Hard Landing Recession or Soft Landing?

It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?

In the case that the US has entered a recession (not yet “declared” by the NBER) then what does that mean for savers and investors? A quick bit of background: typically, economic cool-downs come in two varieties: hard landings and soft landings.

  • The hard landing ends a period of economic expansion in recession,
  • The soft landing ends a period of expansion with a smoother period of mere economic slow-down.

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What’s Important NOW?

Lately it seems that reaching Friday is a goal in itself. In markets like these it is not easy to “keep calm and carry on” as if there is nothing different going on. There are, in fact, multiple very different things going on. The coming weeks and months may bring even more different events and uneasiness – with a bit of good mixed in.

So, then the question becomes, What is important NOW? It may be tempting to answer:

  • Federal Reserve policy on interest rates
  • the coming November elections
  • mortgage rates
  • the level of inflation
  • energy prices
  • the US and world economies.
Photo by Kathy Jones on Pexels.com

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End of an Era?

Just as this week’s TGIF 2 Minutes goes to press, the news of the passing of Queen Elizabeth II, the longest reigning monarch in British history, is hitting the airwaves. God bless the royal family in their mourning of an amazing woman!

The “end of an era” closer to home is the end of 3% 30-year mortgage rates. Does this mean it is time to put off a home purchase? The simple answer is NO. The longer answer is, NO, IF. The “if” stands for:

Today’s 5%+ mortgage rates are more normal and reasonable in the longer-term picture than the media is making them out to be.

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The Psychology of Interest Rates

Dedicated readers of TGIF 2 Minutes will recall highlights two weeks ago of Morgan Housel’s excellent book, The Psychology of Money. Digging deeper into the book revealed the theme that human nature and psychology most often lead people to hear – and believe – only what they want to hear and believe or see happen.

This statement is not an insult or meant to sound arrogant. Rather, in matters of money, financial markets and even the economy there is evidence that people, the more they want something to be true, most often will believe a story that overestimates the odds of the story being true.* The markets, following recent comments by Fed Chairman Jerome Powell, nudged UP on thoughts the Fed might “pivot” (meaning: possibly slow the pace of interest rate increases and even lower interest rates next year – a wishful “story”). But more recent moves down in markets reflect the less popular belief that the US Federal Reserve likely will NOT reverse course, thus continuing to raise interest rates until inflation shows evidence of cooling. 

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Reality Bites

Today’s TGIF 2 Minutes was delayed to reflect a speech given earlier today in Jackson Hole, WY by US Federal Reserve Chair, Jerome Powell.

Earlier today (Friday) US Federal Reserve Chairman Jerome Powell spoke in a widely anticipated speech at an annual meeting of the Kansas City Federal Reserve Bank. The market and investing worlds were looking for guidance from the Fed Chair regarding interest rates and future inflation. Part of the reason for the speech being so closely watched goes back to a former Fed Chair. For those old enough to remember, in December 1996 Alan Greenspan made a now famous speech that rocked the markets when he coined the term, “irrational exuberance.” Then Fed Chairman Greenspan commented,

  • “How do we know when irrational exuberance has unduly escalated asset values…?” Greenspan went on, “We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy.”*

And down the markets went for a time. 

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A Little Paranoia Is a Good Thing

Record-breaking, big outlier events tend to move the needle the most in the economy and stock market.* Note the word, “outlier.” Outlier events typically are surprises and are indeed unlikely. In his beyond excellent book The Psychology of Money author Morgan Housel lists five events that were outliers with world-changing consequences:

  • The Great Depression
  • World War II 
  • The dot-com bubble
  • September 11th
  • The housing crash of the mid-2000’s.

A conclusion could be drawn from the book’s chapter titled, “Surprise!” that surprises are perhaps the most reliable thing going. But the irony of the reliability of surprises is we do not know what the surprise is until after it has unfolded.

Making room for error can be as simple as having a having a “Plan B” and “Plan C” – or being OK with starting completely from scratch – if “Plan A” does not work out. 

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The New Car Conundrum

Shorter post today – the summer weather is HOT! And car purchasing decisions can make a person sweat, or not.

Last July, yours truly bought a new car – after 16 years driving the same fully-paid for car. The old car was purchased as a certified pre-owned (back when CPO saved tens of thousands of dollars); the new car purchase last year was a brand-new car from a dealership. There were “those people” who commented, “Why buy a car now (last July) amidst high prices for new and used cars? Why not wait for prices to come down?” There were valid reasons to ask those questions. But looking back, the decision was a wise one and has stood up amidst full-on, continuing high inflation.

When the time comes to replace an older vehicle, even inflation may not hold up as the most valid reason to delay the purchase.

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Walking Up Interest Rates

To keep with the theme of walking, and because this week the US Federal Reserve “walked up” its benchmark interest rate, a brief discussion is warranted about interest rates, recessions, and the economy. By the way, the weather is HOT as heck, so today’s is a shorter post.

In the accompanying photo please note the mountains in the distance – which could be equated to higher ground, higher prices, and higher interest rates. The walkers seem not to be panicking (yet) because it is early in the higher interest rate progression. Think:

Higher interest rates in the short-term for,

  • Home mortgages
  • Car loans
  • Credit cards.

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A Game of Chicken?

Will the Fed raise interest rates aggressively? Or will the economic threat of recession force the Fed to slow its pace of rate increases? The outcome in what is shaping up as a sort of “game of chicken” remains to be seen.

Inflation is raging – there is no question. Prices of items as basic as eggs, butter and milk are increasing at crazy high rates. This is not to mention price increases for meat and produce. Gas prices have become crippling, just as workers return to corporate offices even part-time. Restaurants are still raising prices for diners. Home prices are still going up, although the recent rise in mortgage rates may cool the craziness. Wage increases are still happening (and not keeping up with inflation but also feeding into inflation) although there may be moderation in wages coming. The list goes on.

The Fed has good intentions to adjust rates to as ideal a level as possible to tame inflation while avoiding a deep recession.

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Can Walking Make Us Richer?

Long walks and successful long term financial & life goal setting go hand in hand. Lots of people have zero interest in long walks but even a walk to the mailbox can turn into a long walk – so stay with me here. A recent, rather long walk on the Camino de Santiago in northern Spain (pictured) taught me life-changing lessons about goal setting. Namely,

  • There is no truly right or wrong way to formulate financial or life goals. Yes, goal setting is easier when pen & paper are involved, but the process is more about quality of thought (meaning being honest and open with oneself) than any set of “rules.”
  • There need not be a rush to set financial, business or life goals. Although starting sooner rather than later can help – and momentum will develop on its own. The list of goals may then turn out longer and more exciting than ever imagined! (Dreams can become goals too.)
  • Accomplishing goals in a quality way becomes a series of decisions made along the way – seemingly small decisions and larger, more serious-feeling decisions.
A walk, short or long, can give space for free thought by separating us from the stress of beeping appliances, phones, laptops – even briefly from bosses and colleagues.

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