Immaculate Disinflation? Old joke. Why did God create economists? To make weather forecasters look good.
A little over a year ago, the Wall Street Journal’s Economic Forecasting Survey, an annual event tapping the brainpower of over sixty academic, business and financial economists, looked into the near-term future and saw nothing but trouble.
All this in response to the Fed’s fight to bring down inflation. Looking back, you couldn’t blame them for their negativity.
A little over a year ago, the Wall Street Journal’s Economic Forecasting Survey, an annual event tapping the brainpower of over sixty academic, business and financial economists, looked into the near-term future and saw nothing but trouble.
- GDP would shrink in the first half of the year (2023).
- Job growth would turn negative.
- A recession was baked in.
- A ‘soft landing’? Forget about it. It was a mythical creature.
All this in response to the Fed’s fight to bring down inflation. Looking back, you couldn’t blame them for their negativity.
November a year ago, inflation was still raging at 7.7%, the Nasdaq was mired in a -29% loss for the year, and the Fed had just delivered a fourth consecutive 75-basis-point interest rate hike – and signaling more to come.
And yet here we are, a year later, in an alternate universe where the current inflation rate is 3.2%, a third of the high water mark of 9.1% in 2022. The U.S. gross domestic product has gone up not down (jumping at a 5.2% annualized rate just last quarter). The unemployment rate is still below 4% with non-farm employers having created about 2.4 million jobs in the first ten months of the year. While we’re at it, bees no longer sting, babies have stopped crying, and grown men are doing chores.
It wasn’t supposed to be like this. “The U.S. combination of strong growth, low unemployment and falling inflation looks rather like the 'immaculate disinflation' in which I, for one, disbelieved," says Martin Wolf, chief economics commentator at the Financial Times, London.
That phrase, ‘immaculate disinflation,’ is being used to describe a scenario where inflation cools without causing a spike in unemployment, something that has been historically difficult to pull off. Indeed there is no precedent in recent history.
So, has the Fed pulled it off?
The naysayers among us will argue that those economists aren’t wrong but premature. That these higher interest rates will eventually take their toll and bring on a recession, perhaps in the first half of 2024. Lending ammunition to that argument: mortgage rates are stuck on high, consumer credit is crushing, and recent commentary from retail giants Walmart and Target suggest that consumers are being cautious going into the holidays.
Not to mention a world stage more explosive than it’s been in years, with two hot wars embroiling American allies and partners.
So while it’s certainly not out of the question that we could confront an ugly surprise in December, Wall Street appears to be setting the table for a Santa Claus Rally into year’s end. Last year’s rally fizzled, and investors were left with lumps of coal in their stockings. But things look different this time.
I hope to be sitting at the table with all of you. But first, I’ve got these chores--
And For What It’s Worth…
The world’s oldest bond is gearing up for its 400th birthday. It was originally issued on goatskin in January of 1624 to fund a dike on the Rhine River in the Netherlands after a big flood. According to NPR reporting, a local Dutch water authority borrowed money from the people who purchased the bonds, and in exchange, it agreed to pay those bondholders interest.
If that sounds familiar, it’s because that’s pretty much the way bonds work today. In fact, the Dutch invented this financial mechanism which is now used to fund all sorts of infrastructure projects around the world.
This particular bond didn't have an expiration date; it's what's called a perpetual bond. Meaning, it pays out interest forever. Today, that interest is still being paid by the present-day regional water authority in the Netherlands. It works out to 13 Euros, or about $14 U.S. dollars a year.
Interesting factoid: at that same rate of return, and reinvesting those proceeds at 4% annually, in 400 years from today you’d be a billionaire. Well, maybe not you – but your disembodied head in a cryogenic locker would be a billionaire. That should bring a smile to those frozen lips.
Happy Holidays to all.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
And yet here we are, a year later, in an alternate universe where the current inflation rate is 3.2%, a third of the high water mark of 9.1% in 2022. The U.S. gross domestic product has gone up not down (jumping at a 5.2% annualized rate just last quarter). The unemployment rate is still below 4% with non-farm employers having created about 2.4 million jobs in the first ten months of the year. While we’re at it, bees no longer sting, babies have stopped crying, and grown men are doing chores.
It wasn’t supposed to be like this. “The U.S. combination of strong growth, low unemployment and falling inflation looks rather like the 'immaculate disinflation' in which I, for one, disbelieved," says Martin Wolf, chief economics commentator at the Financial Times, London.
That phrase, ‘immaculate disinflation,’ is being used to describe a scenario where inflation cools without causing a spike in unemployment, something that has been historically difficult to pull off. Indeed there is no precedent in recent history.
So, has the Fed pulled it off?
The naysayers among us will argue that those economists aren’t wrong but premature. That these higher interest rates will eventually take their toll and bring on a recession, perhaps in the first half of 2024. Lending ammunition to that argument: mortgage rates are stuck on high, consumer credit is crushing, and recent commentary from retail giants Walmart and Target suggest that consumers are being cautious going into the holidays.
Not to mention a world stage more explosive than it’s been in years, with two hot wars embroiling American allies and partners.
So while it’s certainly not out of the question that we could confront an ugly surprise in December, Wall Street appears to be setting the table for a Santa Claus Rally into year’s end. Last year’s rally fizzled, and investors were left with lumps of coal in their stockings. But things look different this time.
I hope to be sitting at the table with all of you. But first, I’ve got these chores--
And For What It’s Worth…
The world’s oldest bond is gearing up for its 400th birthday. It was originally issued on goatskin in January of 1624 to fund a dike on the Rhine River in the Netherlands after a big flood. According to NPR reporting, a local Dutch water authority borrowed money from the people who purchased the bonds, and in exchange, it agreed to pay those bondholders interest.
If that sounds familiar, it’s because that’s pretty much the way bonds work today. In fact, the Dutch invented this financial mechanism which is now used to fund all sorts of infrastructure projects around the world.
This particular bond didn't have an expiration date; it's what's called a perpetual bond. Meaning, it pays out interest forever. Today, that interest is still being paid by the present-day regional water authority in the Netherlands. It works out to 13 Euros, or about $14 U.S. dollars a year.
Interesting factoid: at that same rate of return, and reinvesting those proceeds at 4% annually, in 400 years from today you’d be a billionaire. Well, maybe not you – but your disembodied head in a cryogenic locker would be a billionaire. That should bring a smile to those frozen lips.
Happy Holidays to all.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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