Happy is as Happy Does

You may have heard recently that the US is less happy than it used to be. I saw this news about an annual update from Gallup and others last week to their World Happiness Report. I won’t repeat it all here. Instead, I’ll provide some links and notes to scan through and you can read more when you have the time.

First, here’s a link to a brief article on the update. I like this format because Axios presents us with the news item, gives a quick summary and a suggestion of why it matters, followed by some additional detail. It’s a news appetizer and we can consume the rest later if we want to.

The takeaway from this article? We’ve joined Germany in a happiness nosedive from last year’s findings. We’re told this is because younger people reporting feeling unhappy due to distrusting our political system and fearing political violence.

https://www.axios.com/2024/03/20/world-happiness-america-low-list-countries

Really? Wow. I’m 47, I pay attention, and my life certainly isn’t perfect but I do consider myself happy. I think those around me are happy. But after some reflection I can see cracks in my assumption that, at least generally, correspond with the report. Inquiring minds want to know so I dove into the details.

Here’s a link to the report page where you can review a more detailed summary. Then you can download the full report as I did. It’s 158 pages but contains lots of charts and graphs so it’s not too bad.

https://www.gallup.com/analytics/349487/gallup-global-happiness-center.aspx#ite-611948

Here are some of my notes about the report –

Happy people live longer, healthier lives. This seems straightforward, but are we as happy as we think we are? Personal implications notwithstanding, what does it mean for our culture that a growing number of people, mostly younger, report being unhappy?

Researchers used a three-year average of “life evaluations” that show our country falling from 15th place to 23rd among all countries in terms of overall happiness. The change was due primarily to those under 30 reporting a large drop-off in happiness.

Apparently there’s a U-shaped curve that often tracks happiness throughout one’s life. You’re happier when you’re very young and that declines through adulthood and into middle-age, and then happiness ramps back up as one gets older. Maybe, but whatever shape it takes there’s a growing divide between levels of happiness reported by the young and old, and that gap is very pronounced here at home.

We’re now in 62nd place in terms of happiness for those under 30, behind a laundry list of countries I would assume we’d easily beat. I was surprised to learn that Eastern European and even some Middle Eastern countries have happier younger people than we do, even though those economies are much smaller per person and the standard of living (maybe we should redefine that?) is comparatively low.

Flip that age group around and we’re in 10th place for happiness reported by folks age 60 and older, behind the Nordic countries, Canada, and Australia. Those countries all score higher than we do within their younger population, but the top-ten list for younger people is different.

The notion that younger people generally are happier than older people is now only true in some countries but not here in the US and much of the developed world. This shifted over the last decade or so. Now younger people report being happier in smaller countries like Greece and Portugal. Developed countries like ours are losing ground in the overall happiness ranking because of this. We now rank near the bottom of a list comparing current happiness to results from 10+ years ago. Our rate of change comes close to that of Columbia, Tunisia, and Congo. Canada is down the list with us, but yikes…

And happiness within older populations isn’t necessarily about money. India has the second highest proportion of older people after China but reports high levels of happiness among its older populations. Interestingly, older Indian women report being happier than their male counterparts. Both groups report that their living situation is the largest component of their happiness, but this is also higher for women. The report suggests this could be due to more older Indians “aging in place” with strong family connections that women (typically) have worked hard to maintain. Also interestingly, education and income levels impact happiness but the findings relate generally to the various socioeconomic groups within the country’s caste system.

Researchers also reviewed how enhanced well-being helps ward-off brain diseases that cause dementia by maintaining cognitive abilities over time. They suggested that having a positive environment, personal connections, physical activity, and a sense of purpose naturally support one’s cognitive abilities and can help with early interventions.

Couple these findings about aging in place with strong family connections and the importance of supportive environments in helping to fight dementia and we have a rough model for aging well in the developed world. Researchers made these connections and discussed some ways that certain countries, such as in the Nordic region, are heading in this regard.

Ultimately, reviewing this report was kind of a bummer. There were bright spots, such as I just referenced about the importance of personal connections, but it was tough reading a big-picture analysis of how somber the mood is among our young people, at least on average. I don’t pretend to know why this is the case. It will be interesting to see if this is just a blip that will correct itself in time, or if we’re looking at a new trend.

Either way I think there’s value in this type of information as a check, or perhaps a recommitment, to our own happiness level and doing whatever it takes to maintain it.

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The Power and Pain of "Yes"

A few years ago during Covid I decided to say “Yes” more. “No” is negative and exclusionary while “maybe” can be so unfulfilling. But yes is exciting and freeing while also sometimes being a little terrifying. Life is short, as they say, and I wanted to put myself out there and reset my definition of possible. So both in my personal and business life I was determined to move forward instead of getting stuck in analysis paralysis mode, as was my habit. Call it an occupational hazard.

This led to some exciting ramifications but I won’t bore you with all that here. Instead, let me briefly share some details about a recent yes adventure that was a powerful experience containing more than its share of pain.

As many of you know, after years of running ultramarathons I started dabbling in paddle sports some time back. Last year I was asked to join a crew trying to set a new world record for distance travelled by a dragon boat in 24 hours. I said yes at the time without really knowing what a dragon boat was. I had to Google it. But our team accomplished our goal and got to see a chunk of the historic Missouri River along the way. I can laugh about that experience now because it was something I never, ever thought I’d be doing. Would I still have said yes if I knew how hard it would be? Maybe not but I’m glad I did.

As often happens, one thing follows another and I was asked several months ago if I wanted to be part of a two-person crew paddling a handmade mahogany kayak called “The Condor” from Tampa Bay in Florida down to Key Largo in a race called The Everglades Challenge. Sounds pretty good, right? Am I a kayaker, no. So yes, of course I’ll do it!

Maybe my answer should have been definitely maybe. To say I had limited kayak experience would be stretching the point and my years of running gave me an aversion to sitting for long periods. My race partner would be a veteran of this race and races in Alaska, the Yukon Territory, even the Amazon. He’s written books on the topic but I barely knew him. Sounds even better, right?

However, I committed myself to the task, trained, and toed the starting line with many others on a Saturday earlier this month. The EC, as it’s called, allows sail and paddle craft of various types to enter but no motors allowed. And the challenge is unsupported. Family and crew can only provide moral support along the way. Bystanders can help but this can’t be prearranged. You’re on your own, in other words.

Our goal was straightforward: Paddle roughly 280 miles south to the finish by any available coastal route as fast as possible. Our plan was to head down the Intercoastal Waterway past cities, luxury homes, hotels, and trailer parks. We’d also head “outside” into the Gulf of Mexico for long stretches and eventually leave civilization behind as we passed through Ten Thousand Islands, Ponce De Leon Bay, Everglades National Park, and Florida Bay toward the finish. The race had three mandatory checkpoints and we stopped a few times for rest but I only notched a mystifying 2.5 hours of sleep over nearly four days.

The first day was an anxious one for me. The weather was good but my paddling experience had to this point mostly been in protected waters, often lakes and rivers. Now I was setting off into the unknown. I consider myself a strong paddler but would the seated position be doable for so long? Did I have enough food and water to make it to the first checkpoint? And why did I say yes to this again? These questions and more plagued me throughout much of the first day and night. We often paddled into wind and chop that worsened and, following the loss of our rudder earlier that day, had to work extra hard to keep the boat straight. It was a grind. Numerous justifications for quitting coursed through my mind. Hey, there are city lights over there… maybe let’s quit and I’ll buy the beer… I don’t know but if someone had given me an out that first night I may have taken it.

The second day was better as daylight resets our internal clock and outlook, or at least it does mine. Our plan was to paddle through the first night with a brief stop at the first checkpoint to refill water and not stop for rest until the second evening. As we did so I got more accustomed to the extremely long distances between landmarks. For example, a bridge taking shape on the horizon was an incremental goal – just make it to the bridge. But after what seemed like hours of paddling the bridge was still looming. Eventually we’d make it, of course, and then it’s on to the next bridge or cityscape. There’s something of a life lesson found in achieving one goal only to be presented with the next. Persistence and patience are critical.

We pulled over to a beach just south of the city of Naples for a rest that second night at about 1am. Maybe it was the amazing weather and the southern route calling me but, even tired as I was, I couldn’t sleep for more than an hour. But it was enough. Light pollution faded and the stars shone brightly as we left the beach. Maybe this experience isn’t so bad after all.

Small rewards loomed large. We were fortunate to hit the second checkpoint during daytime which meant the little restaurant on Chokoloskee Island was open. So it was Cuban sandwiches and café con leche before heading out again to paddle all night. This would be a long offshore stretch and I was excited to leave civilization behind.

The weather shifted around a bit but was otherwise beautiful the whole night. We were far enough south that I got to experience bioluminescence firsthand. My partner, in his sleep deprived state, kept asking if a light was on somewhere in the kayak, but it was living organisms generating a greenish-blue light through a chemical reaction. Fish large and small darted by and left trails like shooting stars. Our boat rippled colors and each paddle stroke scooped it up. I probably spent too much time paddling on one side while enjoying the light show. Maybe it was a small gift but, like surprise Cuban coffee, these experiences are part of what I say yes for, so might as well enjoy them!

My partner was exhausted but I was oddly exhilarated as the night progressed. We found a spit of sand to camp on for a few hours but, again, I was only able to grab a little sleep. My mental state didn’t help, but it was the roar of the mosquitoes inches away on my bivy sack that kept me up most. I’ve spent time in the woods and mountains and know a thing or two about the little nasties, but this was otherworldly. Oh well, I can sleep better later I guess.

With the rising sun we saw yet another goal looming far off, the landmass of Cape Sable and a decision. Should we round the Cape and keep navigation simple while adding mileage or take a shortcut through the Everglades. The choice was left to me. We had a good GPS track to follow so I felt it important to travel via the race’s namesake. So it was through Ponce de Leon Bay, up Shark River, and into the Land of Lions, Tigers, and Bears, Oh My!

Truthfully, our Everglades route left a little to be desired. Being a California boy I was more than half expecting to see gators, crocs, and massive pythons waiting to eat me. It ended up being the wind in our face and long distances that proved most frightening. But by this time I was so used to the grind that some prehistoric reptiles would have been a welcome distraction.

We eventually made it through the Everglades unscathed on our third afternoon to reach the final checkpoint at the tiny tourist outpost of Flamingo. There were great volunteers to receive us, a store, even showers, but all I wanted to do was leave. In the ultrarunning world there’s a saying admonishing you to “beware the chair” when you enter an aid station. The idea being you’re exhausted, you sit, you eat and drink, and then choose the chair over completing the race. I had thought about getting some sleep but Flamingo was the chair in this context, so we got out of there as quickly as we could.

After that I smelled the barn and got impatient to cover the final 35 miles to Key Largo. My impatience (and maybe a little hubris) was met with the often-shallow waters of Florida Bay that demand careful navigation, a headwind, and what felt like an outgoing tide – it was going to be a long night.

In hindsight, this is when several things conspired against us. My partner was tired but grinding as only a veteran of many grueling races can. I, on the other hand, was running on maybe a quarter tank of fuel with many miles left to go. The wind came on as the sun went down. I took waves to my face more than once as I marked our slog against a constellation to my left. Progress was incredibly slow but we kept at it, paddling hard and clawing our way forward.

We eventually made it far enough to get some protection from the backside of an island. I felt the rush of accomplishment and pride at getting through the rough patch. The lights of Key Largo were finally visible in the distance. Yes, we’ve got this! Let’s go! There’s nothing quite like the exhilaration one feels at accomplishing a goal.

That is until you start hallucinating and get all turned around, mired in shallows in the middle of a windy night with a thunderstorm coming in. At least it wasn’t cold! We had inadvertently gotten off our GPS track and found ourselves stuck in mere inches of water going on for what seemed like forever. At multiple points we were literally dragging our canoe through knee-deep mud in an easterly direction knowing (hoping?) that we’d eventually hit deeper water.

After battling like this for hours and my fuel gauge on just about empty, we finally got into some decent water and paddled into Key Largo. The end of the race is a small beach hotel that looks just like all of it’s neighbors. It was barely 6am and all was dark, so it took a bit of work to find but we were greeted quietly by a couple of friends and then off to bed for some much-needed rest.

Ultimately, my EC experience was grueling and sublime. The physical test was easily outweighed by the psychological. I wanted to quit so often and had come up with elaborate ways to justify this but I’ll never know how serious I was. Frankly, how could I quit anyway when it would probably take me longer to get “rescued” than to just keep paddling. So do what you set out to do. I eventually trained myself to counter negative thoughts by finding something beautiful to look at, which was easy because there were so many. Cloud formations, light on the water, spoonbills in flight, an open horizon.

Saying yes launched me into the unknown. Would I still have said yes if I knew what I was getting into? I like to think so. Saying yes is all about getting out of my comfort zone and finding adventure in ways large and small. Testing myself and expanding what I think is possible. My patience, persistence, and intestinal fortitude were stretched and I more or less overcame some of my foibles to get the job done. I’m proud of that.

I’m not trying to tell you how to live your life and I hope you don’t mind me sharing my story. And I’m not advocating doing crazy stuff under the banner of “I just say Yes all the time”. Instead, maybe make it a goal to say yes to something that peaks your interest but your rational mind initially scoffs at. The size and scope of your yes doesn’t matter. Whatever it is, and even if there’s some pain involved, there’s power in saying yes that’s hard to find elsewhere in life. Good luck wherever your yes leads you!

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Skipping this week...

Good morning all. I typically write these blog posts on Mondays and finish them up the following morning. Unfortunately I overscheduled myself yesterday and need to skip this week's post. We'll be back at it next week. Until then, take care and have a great day!

- Brandon

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Is Inflation Actually Getting Better?

So which is it, is inflation getting better or worse? You get different answers depending on who you ask. The impact of inflation can be intensely personal and people have stories to share, but investors and the markets care more about inflation at the “headline” level then about individual anecdotes. Metrics like the Consumer Price Index and variations on this theme that come from the government may seem less relevant when compared to your personal finances, but they do move markets.

As we’re all aware, official CPI numbers spiked a couple of summers ago following the pandemic before falling consistently. That helped drive stock prices higher and helped bonds as well. But CPI has flattened out for months now at a higher rate than officials at the Fed would like. That lack of direction has created a sort of information vacuum where theories and opinions abound. Maybe inflation is going to spike again like it has in the past. Or maybe inflation has reached a natural low point for this cycle and isn’t going all the way back down to the Fed’s 2% target anytime soon. Only time will tell but it could be awhile before we get a definitive answer.

In the meantime it’s important to remind ourselves that while past bouts of inflation have common traits, each has been unique and isn’t necessarily predictive. Along these lines let’s look at some work from my research partners at Bespoke Investment Group. They discuss the current inflation backdrop and provide some historical context. The bottom line seems to be that another big spike in inflation isn’t as likely as some would have us believe while consumer prices could remain higher than normal for a while. Markets can grind higher in that type of environment, but investors are still expecting less inflation and interest rate decreases from the Fed this year, so negative surprises there could bite a bit.

Now from Bespoke…

After headline CPI peaked above 9% in June 2022, the subsequent year of inflation data was a bull’s dream as reading after reading showed steady improvement. By June 2023, headline CPI was back down to 3%, and as is often the case, the most optimistic investors simply took the trend of the prior 12 months and extrapolated it forward, predicting 2% within a matter of months. For those investors, the last eight months have been frustrating as headline CPI has been bouncing around a range of 3.0% to 3.7%. With the progress on inflation stalled, the tide of sentiment at the extreme has turned from “inflation is going back to 2%” to “inflation is going to have a second wave higher just like it did in the 1940s and 1970s”.

Looking at the chart below, it’s easy to look at the post-Covid spike in inflation and not be concerned about the potential for a second wave like the ones that followed the prior two spikes during WWII and in the early 1970s. It’s a small sample size, though, and both periods had their own unique set of circumstances that are distinctly different from the current period.

In the 1940s, the US economy was contending with the shortages brought on by WWII in the first wave, whereas the second wave resulted from the pent-up demand and savings that accumulated during WWII. From that perspective, the current period has some similarities to the conditions surrounding the second wave of inflation in the 1940s but not the first. What’s worth pointing out about that period as well is that it didn’t take higher rates to get inflation back under control. In fact, throughout the 1940s, the Federal Reserve kept interest rates artificially low to finance the war, and the highest that the discount rate ever got during the decade was 1.5% in 1949.

The cause of inflation in the 1970s waves was an entirely separate set of circumstances, but it can be summed up mostly by one word – oil. In the early 1970s, before the 1973 Arab oil embargo, a barrel of oil was less than $5. Once the embargo commenced, prices immediately spiked and more than tripled to over $12.50 in less than a year. As prices stabilized in 1974, inflation subsided back below 5% over the next two years, but they started to surge again in 1979 with the Iranian Revolution and the overthrow of the Shah. Over about a year, prices nearly tripled again, causing the second wave higher in prices. The geopolitical situation in the Middle East is hardly sanguine right now, and a wider conflict would likely cause upward pressure on oil prices, but the US is not as reliant on Middle Eastern oil as it was in the 1970s, nor is the US economy as energy intensive.

Whereas shortages of oil drove inflation higher in the 1970s, the post-Covid wave was a function of pent-up demand and labor shortages. Shutdowns caused millions of workers to lose their jobs, and the government stimulus programs enacted to stave off an economic calamity had the deleterious effect of disincentivizing labor to return to the workforce once the economy reopened. The result was spiking wages. Most people still remember the stories of McDonald’s not only offering high starting wages but also signing bonuses of $500 or more.

Today, the labor market remains on a good footing, but it’s not as tight as it was three years ago, diminishing the chances for a wage-price spiral that would fuel a second wave higher. The employment component of the ISM Services report has been gradually (but steadily) trending lower from its post-Covid high in 2021 and has even come in below 50 (boundary between growth and contraction) in two of the last three months. [Last week’s] release of the NFIB report on small business optimism for February also indicated labor market softening. The charts below compare weekly initial jobless claims to the percentage of small businesses citing the quality of labor as their single most important problem (top chart) and the percentage of businesses citing jobs as being hard to fill (bottom chart).

Coming out of the pandemic, a record 29% of businesses in late 2021 cited quality of labor as their single most important problem, but that reading has declined steadily since then and plunged in February, falling from 21% down to 16%. That’s the lowest level since the Covid lockdowns and before that the summer of 2017. For the percentage of businesses citing jobs as being hard to fill, it’s been a similar trend with February’s reading of 37% falling to the lowest level since early 2021. As you’ll note in the charts of each NFIB series shown below, when they start to trend lower, initial jobless claims tend to move in the opposite direction. We could make a list of potential factors that could spur a second wave higher in inflation that stretches down to the floor, but it doesn’t mean that any of them are likely to happen.

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If it Wasn't Already Hard Enough...

Before we delve into today’s post, just a heads up that I won’t be posting next Monday as I’ll be out of the office.

On to this week’s post…

We’re getting deeper into tax season and that’s stressful for just about everybody. Yet another, perhaps larger stressor for some families right now is that we’re also entering college acceptance season. Some high school seniors have already received acceptance letters but most traditionally learn their fate from about mid-March to mid-April. Also traditionally students and their families are expected to choose a school by May 1st. It’s an exciting time that’s been upended this year by our government that, ironically, was only trying to help.

I’m sure Congress passed the FAFSA Simplification Act a few years ago with all the best intentions. The Department of Education was directed to make the Free Application for Federal Student Aid process faster and friendlier, and aid eligibility calculations would be overhauled. This would help more students go to college without as much debt, and so forth. But as was perhaps inevitable, the new website and application process went through delays caused by development oversights and technical glitches. These issues have been referred to in the press as a “smorgasbord of errors” and, my personal favorite, as a “nexus of chaos”. The bottom line is that families began the process later than normal and, due to further delays, relevant financial information will be late going to schools by at least a month.

This creates the unfortunate and anticlimactic scenario where students open their acceptance letters to find little meaningful information about what attending Brand X University will cost them. Yes, there’s probably information in the envelope or email about the sticker price of the institution but nothing about specific aid awards. Net price calculators on school websites and elsewhere offer a school’s typical total cost of attendance, but those can be inaccurate. This can be due to old data, such as for the 2021-22 academic year in one case or, in another case, the “old algorithm” according to a school’s admissions rep. So the student is overjoyed at being accepted to their out-of-state dream school while their parents are left with the conundrum, “How can we afford this if we don’t know what it will cost”?

We’re dealing with these same issues in my household with our son. We completed the FAFSA process early and he’s been accepted to multiple schools, which is great, but now we’re playing the waiting game with everyone else. Maybe the “reach” school would be affordable if we knew how much aid was available, if any. Or maybe the hypothetically “cheaper” state school is a better and more affordable option anyway. It’s an odd thing to consider these weighty financial commitments with such limited information.

Parents and students are scrambling but so are schools. Ordinarily kids have until May 1st to decide but some schools like the UC and CSU system in California have bumped this back to May 15th. Other schools extended to June or later, while others haven’t but offer flexibility if the student asks for it. And some schools are using alternate means to send out aid estimates, so it’s all over the place. Either way I think it's best to call the school and ask instead of waiting. 

Unfortunately this FAFSA delay is compressing a set of difficult decisions into a very short timeframe. Along these lines and while we wait, here’s a fascinating update on college planning from JPMorgan. This is a slide presentation with all sorts of details pertaining to why college matters (it still does, I think – I know that’s up for debate these days…), cost, aid, the new Student Aid Index that replaces the old Expected Family Contribution and saving/investing for college.

Beyond that, I wish you and your family luck if you’re going through this process with your student. It’s a huge decision that’s very stressful for everyone involved, and not just financially!

Here’s the link to the slides…

https://am.jpmorgan.com/us/en/asset-management/adv/investment-strategies/college-planning-essentials/?nav=none&email_campaign=307390&email_job=466755&email_contact=003j0000018XcwiAAC&utm_source=clients&utm_medium=email&utm_campaign=ima-amer-529-02082024&memid=7220927&email_id=76965&decryptFlag=No&e=ZZ&t=613&f=&utm_content=College-Planning-Essentials

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Contrasting Narratives

Contrasting narratives about our strong economy post-Covid continue to mystify just about everyone. From the Federal Reserve on down it’s been interesting to watch how forecasts and opinions evolved over the past few years.

The economy was going to crash. We were supposed to be in a lengthy recession by now. High inflation was expected to be part of the new normal. And the government, overburdened by debt and intent on raising interest rates to fight inflation, was supposed to be the culprit.

Or… high government spending would be absorbed by the economy. There would be imbalances, but these would be overshadowed by a strong recovery coming out of the pandemic lows. Inflation and interest rates? Not to worry because we’re coming in for a soft landing…

How can these two diametrically opposed narratives exist at the same time while almost literally being at war with each other in the economy and culture? It’s fascinating.

There were selloffs in the markets, sure, but those happened amid a tide that still seems to be rising. That can’t last indefinitely so the trillion-dollar question is when the tide ebbs and nobody knows the answer with a high degree of certainty. Nonetheless, people seem certain of their opinions and they’ll only get louder as the year progresses. Just expect more volatility this year so you won't be surprised when it comes. 

Along these lines, I’d been thinking about the various camps that economic outlooks belong to when I saw this article in the WSJ and thought I’d share it with you. The author discusses three dominant narratives about why the economy is proving so resilient and how each leads to different investment implications.

A link is below if you’d like to read the whole article with charts, hyperlinks, etc.

From the WSJ…

Productivity is booming (buy Big Tech!)

Private-sector productivity, measured as output per hour, has been rising strongly since the first quarter of 2022 when the Fed belatedly started to increase interest rates. At the end of last year, it passed its pandemic peak, which anyway was a figment of statistics due to the distortions of the lockdown economy.

The bullish story is that productivity has been boosted by workers moving en masse to better-paid and more productive jobs. Rather than flipping burgers, recent graduates have been in demand as the economy runs hot and unemployment stays near half-century lows. 

Corporate investment has also rebounded much faster than it did after the 2007-2009 recession, now 10% higher than its prepandemic peak even when adjusted for inflation, against just 5% by the end of 2012, the same length of time from the 2009 low. The benefits of artificial intelligence, if they come through, might allow productivity to keep rising.

The bearish story is that productivity only rose because supply chains snarled by the pandemic were finally freed up, and that isn’t going to happen again.

The gains in productivity that have come through have allowed the economy to grow even as inflation comes down. If technology allows productivity to keep rising fast, the economy should be better able to resist higher interest rates—and stocks do well in the future even as the Fed keeps rates high.

The government financed everything, so of course it has been fine (sell Treasurys!)

Fiscal spending is also a good explanation for what happened. The Federal government ran a record peacetime deficit during the pandemic, and last year increased its deficit to 6.2% of GDP even as the economy grew strongly. Combine subsidies for anything with a hint of green with leftover stimulus savings and it is easy to see how the economy could resist higher interest rates.

Unfortunately, this can’t end well: Either the government will rein in spending, removing support and so most likely slowing growth, or it won’t, and higher borrowing will keep pushing up bond yields. Both are worth worrying about.

Monetary policy is taking longer than normal to bite (eventually it will, threatening growth)

The ineffectiveness of rate increases so far is obvious. Far from reducing demand, the economy grew faster as rates rose further. Much of that was just luck. But the risk is that the impact of rates on the economy hasn’t been abolished, merely delayed.

With hindsight, it is easy to see why higher rates didn’t immediately reduce corporate investment or household consumption. Big companies and homeowners had locked in record amounts of debt at record-low rates. Instead of Fed tightening hurting their income, major corporations and people with a mortgage kept paying the same rate but earned more in interest on their savings.

American nonfinancial companies are estimated by the Bureau of Economic Analysis to be paying about 40% less in interest, net of interest on savings, than they were before the Fed’s rate rises started. This shouldn’t be taken too literally, since recent data are calculated as the leftovers after adding up government, consumer and foreign interest, not measured directly. Still, assuming the direction of the data is right, it is the precise opposite of what the Fed’s been trying to achieve.

Not everyone in the U.S. benefited. The U.S. has a two-speed economy, something I’ll come back to in future columns. Small companies and those with poor credit ratings tend to have shorter-dated debt that needs to be refinanced at higher rates or have floating-rate debt. Individuals who borrowed on credit cards or to buy high-price secondhand cars are struggling, with delinquency rates now above prepandemic levels—and the young and poor have the biggest problems, according to the New York Fed.

As time passes and rates stay high, more and more debt needs to be refinanced. More borrowers who put off moving to avoid having to take a new mortgage at much higher rates will bite the bullet. More companies have to repay their bonds. And more economic activity that would have been financed by debt at lower rates just doesn’t happen.

For now, investors aren’t concerned that a delayed impact of higher rates will turn the two-speed economy into an overall slowdown. Even the worst-rated CCC junk-bond borrowers only yield about the same—13.5%—as they did in December 2019. Interest rates are higher, but offset by investors demanding a lower spread over safe Treasurys to compensate for extra risk.

The danger is that the mess in the slow-speed part of the economy drags down the rest. This could be transmitted via trouble in highly-leveraged private equity, commercial real estate or lenders such as regional banks particularly exposed to weaker borrowers. But it seems more likely just to be a slow burn as delinquencies and defaults steadily rise.

The problem for investors is that all three explanations of recent history are attractive and lead to completely different predictions if they continue to hold: Solid growth, government debt bomb or hard landing. 

In the past few months, the markets have swung from one extreme to the other, and back again. Expect that to continue. Nobody can get their story straight.

Here’s the link I mentioned. As before, let me know if you get blocked by the WSJ’s paywall and I’ll send you the article from my account.

https://www.wsj.com/economy/central-banking/the-confusingly-strong-economy-told-in-three-stories-dfd8b387?reflink=mobilewebshare_permalink

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