Weekly eLetter 4/6/2023 –Don’t Get All Defensive – Yet
Among other questions on the doorstep, we have this: “So, how’s that old Inflation Monster doing?” Good question. Fortunately, we have some answers – or at least – opinions.
One of the really good thinkers on this sort of thing is our friend Brian Wesbury at First Trust Advisors. In a recent publication, Brian had this to say:
“The economy is still absorbing and responding to the 40% surge in the M2 measure of the money supply during COVID. Think of that enormous surge in the money supply as installing a furnace built for a 10,000 square foot mansion into a home that’s only 2,000 square feet, and then running it full blast. Even when you have finally turned the furnace off – like the Federal Reserve did with the money supply in the past year, with the largest drop since the Great Depression – that 2,000 square foot home doesn’t immediately get cold. It takes time for the home to gradually cool off and eventually get cold. Given the drop in the money supply, we are headed for a much colder economy; we’re just not there yet. And when the US economy cools off, we expect profits, which were artificially boosted by easy money and government handouts, to fall. This means our model will eventually move stocks’ fair value lower, too. The only thing that could change that forecast is if interest rates fall at the same time profits do.”
Pay special attention to the last line: “The only thing that could change that forecast is if interest rates fall at the same time profits do.” So, Wesbury at first paints a rather gloomy picture, he then (wisely, we think) hedges by saying that while the economy/inflation/disinflation mosaic is made of many parts, the magic key to all comes back down to rates. We tend to think that is probably true. It is interesting then to note what St. Louis Fed President James Bullard had to say in a presentation Thursday morning at a meeting of the Arkansas Bankers Association. The title of his presentation is ‘Financial Stress and the Economy’. (Details here: https://www.stlouisfed.org/from-the-president/speeches-and-presentations/2023/financial-stress-and-the-economy ). For your convenience we have pulled a key point from his presentation:
“Data on the real U.S. economy have generally been stronger than expected, and inflation remains too high, Bullard said. He pointed out that FOMC policy has kept market-based measures of inflation expectations relatively low, which bodes well for disinflation this year.”
So, while Bullard still thinks that the Fed should continue to push rates a bit, he also seems optimistic that things are being brought under control. We would be happy to see that scenario play out sooner than later.
And now I would like to switch gears and turn to an interesting confluence on the calendar. Many of the world’s major religions have observances running in parallel. It’s not terribly rare, but it’s worth noting when it does occur:
March 22 to April 21 – Ramadan: During this time, Muslims observe a holy month of fasting.
April 5 to April 13 – Passover: This holiday spans 7-days and commemorates the Israelites being freed from slavery in Egypt.
April 9 – Easter: Easter is the most important holiday in Christianity. It celebrates the resurrection of Jesus Christ — Lord and Savior of Christians.
The simultaneous occurrences can be taken together to remind us of the value of unity and how we can, and should, recognize the sanctity of beliefs of those who we see as like-minded and those with differing views. To our Muslim friends we say ‘Ramadan Mubarak’. To our Jewish friends we say ‘Chag Sameach!’. And to our Christian friends, ‘Happy Easter!’
Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com
LFS-5612277-040623
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