It's Not a Lie if You Believe It...
They said it couldn’t be done. I said it couldn’t be done. And yet unwavering consumer and investor confidence are plowed American’s King Hell of an economy straight through what the smart money said was going to be a recession by 2024. The stock market clocked the longest winning streak in 20 years - nine consecutive weeks – and the S&P 500 bumped up to an all-time high (but without the “Magnificent 7” driving the S&P 493, not nearly that high). Informal reports show that the economy grew by 2.5% in December, twice expectations. Man, ain’t we got fun!
The confidence, though, in hung on the assumption that everything will go to as expected. “Core” inflation is at 2.2% - damn near the target – so rates are set to come down. True, there are inherent contradictions in our pleasant situation: A cut in interest rates will fuel price rises in property and other sectors, and the costs of services are rising fast. Still, as of November, the San Francisco Fed reckoned that US households are sitting on some $290bn in excess savings over the expected baseline.
Like George Costanza’s fabled “roommate switch” maintaining vigorous growth, tight labor and fading inflation is a very tricky maneuver, but it can be done. Hell, America’s “invisible hand” might do it and actually stick the landing with a smooth disinflation that doesn’t shake the tight job market or consumer spending.
And yet, my mother’s warning about driving on New Year’s was simple: “It doesn’t matter if you are sober as a judge if everyone else on the road is drunk as a skunk.” Or, you can get it right and some deranged rando can still drive a Denali into your lap.
The dumpster fire that is Russia, and the spreading grease fires throughout the Middle East are going to produce commodities shocks in 2024 – and oil is not reckoned in the above “core” number. Shipping will be slower and more expensive – and for America that means everything will be slower and more expensive. Both will wreck investor confidence and trigger an unfortunate consumer pissiness.
For the American Goldilocks scenario to continue in 2024, investors are betting that rates will come down sooner rather than later. Which is precisely why John Williams, president of the New York Fed, said that it was “just premature to be even thinking about that.”
History suggests that recessions – like exactly how drunk you are - are hard to pick up in real time. Those holiday credit card bills haven’t come in the mail yet.