David stared at the two notices in his hands. The first, he had carried home from work; it was his notice of termination. His wife Sally had also received one only a few days prior. The other had been waiting for him in the mail when he came home. It was a notice from the bank informing him that their house was being foreclosed upon. This family’s story was not unique. In their housing development alone several dozen people had been laid off and others had received foreclosure notices.
That scenario, of course, took place in 2008. Unemployment in the US stood at over 10% and many people lived with the worry that their job would be the next one eliminated or their mortgage company would begin the process foreclosure process on their home. It was the Great Recession.
The economy was tumbling downward. One big broker after another was merging with a bank to avoid bankruptcy. Lehman Brothers filed for bankruptcy. Their structured products had dropped to ten cents on the dollar. It was a tough time.
Listening to the pundits and gurus on Wall Street today, it would seem we are in a similar situation today as we were then. Oh, it is not about job losses and home foreclosures or financial panics. But today’s concerns are that the strongly growing firms’ “present value of future earnings” will be reduced by the rising interest rates. Wage rates and commodity prices are increasing, and that will push down the real value of the dollar. Inflation as measured by the Consumer Price Index (CPI) reached the highest one month level seen in fifty years. The Russian invasion of Ukraine is the largest European conflict since World War II. Oh, and the yield curve has inverted.
That is the “glass-half-empty” view of the economy. But are things really that bad? Some talking heads see this economy charging to a recession.
I think not. I’m a mathematician, so let’s consider some numbers.
Consider employment. Unemployment is under 4% in the US, and the number of jobs worldwide is increasing. It seems “help wanted” signs are posted everywhere, and skilled workers are being snapped up quick. Since 1973, the wages of the lowest 90% of earners have lagged far behind the gains of the highest earners. The wages of the lower 50% of earners are increasing and finally beginning to catch up. That makes me optimistic that income inequality is probably going to be reduced over the next several decades.
Can those wage increases be inflationary? It is possible, but I believe unlikely in the longer term. It depends on productivity. Increases in productivity offset wage increases. Everyone benefits, in my opinion, when wages can rise and reduce the income gap while simultaneously productivity gains allow producers to offset the need for price increases.
Almost every major company, and many medium sized companies, have robotics programs aimed at increasing productivity. The use of robots not only allows wages to increase without causing inflation but also requires capital spending. That capital spending increases economic output. It is a positive for growth and creates investment opportunities.
Consider the supply chain. For several decades, globalization was the key to company growth of revenues and profitability. Even before COVID, that had begun to change and COVID has accelerated those changes to the supply chain. Intel, for example, is building a $20 billion chip plant in Ohio. They are moving the manufacturing back to the United States from overseas. That is but one example. There is a move on the part of companies to domesticate the supply chains, and the United States is not the only country with this intention. Much of the developed and emerging world is taking steps to domesticate their supply chain. Those changes to the supply chains mean more capital spending, and that adds to economic growth.
The world has been moving to alternative energy. Solar has been growing at 30% annually. At that rate, solar could theoretically supply the entire world’s electricity needs within two decades. The Russian invasion of Ukraine has accelerated the push to convert away from fossil fuels and into alternative energy sources. That also means an acceleration of capital spending and economic growth.
But could all this growth lead to additional inflation? The Federal Reserve is often criticized for “printing money”. When you or I buy a bond the money transfers from our bank or brokerage account to the sellers. No actual money moves, but our account is simply debit and the seller’s account is credited with the purchase. The Fed is different. When the Fed buys a bond, they only credit the seller’s account. The Fed has no account to debit. The Fed “creates” the money by doing nothing more than creating an entry within the buyer’s account. That is the process for printing money. And printing money when the economy is running well is inflationary.
The Federal Reserve during the Great Recession and again during the COVID19 Pandemic did print money. So much so that the Federal Reserve owns $9 trillion of assets. Beginning within a few weeks, the Fed will begin to reduce their holdings by $1.1 trillion per year for the next eight years. In effect, the Fed will be “de-printing” or “un-printing” money. They will be removing money from the economy. The expectation is that action will slow down some economic growth and inflation. The Federal Reserve is also raising interest rates and that will further slow inflation by putting a squeeze on the areas of the economy that seem to be overheating.
Finally, the world will be mostly vaccinated during 2022, bringing most of the pandemic to an end. It is doubtful that COVID will be eliminated, and some of the vaccines, like the ones developed in Russia, may not be effective. But we are returning to “normal”, whatever that will be.
That’s the glass half full outlook. It is the one that to me makes the most sense. The old saying is that the stock market climbs a “Wall of Worry”. It seems to be true. There is a lot to worry about, but that just sets up the reason for the stock market to begin to climb out of its doldrums and move upward.
A. Michael Adams