Economic storm clouds could be around the corner

The U.S. economy continues to grow, fueled by generous fiscal spending in an election year, robust corporate earnings, and a consumer willing to keep spending. The Federal Reserve Bank’s loosening of monetary policy last month also promises to boost growth.

That dovetails with my expectations, at least in the short term. I expect economic growth will continue to show decent numbers when the third quarter GDP data is released. At the same time, we should see additional modest progress in reducing inflation. September’s CPI inflation data, however, could mark the low for this inflation cycle, in my opinion.

That is certainly not the consensus view. Wall Street is expecting the Federal Reserve to cut interest rates two more times this year and several more cuts next year. This week, Chairman Jerome Powell attempted to reign in some of those expectations in a speech before the National Association for Business Economics. He promised that the central bank would do whatever it takes to keep the economy in solid shape. However, he warned that markets should not automatically expect interest rate cuts at every Federal Open Market Committee meeting.

He said the committee will remain data-dependent and warned listeners that “this is not a committee that wants to cut rates quickly.” My advice is to listen to the Fed. The risk I see is that we could see a bump in inflation beginning in the fourth quarter (probably December). I believe the Fed worries about that as well. They know that reducing interest rates is a risk, given the growth in the economy and the still-healthy wage level.

I have not mentioned the inflationary impact of the present stimulus efforts in China on materials and other commodities, the geopolitical risk of higher energy prices, nor the possibility of a long strike by union workers at the nation’s ports on prices. The Fed, I believe, could be stuck between a rock (stubborn inflation) and a hard place ( avoiding further declines in employment).

At the same time, as I wrote in “My economic outlook for 2025” column last week “I fear we could see declining economic growth-- the result of the cumulative impact of the last two years of abnormally high interest rates. This lag effect will outweigh the Fed’s interest rate cuts of September and maybe November. I am not predicting a recession, but only a slowdown, a ‘recalibration’ to use the words of Fed Chairman Powell.

The plot thickens if you include the dollar and our national debt. A few weeks back (August 29th ) I wrote a column “How the U.S. can manage its debt load,” in which I worried that at some point soon it would become necessary to do something about our rising debt load. Historically, the solution to that problem has always been to devalue the dollar. But we would pay the price for that action.

A weakening currency is inflationary. The dollar has already dropped 5% in as many months and currency traders expect this decline has only begun. It is, in my opinion, just a matter of time (possibly after the November elections), before the world and investors catch on that a devaluation of the dollar is a real possibility.

If I am right, a combination of a declining currency, slowing growth, stubborn inflation, and the onset of easing monetary policy, would spark worries among economists and investors alike over the “S” word—stagflation. Stagflation is an economic situation where increasing inflation, rising unemployment and slower economic growth occur simultaneously. But just imagine how the market would react if inflation indicators like the CPI and PPI see upticks toward the end of the year, while jobs continue to fall.

It is not certain, and I know it is not conventional wisdom but that is what concerns me. And no, I am not expecting a 1970s type of stagflation, but something much more mild.

I am not alone in my fears. Jame Dimon, the CEO of JP Morgan, is a man I respect and have followed for decades. He has been sounding the alarm over bullish economic expectations and remains highly critical of the Fed’s restrictive policies, which he feels went on for far too long. As for the taming of inflation, as recently as last Friday, he said “I am a little more skeptical than other people. I give it lower odds.”

So do I.

As such, I looked at what areas do better in such an environment. Assets considered dollar equivalents like gold and silver and other precious metals do well. Some other commodities like copper outperform, as well as emerging markets and Bitcoin.

In the equity arena, utilities, technology, energy, industrials, and consumer discretionary are standouts while financials, telecom, and consumer staples don’t do nearly as well.

Investment styles such as secular growth, momentum, mid-cap stocks, low beta, and quality outperform, while small caps, dividend plays, value, and defensives underperform. Some fixed-income areas like Municipal bonds, long-dated bonds, and TIPS shine, but stay away from categories like preferred, convertible bonds, high-yield credit, and leveraged loans.

Predicting what the economy and inflation will do every year is difficult at best. Trying to call a change as early as December is not for the faint of heart. Right now, Wall Street is so focused on expectations of a steady stream of expected rate cuts and the outcome of the presidential elections that what happens in December seems a long, long way.

How long will the economy remain in this mild state of stagflation? Unless the demands of populism are somehow resolved quickly, the future economic environment might indicate more of the same.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at billiams1948@gmail.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.

The views expressed here are not necessarily those of The Lakeville Journal and The Journal does not support or oppose candidates for public office.

Latest News

Club baseball at Fuessenich Park

Travel league baseball came to Torrington Thursday, June 26, when the Berkshire Bears Select Team played the Connecticut Moose 18U squad. The Moose won 6-4 in a back-and-forth game. Two players on the Bears play varsity ball at Housatonic Valley Regional High School: shortstop Anthony Foley and first baseman Wes Allyn. Foley went 1-for-3 at bat with an RBI in the game at Fuessenich Park.

 

  Anthony Foley, rising senior at Housatonic Valley Regional High School, went 1-for-3 at bat for the Bears June 26.Photo by Riley Klein 

 
Siglio Press: Uncommon books at the intersection of art and literature

Uncommon books at the intersection of art and literature.

Richard Kraft

Siglio Press is a small, independent publishing house based in Egremont, Massachusetts, known for producing “uncommon books at the intersection of art and literature.” Founded and run by editor and publisher Lisa Pearson, Siglio has, since 2008, designed books that challenge conventions of both form and content.

A visit to Pearson’s airy studio suggests uncommon work, to be sure. Each of four very large tables were covered with what looked to be thousands of miniature squares of inkjet-printed, kaleidoscopically colored pieces of paper. Another table was covered with dozens of book/illustration-size, abstracted images of deer, made up of colored dots. For the enchanted and the mystified, Pearson kindly explained that these pieces were to be collaged together as artworks by the artist Richard Kraft (a frequent contributor to the Siglio Press and Pearson’s husband). The works would be accompanied by writings by two poets, Elizabeth Zuba and Monica Torre, in an as-yet-to-be-named book, inspired by a found copy of a worn French children’s book from the 1930s called “Robin de Bois” (Robin Hood).

Keep ReadingShow less
Cycling season: A roundup of our region’s rentals and where to ride them

Cyclists head south on the rail trail from Copake Falls.

Alec Linden

After a shaky start, summer has well and truly descended upon the Litchfield, Berkshire and Taconic hills, and there is no better way to get out and enjoy long-awaited good weather than on two wheels. Below, find a brief guide for those who feel the pull of the rail trail, but have yet to purchase their own ten-speed. Temporary rides are available in the tri-corner region, and their purveyors are eager to get residents of all ages, abilities and inclinations out into the open road (or bike path).

For those lucky enough to already possess their own bike, perhaps the routes described will inspire a new way to spend a Sunday afternoon. For more, visit lakevillejournal.com/tag/bike-route to check out two ride-guides from local cyclists that will appeal to enthusiasts of many levels looking for a varied trip through the region’s stunning summer scenery.

Keep ReadingShow less