitting bottom in late 2023.
During the ten years prior to COVID, PCE inflation, the Fed’s preferred measure, averaged about 1.5% per year. Jerome Powell said it was too low and he wanted inflation to “average” 2% over time.
In spite of severe polarization on so many issues, there is at least one thing that Americans agree on across the entire political spectrum, left, right, and center. That is: At some point in the past sixty years, or so, something major went wrong with the US economy and it is still causing problems today.
The Federal Reserve held rates steady today, but downgraded the outlook for economic growth in the year ahead. Policy changes in Washington, looming tariffs, and a cautious consumer have made “uncertainty” the new favorite word in the Fed’s vocabulary.
Every so often we hear a theory that makes sense superficially but on closer examination doesn’t add up. The most recent one is that the Trump Administration wants a recession (or at least wouldn’t mind one) because interest rates would drop, making it easier to service the national debt.
It is true that tariffs are a tax. It is also true that tariff policies have been volatile…on and off again…different carve outs…different countries…phone calls that change things. All of this clearly has an impact on the market. So, we are not surprised to see stock market volatility.
Is the US already in recession? Probably not. But in the first quarter, real GDP is very likely to have a minus sign in front of it. Yes, a negative reading for real growth!
We have called inflation “political kryptonite” because it is so damaging to politicians. Clearly, inflation played a role in the 2024 election. So now that President Trump sits in the Oval Office, his opponents have been trying hard to link anything and everything in his agenda to inflation.
The Framers of the Constitution designed our government to be small. Not so small and weak as the one under the Articles of Confederation, which the Constitution replaced, but small nonetheless.
The federal government gets a great deal of grief when it issues economic reports and it’s not hard to see why.
The Federal Reserve made it clear on Wednesday that it’s not about to cut short-term interest rates again anytime soon, which is good news if you’d like to see the Fed live up to its goal of bringing inflation down to 2.0%.
