Is the recovery running out of steam? Last week, a chorus of Federal Reserve presidents gave speeches that uniformly called for additional fiscal stimulus (one writer called it a “chorus”). None gave a rosy assessment of the current economic state. Chicago Fed President Evans doesn’t think the economy will return to growth until 2022; Cleveland Fed President Mester said, “We’re in a deep hole;” Boston Fed President Rosengren was less than optimistic about future growth prospects. The labor market — which is the most important coincidental indicator — is in horrible shape, as shown in these two charts:
The Fed is now targeting an average 2% rate of inflation. Scott Grannis notes this has been the average rate of inflation during the past 18 years:
We have been living in a 2% inflation world for the past 18 years. Sometimes that fact gets obscured by the sheer volatility of year-over-year inflation, which has ranged from -2.1% to 5.6% in the past two decades. Super-volatile oil prices are largely to blame for this; having ranged from $19 to $140 per barrel over this same period. Chart #1 helps illustrate this. The blue line is the total CPI, whereas the red line excludes energy prices. The Personal Consumption Deflator, on the other hand, has been running a bit over 1.5% for the past two decades; it’s fairly typical for the CPI to register more inflation than the PCE deflator, since the deflator is more responsive to shifts in consumer preferences (consumers, being generally smart and thrifty, shy away from high-priced items, preferring instead cheaper substitutes).
Here’s his chart #1:
Today, let’s take a look at a few key charts from outside the US. The reason is simple: global economies are increasingly inter-linked. That means global equity markets tend to act in concert.
It’s important to note that the trend breaks that started the recent corrections aren’t “Katy bar the door” sell-offs. Instead, they are disciplined. I think the following has happened:
- Most major governments have enacted fiscal policies and global central banks have loosened monetary policy. Markets — which are a forward indicator — rallied in anticipation of recovery.
- Economic data from the last few months shows that, in general, economies are at least back on their feet. Please see the latest batch of Markit Economic’s PMI data.
- Now, however, a new reality is taking hold. The quick rebound (which is as much statistically based as real) is over. The next round of economic recovery will be exceedingly harder. It will take longer to materialize. As a result, traders are taking some profits off the table and are waiting for the next round of data.
Assuming all of this is correct, the 4Q20 will probably be a period of reevaluation as investors re-think their economic and investment strategies for 2021.
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