Is the worst of inflation behind us? Will labor market cool from current levels? Will corporate earnings meet expectations? When will the Fed pivot? How will elections affect S&P 500 returns?
Good luck in going full time! I have tried many times to expand into short video format. I find it a difficult transition. What is your intended platform for this?
I wish there were more verticalized video platforms for business, finance, investing content. But, apart from YT and Insta, are there other platforms you know of that I should also be exploring?
Thank you for sharing this detailed perspective. I appreciate the amount of detail and rigor in your work!
There are a few things on my mind I’m wondering if you see affecting the soft-landing scenario:
1. Student loan repayments starting up, and how that might dampen consumer sentiment and spending
2. The commercial real estate situation. I’ve heard there’s about $1T in CRE debt maturing in the next few years, and those owners are going to have a tough time getting refinanced with CRE values falling precipitously since the pandemic. Beyond that, it sounds like a majority of that debt is owned by regional banks, and there’s speculation that could ring new alarm bells with smaller banks in 2024 and beyond.
3. Wars. We have more than before, and they appear to be getting worse. How would these fit into your forecasts?
1. While I think student loan repayment is a headwind, it will ( or should ) slow down consumer spending from current levels moving forward, which on one hand may dampen consumer sentiment, but also help bring down inflation.
2. The commercial real estate thing is still a bit unknown in terms of its overall impact, and yes, regional banks are at a vulnerable spot. The idea is that as the economy slows in 2024, the Fed will be able to lower rates as guided, or even faster as per the Fed funds futures, which should help regional banks' overall balance sheet strength. At the same time, if the Fed funds rate is 75-100 b.p. lower than today, the impact on debt restructuring will be far less than if these companies had to re-structure debts now or even last year. But, no doubt, this is a vulnerable area, which I am monitoring to see if there is any material stress developing.
3. Wars: the probability of wars are increasing, yes, with rising geopolitical tensions, and should major world powers get involved, that would force me to change the basis of my assumptions. But until an event actually happens, the risk premiums never truly reflect the probability. But yes, the threat of a recession from a war remains especially with defense spending rising across major governments in the next 10 years.
4. As for income inequality, unfortunately, I don't have a bright outlook on that. I do believe that with the coming years, there will be more localized social and political unrest, which will strangle US growth, while the current level of government spending projections will keep inflation pressures higher than normal.
So, all in all, while markets can do its own thing in the short term, given my outlook over the few years, I believe the US will be sort of in a gridlock, both economy wise and stock market.
Thanks for this terrific summary. You’re the only economist I can read without getting a headache! Not surprised that your Substack is taking off. Congrats and keep up the great work!👍
That means a lot Marie. Thank you so much for such kind words and glad you enjoyed the post.
Truth to be told, I am not an economist, have no academic or professional background in finance or economics, just self taught over the last few years and right now, trying to declutter the jargon out there.
Surprising that they've held up so well despite rising costs and interest rate on debt (maybe the latter isn't having much impact depending on maturities).
Shows how successful companies have been with passing on higher costs via price increases.
Preceisely, I remember when I did a post earlier on Kellanova (Kellogs), my jaw dropped at how aggressively a lot of these companies have raised prices, but comparatively sales were not affected by nearly as much, a.k.a. higher profits.
This is probably telling that consumers continue to be in good shape and there is still excess savings in the system, though I don't think these two factors will continue to provide a tailwind for very long, moving forward.
As for interest rate on debt, it is only smaller companies with weaker balance sheets thus far who have been affected by higher interest rates, probably explains why Russel 2K is lagging behind S&P 500 and Nasdaq.
Amrita, I only discovered you recently through your piece on dating. I enjoyed it. Wish you all the best for 2024, looking forward to more of your writing.
Amrita, have you discussed ETH? I don't know anything about it, but I thought your writing is so clear and easy to follow that if you have something on it I would like to read it. A catalyst is a guy, with public status, doing podcasts and stuff, offered to buy some of my art. I have no reason to think it is con, and I am not going to decide anything until I know more. I'v asked you, plus a couple of very trusted friends in business. Thank you.
Sure, I can cover it. I keep testing new concepts with my readers and try to find comprehensive ways to get my points across by skipping industry jargon. Since, blockchain and crypto are much newer concepts, it does take significant effort on my part to break it down into simpler concepts. I am currently in the process of drafting a post but it will take a month or two before I put one out.
Just curious though, Michael - what aspects about ETH and other crypto are you most interested in understanding?
You are the best at that! How is it secure? How does one pay for stuff: gas, food, medical, rent, etc? What are NFTs? It seems that an artist sells rights to their work, but not the work itself? Funny, when I sell a painting, they get the object, but I retain the rights/copyright. What happens if the lights go out? Gold is easier to understand.
Great post, Amrita! With consumer credit balances hitting record highs and savings being drained, do you think we might see a shift in consumer spending patterns affecting the overall market in 2024, especially if the labor market cools down as predicted? Curious about your thoughts on this delicate balance! 🤔📉📈
That's a great question Zan. I think consumer spending will remain strong as long as there isn't any material weakening in the labor market. For now, despite the rate hikes, the labor market is proving resilient, with pockets of weakness from time to time, but nothing as broad-based like what you would see before a recession. There are structural reasons for that, such as aging population and low laborforce participation. Moving forward, while I expect labor markets to weaken slightly from current levels, I don't expect major unemployement like we saw in 2008 and 2009. Plus, consumer confidence and sentiment has been on the rise, which means that despite large consumer credit balances, consumers are confident that they would be able to pay it back. In short, I don't think we are heading for a deep recession in 2024, rather we are more likely in a period of slightly lower growth and higher inflation compared to the prior decade.
Wow thanks for such an insightful reply! Yeah it will be an interesting '24 for sure. I was personally surprised at the overall performance of the markets generally in 2023 (albeit mostly buffed up by the big 5 tech firms)
Yeah, common sense dictated lackluster performance for markets in 2023, but then liquidity conditions held up surprisingly well in 2023, as the government was issuing treasury bills (short term), instead of treasury bonds (long term), that did not hurt overall bank reserves.
Hope you enjoyed the holidays and new year and great to have you back Amrita. Thanks for your work in determining what trends will define this upcoming year, and good luck with your 2024 goals for The Pragmatic Optimist. For the record, I don't think you're crazy at all!
All important issues raised in this kickoff issue, Amrita! The stock market has been trading based on Fed Funds (cuts) expectations, so whether inflation will be lowering as fast as the market has priced in (like 6 cuts) is the key driver of market returns -- I think economic growth and labour market may not be as important a driver as disinflation this year.
Fully agree with you on how the path of inflation will determine the Fed funds futures and affect overall market performance. With labor market, the longer payrolls come at or above expectation and avergae hourly earnings trend at 0.4% on a monthly basis or 4.8% annualized, the Fed will be reluctant to pivot, which would then consequently affect the probabilities of the Fed funds futures.
When you say that you dont think labor market will be driving disinflation this year, are you expecting labor market conditions to remain more resilient than the Fed's projections?
I was thinking disinflation (trend) is more a driver of market returns than labour market or economic growth although there are obvious linkages. Thanks for your comments!
Regarding the inflation risk, I continue to lean to the downside. Productivity has growth significantly and real wages still need to catch up post the shock. Labor market wage growth will remain higher for the foreseeable future, as a natural post-inflationary shock development.
A different threat to inflation is the increased shipping costs due to the issues in the Red Sea. This may end up pushing inflation somewhat depending how long we think it may continue.
I fully agree with your point on the rise in shipping costs from issues in the Red Sea and how they put temporary upward pressures on inflation, thus derailing the Fed's plans to pivot further.
Generally speaking, I do believe, inflation is headed lower from current levels unless there are unforeseen shocks as well, though I don't see it dropping below 2.5-2.4%. The growth in consumer credit is partially worrisome to all.
What are your thoughts on overall inflation trending above long term trend? Since you have an academic background, I was curious to get your thoughts on whether it is necessary in the broad spectrum of things?
Since I'm writing this after the December numbers came in - it's interesting to see how sticky the number got due to the shelter component (it accounted for 2/3 of the inflation in all of 2023 and it each month shelter CPI is about 0.5/0.4 and is expected to stay like that for the next 6 months even though median rents just fell!). With normalized shelter, we're basically at 2%.
Regarding the long run inflation target question - I haven't seen much academic discourse on it. There is always the feedback issue - inflation expectations impact today's inflation. So if the Fed were to adjust targets, that might increase inflation today, which might result in the question if they should adjust the target again. Of course, some of the problem is with measuring instantaneous inflation. If we argue that inflation is already at 2%, but due to measurement quirks in lagged shelter, reported inflation is (at 3-4%) than there appears no need for changing targets.
However, since the reported inflation is 3-4%, market participants may start acting as if that is the new normal, increasing underlying inflation (ex-shelter) from 2% to the 3-4% (for example, if stores increase prices by 3-4% rather than 2%). And now, in this world, if we bring back shelter to the inflation measure (so headline CPI), reported inflation would be 4-5%, scaring market participants further. Thus, the Fed has to wait through lagged shelter to feed through entirely before they can stop telling everyone in no uncertain terms that it is 2% or bust.
Thanks for such a thoughtful response. Fully agree with you on the feedback issue thing, probably a difficult piece to maneuver to control for inflation expectation, while at the same time not tipping the economy into a recession.
Loved reading the bit about your journey since starting the publication.
I am a big fan of your approach of connecting the dots across Macro, Investing and Tech. All made easy.
No wonder you saw such incredible growth in subscribers!
Thank you!! Likewise, I have enjoyed your journey and your fabulous posts. Wishing you all the success in going paid.
Good luck in going full time! I have tried many times to expand into short video format. I find it a difficult transition. What is your intended platform for this?
Thanks J.K.
I am thinking starting with Youtube shorts and Insta Reels. Same content, repurposed.
What are all the platforms and tactics that you have used on this short video front?
I haven't started because I haven't identified the platform yet. I am not a fan of Youtube for sure.
I wish there were more verticalized video platforms for business, finance, investing content. But, apart from YT and Insta, are there other platforms you know of that I should also be exploring?
I am not aware of any. Threads may have that capability. Tiktok certainly does.
Congrats Amrita🥳 Amazing journey!
You are doing a great job! well deserved👍
Thank you Oktay for your continued support.
Hi Amrita,
Thank you for sharing this detailed perspective. I appreciate the amount of detail and rigor in your work!
There are a few things on my mind I’m wondering if you see affecting the soft-landing scenario:
1. Student loan repayments starting up, and how that might dampen consumer sentiment and spending
2. The commercial real estate situation. I’ve heard there’s about $1T in CRE debt maturing in the next few years, and those owners are going to have a tough time getting refinanced with CRE values falling precipitously since the pandemic. Beyond that, it sounds like a majority of that debt is owned by regional banks, and there’s speculation that could ring new alarm bells with smaller banks in 2024 and beyond.
3. Wars. We have more than before, and they appear to be getting worse. How would these fit into your forecasts?
4. Poor households in the U.S. have gotten considerably poorer since the end of pandemic-era stimulus programs and temporary social benefits. How does this factor into a macro picture for 2024? (A read on this I found illuminating if you haven’t seen it: https://www.brookings.edu/articles/post-pandemic-poverty-is-rising-in-americas-suburbs/)
Eager to get your thoughts on how these puzzle pieces confirm or allay concerns about a severe recession — short of us all having a crystal ball 😄
Hi Robert, all fair concerns in my opinion.
1. While I think student loan repayment is a headwind, it will ( or should ) slow down consumer spending from current levels moving forward, which on one hand may dampen consumer sentiment, but also help bring down inflation.
2. The commercial real estate thing is still a bit unknown in terms of its overall impact, and yes, regional banks are at a vulnerable spot. The idea is that as the economy slows in 2024, the Fed will be able to lower rates as guided, or even faster as per the Fed funds futures, which should help regional banks' overall balance sheet strength. At the same time, if the Fed funds rate is 75-100 b.p. lower than today, the impact on debt restructuring will be far less than if these companies had to re-structure debts now or even last year. But, no doubt, this is a vulnerable area, which I am monitoring to see if there is any material stress developing.
3. Wars: the probability of wars are increasing, yes, with rising geopolitical tensions, and should major world powers get involved, that would force me to change the basis of my assumptions. But until an event actually happens, the risk premiums never truly reflect the probability. But yes, the threat of a recession from a war remains especially with defense spending rising across major governments in the next 10 years.
4. As for income inequality, unfortunately, I don't have a bright outlook on that. I do believe that with the coming years, there will be more localized social and political unrest, which will strangle US growth, while the current level of government spending projections will keep inflation pressures higher than normal.
So, all in all, while markets can do its own thing in the short term, given my outlook over the few years, I believe the US will be sort of in a gridlock, both economy wise and stock market.
Thanks for this terrific summary. You’re the only economist I can read without getting a headache! Not surprised that your Substack is taking off. Congrats and keep up the great work!👍
That means a lot Marie. Thank you so much for such kind words and glad you enjoyed the post.
Truth to be told, I am not an economist, have no academic or professional background in finance or economics, just self taught over the last few years and right now, trying to declutter the jargon out there.
Nothing wrong with being self taught! That just makes you even more impressive!
Very kind of you.
Interesting chart on corporate profit margins.
Surprising that they've held up so well despite rising costs and interest rate on debt (maybe the latter isn't having much impact depending on maturities).
Shows how successful companies have been with passing on higher costs via price increases.
Preceisely, I remember when I did a post earlier on Kellanova (Kellogs), my jaw dropped at how aggressively a lot of these companies have raised prices, but comparatively sales were not affected by nearly as much, a.k.a. higher profits.
https://amritaroy.substack.com/p/kelloggs-just-broke-up-its-cereal
This is probably telling that consumers continue to be in good shape and there is still excess savings in the system, though I don't think these two factors will continue to provide a tailwind for very long, moving forward.
As for interest rate on debt, it is only smaller companies with weaker balance sheets thus far who have been affected by higher interest rates, probably explains why Russel 2K is lagging behind S&P 500 and Nasdaq.
Kansas City fed : 51% of inflation can be explained by -increase in prices
Amrita, I only discovered you recently through your piece on dating. I enjoyed it. Wish you all the best for 2024, looking forward to more of your writing.
Thank you Priyanka for your wishes. Glad you are enjoying my writing. 🙏🏼🙏🏼
Best of luck with your goals in 2024, Amrita! I look forward to following your journey.
Thank you Diana for your wishes. Happy New Year to you.
Amrita, have you discussed ETH? I don't know anything about it, but I thought your writing is so clear and easy to follow that if you have something on it I would like to read it. A catalyst is a guy, with public status, doing podcasts and stuff, offered to buy some of my art. I have no reason to think it is con, and I am not going to decide anything until I know more. I'v asked you, plus a couple of very trusted friends in business. Thank you.
Sure, I can cover it. I keep testing new concepts with my readers and try to find comprehensive ways to get my points across by skipping industry jargon. Since, blockchain and crypto are much newer concepts, it does take significant effort on my part to break it down into simpler concepts. I am currently in the process of drafting a post but it will take a month or two before I put one out.
Just curious though, Michael - what aspects about ETH and other crypto are you most interested in understanding?
You are the best at that! How is it secure? How does one pay for stuff: gas, food, medical, rent, etc? What are NFTs? It seems that an artist sells rights to their work, but not the work itself? Funny, when I sell a painting, they get the object, but I retain the rights/copyright. What happens if the lights go out? Gold is easier to understand.
Great post, Amrita! With consumer credit balances hitting record highs and savings being drained, do you think we might see a shift in consumer spending patterns affecting the overall market in 2024, especially if the labor market cools down as predicted? Curious about your thoughts on this delicate balance! 🤔📉📈
That's a great question Zan. I think consumer spending will remain strong as long as there isn't any material weakening in the labor market. For now, despite the rate hikes, the labor market is proving resilient, with pockets of weakness from time to time, but nothing as broad-based like what you would see before a recession. There are structural reasons for that, such as aging population and low laborforce participation. Moving forward, while I expect labor markets to weaken slightly from current levels, I don't expect major unemployement like we saw in 2008 and 2009. Plus, consumer confidence and sentiment has been on the rise, which means that despite large consumer credit balances, consumers are confident that they would be able to pay it back. In short, I don't think we are heading for a deep recession in 2024, rather we are more likely in a period of slightly lower growth and higher inflation compared to the prior decade.
Wow thanks for such an insightful reply! Yeah it will be an interesting '24 for sure. I was personally surprised at the overall performance of the markets generally in 2023 (albeit mostly buffed up by the big 5 tech firms)
Yeah, common sense dictated lackluster performance for markets in 2023, but then liquidity conditions held up surprisingly well in 2023, as the government was issuing treasury bills (short term), instead of treasury bonds (long term), that did not hurt overall bank reserves.
Hope you enjoyed the holidays and new year and great to have you back Amrita. Thanks for your work in determining what trends will define this upcoming year, and good luck with your 2024 goals for The Pragmatic Optimist. For the record, I don't think you're crazy at all!
Happy New Year to you too Dylan. Thanks for your encouragement, wishing you and your newsletter all the success in 2024 as well.
All important issues raised in this kickoff issue, Amrita! The stock market has been trading based on Fed Funds (cuts) expectations, so whether inflation will be lowering as fast as the market has priced in (like 6 cuts) is the key driver of market returns -- I think economic growth and labour market may not be as important a driver as disinflation this year.
Fully agree with you on how the path of inflation will determine the Fed funds futures and affect overall market performance. With labor market, the longer payrolls come at or above expectation and avergae hourly earnings trend at 0.4% on a monthly basis or 4.8% annualized, the Fed will be reluctant to pivot, which would then consequently affect the probabilities of the Fed funds futures.
When you say that you dont think labor market will be driving disinflation this year, are you expecting labor market conditions to remain more resilient than the Fed's projections?
I was thinking disinflation (trend) is more a driver of market returns than labour market or economic growth although there are obvious linkages. Thanks for your comments!
Thanks Marianne.
Happy to see you back in the proverbial saddle for 2024! 🫡
Thanks Stone. Happy New Year to you.
Great analysis Amrita. It's great to read your posts again after the Holiday season break. Happy New Year.
Thanks Sanuj, it feels good to be back again. Happy New Year to you too and looking forward to reading more of your work this year.
Congrats on the journey and good luck in 2024!
Regarding the inflation risk, I continue to lean to the downside. Productivity has growth significantly and real wages still need to catch up post the shock. Labor market wage growth will remain higher for the foreseeable future, as a natural post-inflationary shock development.
A different threat to inflation is the increased shipping costs due to the issues in the Red Sea. This may end up pushing inflation somewhat depending how long we think it may continue.
I fully agree with your point on the rise in shipping costs from issues in the Red Sea and how they put temporary upward pressures on inflation, thus derailing the Fed's plans to pivot further.
Generally speaking, I do believe, inflation is headed lower from current levels unless there are unforeseen shocks as well, though I don't see it dropping below 2.5-2.4%. The growth in consumer credit is partially worrisome to all.
What are your thoughts on overall inflation trending above long term trend? Since you have an academic background, I was curious to get your thoughts on whether it is necessary in the broad spectrum of things?
Since I'm writing this after the December numbers came in - it's interesting to see how sticky the number got due to the shelter component (it accounted for 2/3 of the inflation in all of 2023 and it each month shelter CPI is about 0.5/0.4 and is expected to stay like that for the next 6 months even though median rents just fell!). With normalized shelter, we're basically at 2%.
Regarding the long run inflation target question - I haven't seen much academic discourse on it. There is always the feedback issue - inflation expectations impact today's inflation. So if the Fed were to adjust targets, that might increase inflation today, which might result in the question if they should adjust the target again. Of course, some of the problem is with measuring instantaneous inflation. If we argue that inflation is already at 2%, but due to measurement quirks in lagged shelter, reported inflation is (at 3-4%) than there appears no need for changing targets.
However, since the reported inflation is 3-4%, market participants may start acting as if that is the new normal, increasing underlying inflation (ex-shelter) from 2% to the 3-4% (for example, if stores increase prices by 3-4% rather than 2%). And now, in this world, if we bring back shelter to the inflation measure (so headline CPI), reported inflation would be 4-5%, scaring market participants further. Thus, the Fed has to wait through lagged shelter to feed through entirely before they can stop telling everyone in no uncertain terms that it is 2% or bust.
Hopefully my thoughts here make some sense
Thanks for such a thoughtful response. Fully agree with you on the feedback issue thing, probably a difficult piece to maneuver to control for inflation expectation, while at the same time not tipping the economy into a recession.
Congrats for such an amazing growth so far, Amrita!
This is a great summary on what to expect from the markets and the economy in 2024.
Thanks Alejandro. Glad you enjoyed the post.
Wishing you all the success for your Psychology of Wealth in 2024 and beyond.