Why a Soft Landing Could Prove Elusive; The Fed Isn't Getting the Economy It Expected; How Rich Are American Households?; Scott Galloway is bullish on America; Dr. Tom Catena, 'He's Jesus Christ'
1) Here are two articles in today's Wall Street Journal about what the Fed is likely to do...
First, on the front page, is this story: Why a Soft Landing Could Prove Elusive. Excerpt:
On the eve of recessions in 1990, 2001, and 2007, many Wall Street economists proclaimed the U.S. was on the cusp of achieving a soft landing, in which interest-rate increases corralled inflation without causing a recession.
Similarly, this summer's combination of easing inflation and a cooling labor market has fueled optimism among economists and Federal Reserve officials that this elusive goal might be in reach.
But soft landings are rare for a reason: They are tricky to pull off. "You need a lot of luck," said Antúlio Bomfim, a former adviser to Fed Chair Jerome Powell who is now at Northern Trust Asset Management.
Fed officials are set to hold rates steady this week after raising them to a 22-year high because they don't want to blow a shot at achieving a soft landing.
The goal faces four threats: the Fed holds rates too high for too long, economic growth accelerates, energy prices rise or a financial crisis erupts.
And here's a Heard on the Street column: The Fed Isn't Getting the Economy It Expected. Excerpt:
When the Federal Reserve's rate-setting committee sits down Tuesday and Wednesday, one thing it has to grapple with is that underlying inflation is looking cooler than it thought just a few months ago. Another: The economy is looking much stronger.
The central bank's policy makers will need to update the economic projections to reflect these changes. But an environment with a bit less inflation and more growth has interest-rate implications, too. While policy makers are almost certain to keep rates on hold, and might be comfortable leaving them on hold for the remainder of the year, rate cuts are likely to be even further from their minds now.
Both of these articles reinforce my view that we have a dream scenario right now: a strong economy, low unemployment, and muted inflation.
This makes me constructive on stocks, even though they're had a good run this year – and, if you don't want more exposure to equities right now, you can earn more than 5% risk-free on your cash.
That said, as the first article notes, things could go awry – and there will always be plenty of well-credentialed, highly articulate people predicting it – but that's always true.
One of the biggest (and most costly) lessons I learned in the decade after the global financial crisis is the price you pay as an investor to always be seeing stormy weather ahead, even when the skies are clear.
Even though my fund was only down half the market in late 2008 and early 2009, that period was so painful that, in an attempt to avoid a repeat of it, I became much too conservative in the more-than-decadelong bull market that followed.
I owned great stocks, like a 5% position in Netflix (NFLX) under $8 per share (which was a 90-bagger in the subsequent eight years), but sold my winners too quickly, held too much cash, and had too big of a short book. As a result, my fund only made small gains while the market doubled... and then doubled again...
If there's an obvious storm that's about to hit, of course it makes sense to trim the sails and batten down the hatches. But doing so when the skies are largely clear, just because there might be a storm at some unknown point in the future, makes no sense. So don't let the naysayers scare you out of the market.
And when looking for the right stocks to buy in this market, our flagship Empire Stock Investor newsletter is a great start – in fact, right now, you can try it out risk-free for 30 days.
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2) As I've highlighted many times, economic data today is all over the map, so anyone can draw any conclusion they wish.
While there are plenty of people who disagree with me, my overall take is that the economy, while perhaps slowing slightly, remains very strong, driven by strong household balance sheets (keep in mind that consumer spending accounts for 70% of GDP), as this article notes:
3) My friend Scott Galloway rebutted the gloom-and-doom about America's future in this smart essay: Least Bad. He lays out the bear case here:
For decades, America has predicted – arrogantly and repeatedly – the imminent fall of a nation. The doomed nation, according to Americans? A: America...
Today the decline is (supposedly) more imminent. January 6 was the "beginning of the end." Russia's invasion revealed a "great unwinding." Nations view us "with pity," and we are "on the brink of collapse." Just last week, the New York Times opinion page compared us to Rome (again). These headlines are click bait, and we still take the bait: Three-quarters of Americans believe our country is in structural decline, and the song of the summer is an ode to our demise.
It's not just the public. Among economists there's a growing school of thought that our situation is dire. Two months ago, ratings agency Fitch downgraded America's credit rating due to "fiscal deterioration" and "erosion of governance." The debt ceiling debacle didn't help: Investors "should worry." Our debt-to-GDP ratio is hovering around 120%; back when it was 70%, Brookings called it "the real national security threat."
Many believe we are in the midst of "dedollarization," ceding our status as the world's reserve currency because of our unsustainable spending habits and an overall loss of faith globally. JPMorgan recently flagged it, an ex-CIA adviser plainly predicted it, and one prominent tech investor bet $1 million on it. Ray Dalio, the founder of the world's largest hedge fund, hinges his recent bestseller, Principles for Dealing with the Changing World Order, on America's inability to adapt to our loss of status and power. Empires win and lose their hegemony depending on their reserve currency status, and in Ray's view, we're near freefall.
We're Not
Culturally you could build a compelling case. National pride is at an all-time low, and the "vibe" in America is that things are not good. (See above: the song.) But these are functions of perception, and as I've written before, human perception is flawed.
Here's an excerpt from Galloway's full-throated response to all this gloom-and-doom:
By nearly every measure, America is doing just fine. Better than fine. Our annual GDP is $26 trillion – 40% greater than China's, whose population is four times larger. And, despite our enormous output, our economy is still growing, with 2.4% GDP growth last quarter. China's is higher, but slowing faster than expected. Meanwhile the yuan continues to slide and this week hit a 16-year low. We have many unique advantages, including unrivaled innovation, the best universities, the best military, strong rule of law, a willingness to embrace risk, and a culture of doing the right thing (I believe this). Last year, U.S. startups received $245 billion in venture funding – roughly equal to the rest of the world combined.
Upstream in the public markets, we remain dominant. Nine of the ten largest companies in the world are domained in America. Nvidia, the undisputed leader in AI, the next world-changing technology, is headquartered in Santa Clara. Investors have reaped the benefits, and continue to wager their money on America. In the past decade the U.S. stock market has returned 10% per year. Compare that to Europe (2%) or China (0.09%) or Australia (-0.2%).
Meanwhile, our near-term economic prospects look good. Unemployment is hovering at record lows. Inflation has fallen precipitously and is low relative to our peers (see above). Poverty rates are in decline. Disposable income is higher than any other country. We have a lot to be proud of.
Exceptionalism
The schadenfreude we feel for our own country when it stumbles is nothing new. In fact, I would argue that in a democracy this is a feature not a bug. Things appear brighter when our favored political party is at the helm, and vice versa when it isn't. A case in point is the consumer sentiment index, which is supposed to be an economic barometer, but is really a political one. In 2019 Republicans felt great about the economy, Democrats less so. Then Biden got elected and the relationship flipped.
4) I had the pleasure last week of catching up with Dr. Tom Catena, a man who New York Times columnist Nick Kristof called "Jesus Christ" in this 2015 op-ed.
Dr. Tom, as he's called, graduated from Brown University in 1986, where he was an all-American nose guard on the football team. He later graduated from Duke Medical School and served as a flight surgeon for four years in the Navy.
In 2008 he went to the Nuba mountains in southern Sudan, a remote area that has been plagued by civil war for decades. Ever since, while dodging bombs and other attacks, Dr. Tom's hospital and 21 clinics have been the only health care for a population of up to 1.5 million people in an area the size of Georgia. In fact, he said, with the fighting in Khartoum and elsewhere in the country, he says his operation is one of the few sources of any health care in the country of 46 million people. He operates on a budget of $1.5 million – that's $1 per person per year.
My friend Bill Ackman, on whose Pershing Square Foundation board I sit, donated $1 million last year to support Dr. Tom (donation page here).
Here's a picture of us with our friend Mark Gerson on the right:
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.