The U.S. Economy Is Booming. So Why Are Economists Worrying About a Recession?; Recession Risk Is Rising; Inflation is about to come down — but don't get too excited; Will Elon Musk Buy More Twitter?; A Mentalist Sets a Central Park Running Record (Just as He Foresaw)

1) I can't recall a time with such dramatically different economic signals in my more than two decades of investing. By some measures, the economy is doing incredibly well – in fact, it's too hot – but by others, it's heading for a cliff...

Here's a New York Times article that captures the dichotomy: The U.S. Economy Is Booming. So Why Are Economists Worrying About a Recession? Excerpt:

Employers are adding hundreds of thousands of jobs a month and would hire even more people if they could find them. Consumers are spending, businesses are investing, and wages are rising at their fastest pace in decades.

So naturally, economists are warning of a possible recession.

Rapid inflation, soaring oil prices, and global instability have led forecasters to sharply lower their estimates of economic growth this year and to raise their probabilities of an outright contraction. Investors share that concern: The bond market last week flashed a warning signal that has often – though not always – foreshadowed a downturn.

Such predictions may seem confusing when the economy, by many measures, is booming. The United States has regained more than 90% of the jobs lost in the early weeks of the pandemic, and employers are continuing to hire at a breakneck pace, adding 431,000 jobs in March alone. The unemployment rate has fallen to 3.6 percent, barely above the pre-pandemic level, which was itself a half-century low.

But to the doomsayers, the recovery's remarkable strength carries the seeds of its own destruction. Demand – for cars, for homes, for restaurant meals, and for the workers to provide them – has outstripped supply, leading to the fastest inflation in 40 years. Policymakers at the Federal Reserve argue they can cool off the economy and bring down inflation without driving up unemployment and causing a recession. But many economists are skeptical that the Fed can engineer such a "soft landing,", especially in a moment of such extreme global uncertainty.

"It's like trying to land during an earthquake," said Tara Sinclair, a professor of economics at George Washington University.

William Dudley, a former president of the Federal Reserve Bank of New York, called a recession "virtually inevitable." He is among the economists arguing that if the Fed had begun raising interest rates last year, it might have been able to rein in inflation merely by tapping the brakes on the economy. Now, they say, the economy is growing so rapidly – and prices are rising so quickly – that the only way for the Fed to get control is to slam on the brakes and cause a recession.

Still, a majority of forecasters say a recession remains unlikely in the next year. High oil prices, rising interest rates, and waning government aid will all drag down growth this year, said Aneta Markowska, chief economist for Jefferies, an investment bank. But corporate profits are strong, households have trillions in savings, and debt loads are low – all of which should provide a cushion against any slowdown.

"It's easy to construct a very negative narrative, but when you actually look at the magnitude of all those impacts, I don't think they're significant enough to push us into a recession in the next 12 months," she said. Recessions, almost by definition, involve job losses and unemployment; right now, companies are doing practically anything they can to retain workers.

And here's a related article in the Wall Street Journal: Recession Risk Is Rising, Economists Say. Excerpt:

Economists see a growing risk of recession as the relentlessly strong U.S. economy whips up inflation, likely bringing a heavy-handed response from the Federal Reserve.

Economists surveyed by The Wall Street Journal this month on average put the probability of the economy being in a recession sometime in the next 12 months at 28%, up from 18% in January and just 13% a year ago.

"Risk of a recession is rising due to the series of supply shocks cascading throughout the economy as the Fed lifts rates to address inflation," said Joe Brusuelas, chief economist at RSM US LLP.

Economists slashed their forecast for growth this year. On average, they see inflation-adjusted gross domestic product rising 2.6% in the fourth quarter of 2022 from a year earlier, down a full percentage point from the average forecast six months ago, though still higher than the 2.2% average annual growth rate in the decade before the pandemic.

2) Inflation is one of the biggest concerns of economists and investors, which was only heightened by yesterday's inflation report that showed prices soaring by 8.5% in March, the highest rate since 1981.

Paul Krugman is quite confident that reported inflation will come down in the next few months, but interestingly, given his prior optimism, he does not think that this means "that the inflation problem is over." Inflation is about to come down – but don't get too excited. Excerpt:

The inflation report for March came in hot, as expected: Consumer prices are up 8.5 percent over the past year. But more than two years into the pandemic, we're still living on Covid time, where things can change very fast – so fast that official data, even about the recent past, can give a misleading picture of what's happening now.

In this case, the Consumer Price Index – which roughly speaking measures average prices over the month – probably missed a downward turn that began in late March and is accelerating as you read this. Inflation will probably fall significantly over the next few months.

But don't get too excited. The better numbers we're about to see won't mean that the inflation problem is over.

Why expect inflation to come down? Surging gasoline prices accounted for half of March's price rise, but it now appears that the world oil market overshot in response to Russia's invasion of Ukraine...

Beyond that, there are growing indications that the bullwhip is about to flick back...

Supply-chain issues, in other words, may well be about to fade away, producing a glut of trucking and perhaps shipping capacity. And this will remove one reason for high inflation.

OK, there are some other immediate factors pushing in the opposite direction. In particular, the cost of new apartment rentals has soared, a fact not yet fully reflected in official measures of shelter inflation, which still largely reflect leases signed many months ago. Still, it's likely that over the next few months inflation will come down significantly.

But as I said, don't get too excited. The U.S. economy still looks overheated. Rising wages are a good thing, but right now they're rising at an unsustainable pace:

This excess wage growth probably won't recede until the demand for workers falls back into line with the available supply, which probably – I hate to say this – means that we need to see unemployment tick up at least a bit.

The good news is that there's still no sign that expectations of high inflation are getting entrenched the way there were in, say, 1980. Consumers expect high inflation in the near future, but medium-term expectations haven't moved much, suggesting that people expect inflation to come down a lot:

Anyway, if you think today's report showed inflation spiraling out of control, you're wrong. In fact, we're probably about to get some misleadingly good news on that front.

Overall, my take remains the same: I think inflation will come down to around 4% by the end of the year (up from my pre-Ukraine-war estimate of 3%) and that, while the economy will certainly slow, we'll avoid a recession.

If so, stocks should hold up well.

But there is an unusually wide range of possible outcomes, so much humility and mental flexibility is in order...

3) Bloomberg columnist Matt Levine had some funny musings in his column yesterday about whether Elon Musk might make a bid to buy Twitter (TWTR) outright: Will Elon Musk Buy More Twitter? Excerpt:

The fact that it makes no sense for Elon Musk to do a hostile takeover of Twitter is not absolute proof that he won't do a hostile takeover of Twitter! The threat remains alarming; they have to take it seriously.

Musk could also just buy more stock in the open market, but what does that accomplish? It gives him more of a toehold for a proxy fight or a hostile takeover, but if he's not going to do those things, then owning more stock doesn't matter. Also, he's at 9.1% now, and if he goes over 10%, he would be subject to stricter limits under U.S. securities laws. In particular, his ability to actively trade the stock, buying and selling whenever the mood strikes him, would be limited. So why bother?

Mostly my guess is that Musk enjoys being able to tell Twitter what to do and does not care very much about it actually getting done. I could be wrong here but tweeting about accepting Dogecoin for Twitter's paid subscription tier seems like more fun than supervising its implementation. If he buys Twitter, he has to make decisions; Twitter is his problem. If he owns 9% of Twitter, he can just troll; he is Twitter's problem.

My take: I agree with Levine that Musk is highly unlikely to make a bid or even to go above a 10% stake. Rather, as I wrote in my April 4 e-mail:

Musk has now put Twitter into play, meaning that someone is going to buy this company. The questions are who and at what price?

Regarding the former, the most obvious buyers, Meta (FB), Alphabet (GOOGL), or Microsoft (MSFT), are likely blocked for antitrust reasons, and there's no way the U.S. government will allow a foreign company to buy Twitter. But I wouldn't rule out Salesforce (CRM), PayPal (PYPL) – which bid for Pinterest (PINS) recently – or Oracle (ORCL).

But I think the most likely scenario is that Twitter is purchased by a private equity firm with Musk's participation.

As for price, even with today's big move, I think the takeout price will be much higher, so the stock remains a strong buy.

4) This is AWESOME! A Mentalist Sets a Central Park Running Record (Just as He Foresaw).

I was out there running in the park on Friday and saw his pit crew at Engineers Gate but didn't see him. I wish that I would have waited and done a lap with him!

This blows my mind: "His 91st mile was his fastest: 6:43." I would be really pushing it to run ONE mile, completely fresh, at that pace!

And I can sure relate to this, based on my experiences at five World's Toughest Mudders (I wrote about the latest one in my November 15 e-mail):

He knew the suffering would begin at some point, and just before Mile 50, it hit hard.

"Your mind plays tricks on you," he said as he finished his eighth loop. "You start thinking of how much further and how much time you have, and doubts creep in. They just eat at you. It's your mind telling you to quit."

Twenty miles later, on his 12th loop, his digestion faltered. He had been consuming nothing but gels (he sucked down two or three per lap), caffeine gummies, and orange Gatorade. Perhaps that took its toll. Or it could have been that he had worked late the night before and managed only four hours of sleep.

He vomited twice and had to find a toilet. His pace dropped from eight minutes per mile to over 12. The color drained from his face. He felt blisters form on the bottom of his feet. His right shin started to throb. His team filled his hat with ice, which he dumped on his head to wake himself up. Once his stomach settled, he popped more caffeine gummies to keep himself humming.

As is often the case with ultra, that period of pain and deep exhaustion was chased by an extended flow state. Toward the end of his 13th lap, he hit top gear. Rocking to playlists he had curated for the occasion, he sang aloud as he ran. His 91st mile was his fastest: 6:43.

Pearlman completed his 16th loop, and 98 miles, at around 8:20 p.m., to equal Balenger's distance record. He ran roughly four hours faster than Balenger. Two miles later, he hit 100 miles with a time of 14 hours 36 minutes, beating his own 100-mile record by two hours.

When he finished his 17th lap at 9:15 p.m. to set the Central Park Loop Challenge F.K.T., he paused to hug his wife and celebrate with friends who confirmed that he had also surpassed his fund-raising goal of over $100,000. But he wasn't done. His pacers, some of them seasoned ultrarunners, wouldn't let him go home. They insisted he tack on a few more laps to the new Central Park Loop Challenge F.K.T. So a few minutes later, he was running uptown once again.

On his 18th lap, he savored the slower pace and the hills because they allowed him to walk. It was obvious from his expression that his right shin was getting worse. He popped ibuprofen to keep the swelling down and the pain at bay and kept moving.

His 19th and final loop was his victory lap. "I told the guys, we're going to finish the way we started: strong. And I just went for it."

He ran, all out, often with his eyes closed. It was up to his pacers to make sure he stayed on course, and they did. When he reached Engineers' Gate for the final time just before midnight on Friday, after running a total of 19 loops and 116 miles, he fell to the ground, elated yet spent.

"I had a spectacular day," he said. "There's just no other way to describe it."

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.