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6 Questions About the Market & the Economy – A Wealth of Common Sense

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I did a radio interview this week.

I don’t do a lot of these things because it’s just easier and more comfortable to talk about stuff on my podcast but this one sent me a great list of questions ahead of time that I liked.

Here are 6 of the best questions with some thoughts on each:

(1) What is your reaction to the latest CPI report and your outlook on inflation?

Inflation was basically flat from June to July.1

This is the first good news we’ve gotten on the price front in a while. You can see the energy components finally softened in a big way (via the BLS):

Inflation of 8.5% over the past 12 months is still uncomfortably high but it’s going to take a while for that rate to subside, even if prices do continue to slow in the months ahead.

Obviously, one data point does not make a trend but it does seem like the Fed’s moves along with some easing of supply chains have helped stop the uninterrupted rise in prices.

Gas prices are down like 60 days in a row. Oil prices are down. Used car prices are finally falling.

We can build on this (I hope).

(2) Where does the Fed go from here?

It’s difficult to know exactly what the Fed will do without knowing what the inflation data will look like in the coming months.

Back in the summer of 2020, the Fed said they were comfortable letting inflation run hot for a while if it meant a more robust recovery for the labor market.

The labor market is certainly in a better place than it was in 2020 but inflation is running just a smidge higher than their 2% target.

Fed officials say they’re not done hiking rates just yet and I tend to believe them (for now):

Minneapolis Federal Reserve Bank President Neel Kashkari on Wednesday said he is sticking to his view that the U.S. central bank will need to raise its policy rate another 1.5 percentage points this year and more in 2023, even if that causes a recession.

The Fed is “far, far away from declaring victory” on inflation, Kashkari said at the Aspen Ideas Conference, despite the “welcome” news in the consumer price index report earlier in the day that inflation may have begun to cool.

Kashkari said he hasn’t “seen anything that changes” the need to raise the Fed’s policy rate to 3.9% by year-end and to 4.4% by the end of 2023. The rate is currently in the 2.25%-2.5% range.

The Fed waited too long to act and they don’t want to look like idiots again.

They care more about inflation than the job market right now so they’ll likely keep raising rates until we get a number of lower inflation prints.

If they go too far that has to be a risk to both the stock market and the economy.

(3) What does a soft landing look like?

Let’s start with what a hard landing looks like and work backwards.

A couple of months ago I looked at what has happened to the unemployment rate during past recessions:

The average increase is more than a doubling off the lows. That would take us to more than 7% from the current 3.5% unemployment rate.

To me, a soft landing would see inflation below 4% or so without a commensurate rise in the unemployment rate. The lowest it’s ever increased to during past slowdowns is just over 6%.

I’d say anything 5% and under for the unemployment rate would be a win if we could get inflation back to 3% or so.

What’s the scenario that could make this happen?

The labor market is in a weird place right now since there are more jobs available than people who are looking for one:

Those openings have come down a bit from 11.7 million to 10.7 million. The dream soft landing scenario for the Fed would see these openings fall by 4-5 million but the unemployment rate doesn’t go much above 4-5%.

Is this actually possible?

History says no but employers have been dealing with a challenging hiring market since the start of the pandemic.

Sam Ro wrote a thought-provoking piece this week about the concept of labor hoarding that’s worth considering:

So what explains the current reluctance to shed workers?

Maybe recent experience has something to do with it.

Much of the ongoing economic recovery has come with persistent labor shortages. Employers haven’t been able to hire fast enough to keep up with the booming demand for their goods and services.

At least some of the employers seeing business slow right now remember how hard it was to recruit talent over the past two years and would rather just hang on to employees, even if it comes with carrying costs.

As a matter of convenience, of course it’s easier to just hang on to workers during a slowdown or recession if you expect the downturn to be brief and shallow.

Millions of people were either let go or put on the shelf in 2020 and that made it more difficult to re-staff once demand came back faster than companies are used to.

What if employers hold onto more employees than in past recessions if they assume the next one will be mild?

What if companies don’t want to go through the hiring process all over again following a recession?

That’s probably the best-case scenario for a soft landing if the Fed does cause a meaningful downturn in economic activity to get inflation under control.

(4) What is your general outlook on the markets and/or a recession?

I wish I had a good answer for this one. I don’t.

We could go into a recession while the stock market hits all-time highs.

Or we could see the stock market tank even if the economy improves from here.

Sometimes these things don’t make sense.

My macro outlook has never really helped my portfolio all that much.

Sometimes my thoughts on the economy/markets would have served me well. Other times my thoughts on the economy/markets would have destroyed my portfolio.

Here’s a little secret about investing the pros will never admit — you don’t have to predict the future to be successful in the markets.

Outlooks are more helpful for your ego than your performance in most cases as long as you have a reasonable investment plan in place.

(5) What can we learn from this downturn?

Since the start of 2020, the U.S. stock market has fallen 34%, risen 120%, declined 24% and now gained almost 17%.

In less than 3 years, it’s felt like we’ve lived through every cycle imaginable — 1918, 1929, 1999, the 1970s, maybe the 1960s and some other parallel I’m probably missing.

Everything in the markets is cyclical.

Stuff that has never happened before happens all the time.

The biggest risks are always the things you’re not thinking about or preparing for.

(6) Have we hit a bottom in the markets?

I took a stab at this one a couple of weeks ago and markets are up even more since then.

If inflation keeps improving and there isn’t some outside shock to the system it wouldn’t surprise me to see new highs by 2023 (maybe earlier?).

But the risk of a Fed policy error has probably never been higher so I wouldn’t be surprised to see more volatility in the months ahead either.

If that was the bottom, it will feel obvious once we know for sure.

If stocks roll over again, that will seem obvious too.

That’s the kind of market we’re in.

If stocks fall further that could present a good opportunity to rebalance into the pain.

If stocks keep rising you’ll just have to wait for the next correction to buy at lower prices.

Bottom or not, volatility is a feature of the stock market and it will return at some point.

Further Reading:
Every Time Out it’s a Guess

1Technically it was 0.02% lower but I’m not a fan of decimal points with economic data.

 

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Poverty, inflation, fear: Egypt's economy pushed to brink – CityNews Toronto

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Poverty, inflation, fear: Egypt’s economy pushed to brink  CityNews Toronto



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Brazilians’ Outlook on Economy Improves Ahead of Vote – BNN Bloomberg

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(Bloomberg) — Brazilians’ views on the economy are improving amid stronger-than-expected activity and easing inflationary pressures. 

The number of voters who believe the economy is doing better now is as high as before the onset of the Covid-19 pandemic, local newspaper Folha de Sao Paulo reported on Sunday, based on the latest Datafolha poll. In the survey, 28% of respondents say the economic outlook has improved, up from 25% in August and 15% in June. Still, 50% believe activity has worsened in the last few months. 

Latin America’s largest economy is witnessing the first signs of easing inflationary pressures. Consumer prices fell back to single digits in August, after tax cuts on gasoline prices kicked in and commodity prices declined. Activity is proving resilient to an aggressive monetary tightening campaign, as unemployment fell for five consecutive months amid stronger-than-forecast growth in the second quarter. 

President Jair Bolsonaro’s voters have a more positive view on the economy, with 64% saying there’s an improvement in recent months. Only 7% think alike among those who favor former president Luiz Inacio Lula da Silva, still the favorite ahead of presidential elections. 

Read More: Bolsonaro Becomes Main Target in Brazil Debate Without Lula 

The economy remains one of the top concerns for Brazilians as they head to the polls on Oct. 2. Trying to improve his chances of reelection, the incumbent pushed a multibillion social package that included boosted paychecks to the poor. Still, 55% of those who received the aid believe the economic outlook is worse now, with 46% saying their personal situation also worsened in recent months.  

Read More: Bolsonaro, Lula Battle for Votes in Brazil’s Largest State (2)

Both Bolsonaro and Lula are focusing on populous regions of the country in the week before the election day. Bolsonaro is continuing to reach out to female voters, while Lula is facing a tough fight with his opponent among evangelical groups.

©2022 Bloomberg L.P.

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Poverty and inflation: Egypt's economy hit by global turmoil – Yahoo Canada Finance

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DUBAI, United Arab Emirates (AP) — Stores are selling winter clothes from last season in the middle of summer. Repair shops lack spare parts for appliances. There’s a waiting list to buy a new car.

Egypt, a country of more than 103 million people, is running low on foreign currency needed to buy essentials like grain and fuel. To keep U.S. dollars in the country, the government has tightened imports, meaning fewer new cars and summer dresses.

For the nearly third of Egyptians living in poverty, and the millions more in poor conditions, the country’s economic woes mean life is much harder than off-season shopping — they’re finding it harder to put food on the table. A decade after deadly protests and political upheaval rocked the Middle East’s most populous nation, the economy is still staggering and has taken new hits.

Fatima, a 32-year-old cleaner in Cairo, says her family stopped buying red meat five months ago. Chicken also has become a luxury. She’s borrowing from relatives to make ends meet.

She’s worried about the impact of high prices on Egypt’s social fabric. Asking to be identified only by her first name for fear of reprisal, she worries that crime and theft will increase “because people won’t have enough money to feed themselves.”

For decades, most Egyptians have depended on the government to keep basic goods affordable, but that social contract is under pressure due to the impact from Russia’s war in Ukraine. Egypt has sought loans to pay for grain imports for state-subsidized bread. It’s also grappling with surging consumer prices as the currency drops in value. The threat of food insecurity in the world’s largest importer of wheat, 80% of which comes from the war-torn Black Sea region, has raised concerns.

“In terms of, like, bread in exchange for freedom, that contract got violated a long time ago,” said Timothy Kaldas, an economic expert at the Tahrir Institute for Middle East Policy.

Annual inflation climbed to 15.3% in August, compared with just over 6% in the same month last year. The Egyptian pound recently hit a record low against a strengthening U.S. dollar, selling at 19.5 pounds to $1. That has widened trade and budget deficits as foreign reserves needed to buy grain and fuel plunged by nearly 10% in March, shortly after Russia’s invasion sent commodity prices soaring and investors pulled billions of dollars from Egypt.

Egypt has few options to deal with the hole in its finances. As with previous crises, it’s turned to Gulf Arab allies and the International Monetary Fund for a bailout.

A new IMF loan would buoy Egypt’s dwindling foreign reserves, which have fallen to $33 billion from $41 billion in February. A new loan, however, will add to Egypt’s ballooning foreign debt, which climbed from $37 billion in 2010 — before the Arab Spring uprisings — to $158 billion as of March, according to Egyptian central bank figures.

Leaders blame the challenges on the coronavirus pandemic, which hurt the vital tourism industry, and price shocks sparked by the war in Ukraine. They’ve also faulted revolutionaries and those who may have backed the Muslim Brotherhood.

“Why don’t you want to pay the cost of what you did in 2011 and 2013?” President Abdel Fattah el-Sissi said in televised remarks this month. “What you did — didn’t that negatively impact the economy?”

He was referring to protests, which toppled Egypt’s longtime president, ushered in a divisive Muslim Brotherhood presidency, and resulted in a populist-backed power grab by the military and el-Sissi’s ascension to the presidency.

The former military general said the fallout from those years cost Egypt $450 billion — a price, he said, everyone must bear.

“We solve the matter together. I am saying this to all Egyptians … we are going to finish this matter together and pay its price together,” he said.

Critics, however, argue the government has squandered chances to make real reforms and is overspending on superfluous mega-projects as it builds a new administrative capital. The government has touted the construction boom as a job producer and economic engine.

The state’s hold over the economy and the “outsized role of military-related enterprises” have historically crowded out foreign investors and the private sector, said Hasnain Malik, who heads equity research at Tellimer, an emerging-markets investment analysis firm. The government’s plans to sell off minority stakes in some state-owned enterprises “does not necessarily fix this problem,” he said.

Egypt’s elite can withstand rising costs, living comfortably in Nile-view apartments and gated communities beyond the hustle of Cairo. Life for middle-class Egyptians is deteriorating, said Maha, a 38-year-old tech company employee and mother of two who asked to only be identified by her first name to speak freely.

“I think we will eventually move down the social ladder and end up below the poverty line,” she said.

The government took out a $500 million loan from the World Bank this summer and $221 million from the African Development Bank to help buy wheat. That covers around six weeks of a bread subsidy program supporting 70 million low-income Egyptians.

China assisted with a $2.8 billion currency swap. Saudi Arabia, the United Arab Emirates and Qatar stepped in with pledges of $22 billion in short-term deposits and investments.

“Having what they define as stability in Egypt is in their strategic interests. They really don’t want to go through a repeat of 2011 and its aftermath,” said David Butter, an associate fellow at international affairs think tank Chatham House. Gulf Arab states are also making strategic investments in Egypt for the short and long-term, he said.

The government announced an “extraordinary” social protection program to roll out this month, targeting 9 million families with extended cash transfers and food coupons. This is on top of other assistance programs, including pop-up stands selling subsidized food staples. Officials point to how they managed the supply crunch brought on by the pandemic and the war in Ukraine, saying there is enough wheat and other basic food items for six months.

For some, leaving has promised more hope. Egyptians rank behind only Afghans as the top nationality of “irregular arrivals” to Europe so far this year, according to the International Organization for Migration’s flow chart. Most arrive by sea.

As pressure mounts on the Egyptian pound, the government could devalue the currency again.

“It’s going to hurt. It’s going to increase inflation,” said Kaldas, the Tahrir Institute economic expert. “Subsidies on bread is only one line-item in a family’s budget. So, for a lot of families, this is still going to be a lot of pain.”

___

Follow Aya Batrawy on Twitter at www.twitter.com/ayaelb.

Aya Batrawy, The Associated Press

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