Timing is Everything

The best of our forecasters put the probability of a recession next year at around 65 per cent. Inflation is wiping out the value of the wage increases generated by a tight labor market. Joe Biden’s administration is on a spending spree that has sent the national debt over the $30 trillion mark, and rising, the forgiveness of student debt adding an estimated $400 billion-to-$1 trillion to the deficit. The dollar is so strong that companies with large piles of dollar-denominated IOUs might be unable to pay what they owe, while other countries have difficulty affording the dollars they must buy to pay for oil. In 1971, when a weak dollar was ravishing many countries’ export markets, Treasury Secretary John Connally told his international counterparts, “It’s our currency, but it’s your problem.” Just as true of the problems created by a strong dollar.

Biden Hunts For Oil But NIMBY

The President is draining the Strategic Petroleum Reserve in a vain effort to contain politically potent petrol prices, approaching the minimum level required by international commitments. The upward pressure on prices was given an added fillip by Crown Prince and now also Prime Minister Mohammed bin Salman. In  answer to the President’s plea “please sir, I want some more”, Opec, led by Saudi Arabia and fellow traveler Russia, announced a two million barrel per day production cut from quota levels, or about 660,000 barrels from current production levels. That’s equivalent to less than one per cent of global supply, but nevertheless will add to the upward pressure building on oil prices and help Russia meet the costs of its invasion of Ukraine. Biden, while rattling his begging barrel in the Middle East and South America, is restricting US crude oil production lest his green-hued Left accelerate its hunt for a new candidate in 2024. The XL Pipeline could deliver enough Canadian crude to Gulf Coast refineries to more than offset OPEC+ production cuts.

Meanwhile, a policy war rages in America. A mounting chorus has switched from the Fed’s hymn book to a more agreeable one that calls for the Fed to stay its hand after the rate increases likely at the two remaining monetary policy committee meetings scheduled for this year. But the Fed wants “convincing evidence” that it has inflation on the run before holding off on increases in 2023. Fair enough. Meanwhile, it should not ignore anecdotal evidence that its medicine is working.

Some Cool Hints

  • The housing industry is slowing in the face of 7 per cent interest rates on traditional 30-year mortgages, the highest since 2007. Mortgage applications are down 35 per cent since the beginning of the year. Builders are offering large discounts to developers to buy houses to be converted to rental units.
  • Kohl’s, Target, Walmart, Gap and other retailers report sharp increases in inventories. The excess stuff is on sales racks or flogged to vulture buyers who are passing the goods on at a fraction of their original prices.
  • Trans-Pacific cargo rates are down 75 per cent from last year, and sailing trips are down.
  • Cotton prices are down more than 40 per cent and lumber prices 70 per cent from their peaks.
  • S&P Global reports a slowdown in manufacturing activity.

Jobs Market Goes From Red Hot To Hot

Add that the job market, so tight to as to be “unhealthy”, according to Powell, is becoming what he would call “healthier” but not yet “healthy”. The economy added 263,000 jobs in September, well below last month’s 315,000 and this year’s monthly average of 420,000. In August the number of job openings fell from 11.2 to 10.1 million, with the financial and property sectors among the biggest losers. New claims for unemployment insurance and reported lay-offs are up, and hiring intentions are down. Firms announcing layoffs include Amgen, Gap, Nordstrom, Opel, Amazon, Credit Suisse, Tencent, Peloton, Ford, Twitter, Rivian, Tesla and Netflix.

Nevertheless, it is too early for the Fed to declare victory. The unemployment rate fell a tick last month to a post-Covid low of 3.5 per cent; many economists say it will take a rate of 5 per cent for some time to cool the labor market. Food prices remain elevated, and the price index on which the Fed bases policy continues to rise. Most experts expect rate increases of 0.75 (traders give this an 81 probability) and 0.50 percent in November and December. That suggests itself as the time for Fed policymakers to take what Coca-Cola once called the pause that refreshes. There is, after all, a lag between the administration of anti-inflation medicine and evidence of its curative powers.

There’s No Finding Lost Credibility

It would be unfortunate if, as rumor has it, the Fed is unwilling to pause until it restores its credibility, never mind the state of the economy. My scan of the relevant statutes reveals that congress has stated the Fed’s mandates as “maximum employment, stable price and moderate long-term interest rates.”  Plenty of wiggle room there, but not enough to add “restoring the Fed’s credibility” to the list of policy goals. Good thing, because that would be mission impossible in the face of the Bank’s history of wildly wrong forecasts, including most recently that inflation encouraged by the Fed’s negative interest rates would prove “transitory”.

The Best Is Yet To Come And Won’t That Be Fine

Here’s the good news, so good that it trumps all the bad. Every ill afflicting the country is man-made, created by a policy error. America contains all the oil it needs if it would allow oilmen to drill for it. It can reduce its deficits if  its politicians would decide to do so. It has a large entrepreneurial class capable of producing the answer to global warming. It is a magnet for the world’s best. It has a military that would make enemies tremble if they thought we know how to use it. It can even cut the crime and illegal immigration that threaten social stability. As Nike advises in its ads, “Just Do It.”