17 Aug America’s Economy

“Can America continue to experience robust economic growth and expanding stock market values?” – The Lonely Realist

Like many of its readers, TLR has questioned whether America’s economic growth and stock market prices can continue levitating. After all, except for the Q2 2020 COVID dive, since 2009 the U.S. has seen positive GDP growth in every calendar quarter, an unprecedented period of almost uninterrupted prosperity. Over those 15 years, the S&P500 Index has risen from 1090 to 5500. Investors canny enough to ride the stock market wave have more than quintupled their money…, with those who concentrated on the Mag 7 having done significantly better. What’s next? Bulls are forecasting ever-increasing economic growth driven by technological innovation, with the S&P forecast by some to rise above 10,000 before 2030. Bears see a bubble ready to burst, inflated by an insane amount of money-printing magnified by investor irrationality. Who is right? Has America’s economy entered an era of ever-increasing growth in which its high-flying economic flight never has to “land,” or is it headed for a level of turbulence that will force a “hard landing”? Cassandra recently sent TLR the following letter expressing her views:

“Dear Mr. Realist:

I appreciate your interest in coordinating another interview about America’s economic future, as well as your persistence via repetitive voicemail messages. However, one voicemail is quite sufficient! I have a full prophesizing schedule and can spare only enough time for this brief letter. However, my calendar is likely to open again after Christmas.

As you are well-aware, it was more than 2 years ago, in June 2022, that I prophesized that Federal Reserve Chairman Jay Powell’s successful management of America’s economy would confirm the Fed’s status as “a highly capable economic general [whose] creative policies avoided depression following the Global Financial Crisis and successful navigation of the world economy to a [15]-year period of consistent growth. The Fed did so again in 2020, avoiding economic calamity during the global COVID pandemic. It will continue to successfully fine-tune America’s economy to achieve a soft landing with fading inflation and modest GDP growth.” I followed in February 2023 with a prophesy that no one at the time thought possible: “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.” My predictions of economic expansion, waning inflation and rising stock market prices have proven to be correct. They will continue being correct.

And, yet, there are those who are self-deceived by each Fed twitch, misperceiving Fed-speak for policy change. The Fed is adept at tweaking market perceptions to enhance the execution of its long-term goals. It has demonstrated over and over again that consistency is its policy-making hallmark. Yet, at the end of 2023, market pundits were betting on the Fed to taper interest rates 6 times during the next year. How absurd! By the middle of the year, they were questioning whether the Fed would take any tapering action at all. Today they are debating whether the Fed will make 0, 1, 2 or 3 interest-rate cuts. How nonsensical. Despite all the parsing of “dot plots,” analyses of scripted speeches by Fed governors, and dissection of  Chairman Powell’s every word, the Fed will stay on-track by lowering rates 2 times this year. As a consequence, the ebullient stock market will prove itself properly priced for continued airborne flight. Expect a “no landing” in 2024.

Many thought last week that America’s economic airplane would be forced to the ground – and land hard – when global equities suffered through a dramatic sell-off triggered by the unwinding of the Japanese Yen carry trade. The Tokyo Stock Price index quickly fell 20% and the S&P Global Index lost 3.3%. The market promptly shrugged off the news…, and for good reason – Central Bankers have successfully fine-tuned the global economy by using massive government spending to complement overheated printing presses. It is precisely that money-printing by America’s Fed, when combined with government borrowing from foreigners, that has funded and will continue to fund ubiquitous global spending by China, France, Russia, England, India, Japan and other countries utilizing deficit-spending to keep unemployment rates low and economic growth going. This global perpetual motion machine will continue for the foreseeable future. Yet, there will come a time when it no longer can do so.

Economists agree that no single nation can indefinitely run deficits without limits. That means that America cannot lower the cost of money below the equilibrium rate and print unlimited amounts of Dollars without causing, at some point, an explosion of inflation and/or a collapse in the value of the Dollar. That is not of concern today, Mr. Realist, because the world’s leading economies are pursuing parallel economic policies. As a result, relative value necessarily is being maintained and economic growth will continue…, although at some point a significant upset to that equilibrium is inevitable, with catastrophic consequences.

What might such an era-ending event look like, Mr. Realist? History is replete with examples: spreading wars (Ukraine, the Middle East, Taiwan, and conflicts in Africa are possible trigger points); famine (perhaps caused by a changing climate); pestilence (with COVID consequences continuing); energy shortages (fossil fuels remain the world’s go-to energy source); out-of-control AI; etc. I would be happy to discuss the issues with you when we next speak. However, at this time I see clear flying weather for America’s economy over the next number of months.”

[ED NOTE: Despite Cassandra’s apparent optimism, a number of economists are predicting difficult economic times, perhaps quite soon, with politics having a potentially significant impact on Fed policy.]

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Finally (from a good friend)