Let’s see if I got this right: Normally, you’re a cool, calm and collected investor, but lately it seems there’s an awful lot to worry about.
Oil prices have been uncooperatively high. Inflation has been stickier than feared. Wages keep rising.
And you know what that means the Federal Reserve is doing to do: hike rates again, plunging the US economy into recession – and our stock portfolios into the gutter.
But are we correctly poised to panic? Let’s take a closer look at some of these so-called warning signs.
Friday’s employment numbers came out hugely stronger than expected. Stocks opened down sharply but reversed and the S&P 500 ended the day up 1.18%. Why? Could be this, could be that, woulda, coulda, shoulda.
The point of this wishy-washy talk is simply to highlight that “wishy-washy” is the best that talk can get when you’re overly focused on what’s happening today, or this week, this month or – depending on your nerves – this quarter or year.
Instead, let’s drill down on the bigger, long-term picture. With inflation, the “headline” number rose last month to 3.7%, creating that “sticky” impression. But “core inflation” – the basics pointing to the future – keeps wiggling benignly.
There’s a major point about inflation to be made here that’s far from brand new – Milton Friedman made it decades ago but which gets ignored month in, month out and year in, year out.
Inflation comes from excess money creation.
That’s right – inflation arises not from an overheated economy or government spending or jobs market, but from excess money creation. Specifically, we are talking about money creation by central banks on a global scale and in relation to goods and services.
In our latest case, central banks stupidly created too much money trying to “stimulate” things during 2020’s COVID lockdowns. We couldn’t do much during the lockdowns, so inflation didn’t immediately bite. Post reopening, you know that it increasingly did.
The bad news: At the onset of the pandemic, over the span of 18 months, our idiotic Fed boosted our broad quantity of money by a ridiculous 35%.
The good news: money creation by central banks in the US and abroad has been zero for the past two years.
What does it mean, exactly, about the outlook for inflation now? It’s hard to say exactly because inflation has always followed excess money creation with variable time lags that aren’t very predictable.
Nevertheless, new inflation will slowly and surely fades.
As for wages, it’s worth noting that they have recently outpaced inflation precisely because they lagged inflation in 2021 and 2022, provoking gripes from workers. (Friedman also proved in the 1960s that wage increases follow inflation, never lead or cause it.)
Maybe you’re still worried about what the Fed says. The September minutes warned of higher rates for longer.
But here’s a little secret: The Fed never has a clue what it will do. In May 2022, Fed Chairman Jerome Powell said “a 75 basis point increase is not something that the committee is actively considering.” The next month, the Fed started doing exactly that – three times in a row.
In my column last December, I explained why inflation would fade and why it would just take time. It has and it will. The Fed’s 2% annual inflation rate goal is a done deal, just not in the numbers yet.
The takeaway: This post-July stock slump is much like the one we saw in December and in the late winter, just slightly bigger and longer from a higher base. Each hiccup sets the stage for the bull market’s next leg up.
Solid job market? Moderating inflation? Decent growth? Check, check, check. We’re nearer to that Goldilocks economy I detailed Sept. 10 than most folks think. Enjoy it.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 17 countries globally.