06 Apr Cassandra was (and is) right

“Fear and greed cut two ways.” – The Lonely Realist

The predictions Cassandra made two years ago were prescient. She said that the Fed’s successful management of America’s economy has proven it to be “a highly capable economic general [whose] creative policies avoided depression following the Global Financial Crisis and successfully navigated the world economy to a [15]-year period of consistent growth, accomplishments that no one thought possible in 2009.” Relying on the Fed’s capabilities, Cassandra in June 2022 predicted that the Fed “will fine-tune America’s economy to achieve a soft landing.” And then, in February 2023, she forecast another seeming impossibility: “By Q1 2024, America’s economy will be expanding, inflation will be continuing to fall, and GDP growth will be returning to a stable level of ~2%/year.” That’s exactly what has happened.

The vast majority of economic experts now have embraced Cassandra’s economic vision, belatedly abandoning their forecasts of a 2024 recession, rising unemployment and anemic GDP growth. Former skeptics have become economic bulls, cheerleading America’s continuing economic success and its ever-rising stock markets. As John Authers wrote this week, “Stock market bears have given up…. For the first time in two years, the allocators, who are asked to affix a probability to certain outcomes, put the chances of recession below 50%.” Bank of America agrees: Two-thirds of respondents to its global fund manager survey predict no recession in the next 12 months. Even Morgan Stanley’s Mike Wilson, whose bearish forecasts have rattled the markets for years, today is sanguine about America’s growth this year.

So are investors. Their experience bears out an optimistic vision of America’s economic strength and resilience. Except for the 2020 COVID blip, stock markets have been levitating since 2009, reinforcing Americans’ belief that its direction is always up. The low-interest rate era that ended in 2022 provided financing fuel that allowed American businesses to borrow for the long-term at historically unbeatable rates. They accordingly printed profits …, and businesses that borrowed long-term are continuing to ride that “free money” wave. COVID supply-chain snarls created an inflationary surge that indeed was “transitory,” briefly slowing America’s economy. Businesses, however, had little need to tighten their belts and instead passed along higher costs to consumers. The Federal government’s massive subsidies added jet fuel to growth …, and the economy responded. The AI Revolution that began in October 2022 has been kicking-up stock market prices (and the values of the Magnificent Seven) to ever greater heights. As several TLR readers have lamented commented, “I would have slept better and been far wealthier if I’d just put all my money in a passive stock fund …, and that’s what I’m doing now.”

Uniform belief, however, can signal danger. That’s the principle of contrarianism. For stock markets, herding behavior can lead those markets to become underpriced, as was the case in 2022, or overpriced, as they might be today. Are greed and FOMO now driving investors to excessive optimism?

As Cassandra cautioned this past February, “America’s high-wire act cannot continue…. An accident is waiting to happen.” Cassandra’s principal concern was on over-leveraged commercial real estate. Others have expressed fears concerning a “maturity cliff,” where expiring low-interest loans will have to be refinanced, while yet others have raised concerns about America’s unsustainable debt. Although those risks are real, they are not do not appear to be imminent. Jay Powell acknowledged their reality in his February 60 Minutes interview, cautioning that “The U.S. federal government is on an unsustainable path…. It’s probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path.”

It was barely three weeks ago when TLR cautioned that “there’s something happening here.” Gold’s price then was $2,157. It closed on Friday at $2,330 (echoing the volatility of the early 2000s when gold’s price rose from $280 to $1,226)! Explanations for the 2024 increase in precious metals prices present a cautionary tale. CPM Group’s Jeffrey Christian ascribes the surge to fundamental supply-demand factors coupled with strong GDP growth, high interest rates, fears of international conflicts, and debt weaknesses. Fred Hickey’s reasons are undisciplined government spending and budget deficits, mirroring Jay Powell’s concerns. Ed D’Agostino places responsibility on central bank purchases, primarily by China as part of an effort to strengthen alternatives to the US Dollar and thereby provide substitute payment mechanisms for itself and its allies. All are contributors and all are signaling a warning that something significant is happening …, though what it is “ain’t exactly clear …,” yet.

Market bulls see the “something” as a cause for celebration. Jeffrey Christian sees an increased appetite for speculative investment and heightened investment returns. John Authers believes that buoyant demand for gold and oil are evidence of a stronger economy and an increased appetite for risk, both of which are bullish. Ed D’Agostino foresees waning inflation with lowering interest rates as fuel for continuing GDP growth, with gold experiencing a resurgence “as a store of wealth, a hedge against currency debasement, and a return to its centuries-old role as a tradable currency,” noting (as TLR previously observed) that “mining stocks usually lag a big move in gold’s price.” And hedge fund manager DE Shaw has made a fascinating case for ongoing economic growth with a “no landing” outcome similar to Cassandra’s.

What if fear, greed, the AI Revolution, and domestic and international risks indeed will continue driving investment and economic growth? Yes, there are downside risks aplenty, but what if Cassandra once again has accurately predicted that the inevitable cliff-dive will not soon occur? What if the remainder of this year sees strong growth, sticky interest rates and rising precious metals prices? What if, as TLR readers have urged, a smart investment strategy is to invest in a passive stock fund? What if putting aside technical and fundamental risk concerns is the road to riches? Then again, when exactly will the piper have to be paid? “What if” indeed?

TLR Index

An index of TLR titles can be found here.

Finally (from a good friend)