The Long Term Investor

I owned this stock.....J&J.....for decades. I sold them some time ago due to their litigation exposure and other issues. I WILL NOT own this company again.

J&J will pay $8.9 billion to settle claims cosmetic talc products caused cancer

https://www.cnbc.com/2023/04/04/jj-...ims-cosmetic-talc-products-caused-cancer.html

I normally will NOT buy a drug company. I made an exception for J&J due to their consumer products and consumer focus.

 

A weak day in the markets today. The DOW is up but is not relevant anymore. The rest of the averages are in the RED.

 

I like this little article.

Ken Fisher’s ‘Pessimism of Disbelief,’ Illustrated

https://www.fisherinvestments.com/e...en-fishers-pessimism-of-disbelief-illustrated

(BOLD is my opinion OR what I consider important content)

"Sour sentiment and better-than-expected economic results are a normal bull market backdrop.

Amid all the din over March’s banking sector chaos, here is something that seems to have surprised many pundits: Stocks surged in the month’s second half, finishing it and Q1 with some pretty nice returns. The S&P 500 rose 7.5% in Q1, bringing its return since October 12’s most recent low to 15.8%. The MSCI World Index did even better, up 7.7% and 18.8%, respectively, in those two timeframes.[ii] But sentiment hasn’t caught up. Surveys and a quick tour of financial headlines show people continue dismissing the rally and seeking reasons to be bearish. Meanwhile, economic data, while not stellar across the board, keep beating expectations. This is encouraging—a backdrop that makes today’s environment look more and more like the normal backdrop for stocks early in a bull market.

Until and unless stocks eclipse their prior peak, returns alone won’t tell you if a new bull market is underway. False dawns are common, and bear market rallies can get pretty big—as last spring and summer proved. Assessing sentiment can help a lot on this front. If a rally from a market low attracts plenty of cheer, it has a higher likelihood of being a fakeout—it would indicate sentiment hadn’t run its full bear market course to its typical ultra-pessimistic trough. New bull markets, by contrast, are usually unloved and disbelieved—a phenomenon Fisher Investments Founder and Executive Chairman Ken Fisher calls “the pessimism of disbelief.”

That sums up sentiment now, in our view—and not just the revolving fears over banks, Fed rate hikes, oil prices, the debt ceiling and more. A CNBC survey of Wall Streeters found 70% of the “chief investment officers, equity strategists, portfolio managers and CNBC contributors who manage money” expect stocks to fall from here.[iii] Just over one-third called Fed error the biggest risk, and another third cited inflation—basically overlapping fears, considering how many associate inflation with more rate hikes … and rate hikes with bear markets. Only 32% said the low is nearby or in the rearview. When asked their preferred “safe haven,” 59% said cash, indicating last year’s bond market woes have the pros similarly skittish toward fixed income.

Some are reaching for technical reasons to argue the rally is a mirage. One piece that got a fair amount of attention Friday argued that while the S&P 500 is up, relatively few stocks are driving it—market breadth is too low, if you will pardon the technical term. With the equal-weighted S&P 500 index several points behind the headline market-cap weighted index in the quarter, returns must be coming from just a handful of companies hiding dim results among the vast majority of stocks. In other words, if most companies aren’t up, then the rally isn’t real.

A look at market history should put this to bed. Exhibit 1 shows the cap-weighted S&P 500’s returns relative to the equal-weighted since daily total return data for the latter begin in 1989. When the line is rising, the cap-weighted index is outperforming, indicating narrower market breadth. As you will see, little wiggles early in a bull market aren’t unusual, and the most recent little bump isn’t out of step with those that came before. (For visual clarity, we ended the 2022 bear market shading at the October low, although we cannot know for sure if that is the ultimate low yet.)

Exhibit 1: Market Breadth Isn’t an Ironclad Indicator


Source: FactSet, as of 3/31/2023. S&P 500 and S&P 500 Equal-Weighted Index total returns, 12/31/1989 – 3/30/2023.

Moreover, breadth doesn’t have a standard bear market pattern. It narrowed in 1990’s short downturn but mostly widened during the dot-com bust. It went back and forth during the global financial crisis and widened irregularly during 2022. (The COVID bear market is too short to glean any meaningful trends from, in our view.) About all we can say is that breadth usually narrows as bull markets mature—which is consistent with the tendency for the biggest stocks to lead later in the cycle—but that doesn’t mean it can’t narrow at times early on.

So sentiment and market behavior are pretty standard for an early bull market. Crucially, so are economic drivers. As we have often said, new bull markets don’t need perfection—just a reality that goes modestly better than expected. That is the power behind pessimism—it lowers the bar to clear after the bear market destroys sentiment and darkens expectations … and reality has been clearing it. Citi’s Economic Surprise Indexes are a handy, if imperfect, way to see this, and they show a mild upward trend in data beating expectations across global markets. Headlines dwell on high-profile misses like manufacturing purchasing managers’ indexes and US retail sales, but these are the exceptions, not the rule, as Exhibit 2 shows.

Exhibit 2: Positive Surprise Is Trendy


Source: FactSet, as of 4/3/2023.

With all this said, it remains possible that this is an unloved bear market rally. Time will tell. But investing is about probabilities, not possibilities or certainties. To us, the probability that a new bull market is either very close or underway looks quite high, making the risk of being on the sidelines and missing bull market returns greater than the risk of being in and enduring a bit more downside."

MY COMMENT

I agree completely....obviously.

The longer it takes for the "professionals" and the corporate big shots to get on board with the bull market....the better. Their focus is so narrow, on the short term, and on news events...they have little ability to predict or see medium to long term happenings right in front of them. In other word they....can not see the forest for the trees.

 

The BORING market today....so far.

Stocks wobble, yields tumble, gold gains: Stock market news today

https://finance.yahoo.com/news/stock-market-news-today-live-updates-april-5-2023-115922526.html

(BOLD is my opinion OR what I consider important content)

"U.S. stocks were mixed after another hiring report showed a slowdown in private-sector job growth and a separate print showed growth at U.S. service providers also experienced a pullback.

Around 10:30 a.m. ET, the S&P 500 (^GSPC) moved down 0.3%, while the Dow Jones Industrial Average (^DJI) added 0.1%. The technology-heavy Nasdaq Composite (^IXIC) dipped 1%.

Treasury yields moved down sharply. The yield on the 10-year note slid to 3.287%. The move came after a weak ADP payrolls report on private-sector job growth.

Meanwhile, on the commodities front, gold futures (GC=F) are hovering at their highest level in more than a year — and nearing a record high — amid the signs of softening in the labor market. Crude oil (CL=F), which jumped on Monday, fell back to hover around $80 a barrel.

The S&P 500 closed down 0.6% on Tuesday after new data showed fresh signs of the labor market cooling. The monthly Job Openings and Labor Turnover Survey (JOLTS) showed that US employers reported 9.93 million job openings in the month of February, down from over 10.5 million in January and significantly weaker than the consensus forecast of 10.5 million.

“Since 2000 when JOLTS data [started], prior rollovers and drawdowns of similar magnitude in the number of job openings were associated with recessions,” Paul Hickey, cofounder of Bespoke Investments, wrote in a note.

On Wednesday, two new data releases pointed to further economic weakness. Private companies added 145,000 jobs in March, lower than consensus estimates of 210,000, signaling that employers are pulling back, payroll processing firm ADP reported.

“Our March payroll data is one of several signals that the economy is slowing,” said Nela Richardson, chief economist at ADP. “Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down.”

Meanwhile, growth at US service providers decelerated in March. The Institute for Supply Management's services activity index fell to 51.2, lower than the consensus estimates of 54.4. New orders dropped from 62.6 to 52.2 in March, while prices receded from 65.6 to 59.5. Additionally, employment continues to expand but slipped to 51.3 for the month. (Readings above 50 generally indicate expansion.)

At the same time, investors will be paying close attention to Walmart's (WMT) two-day investor meeting, which could provide more color on consumer health.

Elsewhere, Federal Reserve Bank of Cleveland President Loretta Mester said Tuesday inflation remains too high and stubborn, and expects to see interest rates move above 5%, while “real fed funds rate staying in positive territory for some time.”

In other single-stock moves, Johnson & Johnson (JNJ) shares rose 2% in premarket trading after the healthcare giant quadrupled its offer to settle cancer lawsuits related to its baby powder. The company is now offering $8.9 billion to the 60,000 claimants.

Meanwhile, bank stocks slid on Tuesday, with the KBW Banks Index (^BKX) down by 2%. The worst performers were First Republic (FRC), KeyCorp (KEY), and Comerica (CMA), which were all down more than 5%. They appeared poised for more losses Wednesday.

Shares of C3.ai, Inc. (AI) fell about 4% Wednesday morning after Kerrisdale Capital, a firm that holds a short position in AI stock, said it has sent a letter to the software maker's auditor, alleging a series of accounting irregularities. The company denied the wrongdoing.

InflaRx N.V. (IFRX) shares soared Tuesday morning after the U.S. Food and Drug Administration (FDA) granted emergency-use authorization to Inflarx NV's monoclonal antibody for the treatment of hospitalized COVID patients.

Shares of FedEx (FDX) rose 3% Wednesday morning after the Memphis, Tenn.-based delivery giant announced it would consolidate its ground, express and freight operating companies into a single organization.

Elsewhere, in the crypto market, Ethereum (ETH-USD) has gained momentum over the past 24 hours as it moves closer to $2,000 threshold ahead of the blockchain's Shanghai upgrade."

MY COMMENT

Today "should " be a positive day for stocks and funds. The Ten Year Treasury is significantly down. It is extremely low considering all the FED hikes and current rates. The economic data is extremely positive.....for the FED. Basically the markets should be celebrating.

BUT.....you can never anticipate what or why the markets are going to do anything. I suspect that the political news is hurting the markets today. And.....no I am not going to comment further......although the news items I am talking about are obvious and are important for investors to be able to understand business and the markets.

I basically dont have much of a positive expectation for the markets today. I hope I am wrong.

 

I like both of these little articles.

Stocks are trying to cancel the recession. Wall Street isn't so sure.

https://finance.yahoo.com/news/stoc...ssion-wall-street-isnt-so-sure-093050219.html

US private payrolls growth slows in March -ADP

https://finance.yahoo.com/news/us-private-payrolls-miss-expectations-122702375.html

 

As to the first article above......cancel the recession, what recession? How can you cancel something that has not occurred yet?

The "expectation" of recession flys in the face of the economic facts....at the moment. Much of the expectation of recession is wishful thinking from people and companies that will PROFIT from one happening.

Here is the guts of the article:

"JPMorgan Chase (JPM) CEO Jamie Dimon said in his annual letter to shareholders on Tuesday "the current crisis is not yet over," referencing the stunning collapse of Silicon Valley Bank, which sent shockwaves throughout the entire financial system.

"There will be repercussions from it for years to come," Dimon warned, although he said this isn't a repeat of the 2008 financial crisis, when mortgages held by global financial institutions went bad. "This current banking crisis involves far fewer financial players and fewer issues that need to be resolved."

Still, the executive cautioned recent bank failures "have significantly changed the market’s expectations" as "the market's odds of a recession have increased."

Dimon's comments come as Minneapolis Fed President Neel Kashkari echoed similar sentiments on CBS' "Face The Nation" last weekend, saying recent banking stresses "definitely brings us closer right now" to a recession.

"What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. And then that credit crunch, just as you said, would then slow down the economy," he said, noting it's too soon to tell what impact the crisis could have on future interest rates decisions or the broader economy."

If there is anyone that will benefit from a banking crisis it is JP MORGAN and Jamie Dimon. It is TOTAL self interest that he is out there fear mongering the banking crisis.

 

Having just looked at my accounts.....I am pretty much tracking the NASDAQ today. Nine stocks down and a single stock up today. Good old COSTCO is my lone winner today.

 

This pretty much sums up my local real estate market.

Lack of home listings is taking a toll on mortgage demand

https://www.cnbc.com/2023/04/05/lack-of-home-listings-is-taking-a-toll-on-mortgage-demand.html

(BOLD is my opinion OR what I consider important content)

"Key Points

• Mortgage applications to purchase a home dropped 4% last week compared with the previous week.
• New listings were down 20% year over year in March, according to Realtor.com, and total inventory was about half of what it was in March 2019, pre-pandemic.
• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased to 6.40% from 6.45%

Mortgage rates fell last week, but demand for home loans didn’t move higher as a result. Other aspects of today’s housing market are outweighing the benefit of lower mortgage rates right now, namely a lack of supply.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.40% from 6.45%, with points falling to 0.59 from 0.62 (including the origination fee) for loans with a 20% down payment. It had been over 7% just a month ago.

Mortgage applications to purchase a home, however, dropped 4% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was 35% lower than the same week one year ago.

“Spring has arrived, but the housing market is missing the customary burst in listings and purchase activity that typically mark the season. After four weeks of increasing purchase application activity, volume declined a bit this week even with another small drop in mortgage rates,” said Mike Fratantoni, MBA’s chief economist.

New listings were down 20% year over year in March, according to Realtor.com, and total inventory was about half of what it was in March 2019, pre-Covid pandemic.

“Although the mortgage rate for conforming balance loans declined by five basis points over the week to 6.40%, the mortgage rate for jumbo loans increased by nine basis points to 6.36%,” added Fratantoni. “While we have seen relative weakness at the high end of the housing market in recent months, the divergence in rates suggests that banks may be tightening credit in response to recent challenges, preserving balance sheet capacity as deposit balances have declined.”

Most jumbo loans are held on bank balance sheets.

Demand for Federal Housing Administration and Department of Veterans Affairs loans, which are favored by lower-income borrowers due to low down payment requirements, declined more than those for conventional loans. While there is strong demand from first-time homebuyers, with millennials hitting their peak buying age, affordability is still a challenge right now.

Applications to refinance a home loan also dropped, down 5% for the week and 59% lower than the same week a year ago. The refinance share of mortgage activity decreased to 28.6% of total applications from 29.1% the previous week. Rates are 150 basis points higher than they were at the same time last year, so there are precious few borrowers who can now benefit from a refinance."

MY COMMENT

First.....in general.....I dont expect this lack of inventory to end any time soon. In fact this might actually be a .....GASP......"new normal". Especially in desirable areas.

Due to cultural, social, political, etc, etc happenings and changes.....I see the desirable areas with great schools.....as GOLDEN. This is only going to increase. The greatest factor is lack of crime and schools. Areas like where I live......near a big city.....but not in the city.....are going to continue to be extremely desirable. As conditions in the city and especially the city schools deteriorate...these areas will be even more attractive. People here can be sure their kids are going to get a great education in top rated neighborhood schools....and....can avoid having to pay for expensive private schools.

As usual it is going to continue to be.....location, location, location,......schools, schools, schools,......driving real estate for the long term future. These sorts of areas are going to get more and more difficult to buy into.

Now in terms of renting......I am surprised by rents in 2 and 3 bedroom apartments in my area being generally fairly reasonable. So there is ability for people that can not afford to buy to take advantage of living in this area.

Obviously we are also seeing a huge impact of the people that have a 2% or 3% mortgage being very resistant to selling unless they have to.

To be BLUNT......race is not a factor here in my area. We are probably the most diverse area in the entire city area. For example in my little 85 home neighborhood there is every race or background you can imagine.....Chinese, Japanese, many Hispanic backgrounds, many people from India, Blacks, Whites, Middle Eastern, etc, etc.

The key factor that is a common denominator in this area is.........wanting the schools for kids and a good job with a good income. Most people here are also two earner families. These simple factors cut through everything else. The neighborhood is EXTREMELY cohesive.......especially when it comes to income level and education of the children.

 

Too bad more BIG businesses dont focus on this.

A Microsoft HR boss wrote a legendary memo 30 years ago about lavish employee perks and cost-cutting that offers important lessons for today’s tech companies

https://finance.yahoo.com/news/microsoft-hr-boss-wrote-legendary-005135292.html

(BOLD is my opinion OR what I consider important content)

"With the economy in a slump, and company headcount having growing sharply in recent years, the mandate to managers was to clamp down on free-wheeling spending. "We need to halt the growing practice of handing out random T-shirts and other goodies for simply attending a required business meeting," the sternly-worded memo stated. Other examples of excess included catered lunches and oversized teams. "Every penny counts," and everyone—from those in the executive suite to front-line coders—should get used to eating "weenies not shrimp."

The year was 1993, and Microsoft had reached its limit on lavish employee spending and recreation.

The "Shrimp and Weenie Guidelines" memo, authored by Microsoft's head of HR at the time, Mike Murray, became a touchstone in the software company's history, and one which has renewed resonance among tech companies today.

Steven Sinfosky, the former president of Microsoft's Windows business, shared the memo on Twitter on Tuesday, noting the similarities to the current state of affairs. "These stages of cutbacks are a natural evolution, not just of tech companies but all companies," Sinofsky noted in a fascinating, must-read 15-tweet thread.

Financial prudence is top of mind at many — if not most — tech companies today. Only four months into the new year, 554 tech companies have laid off a total of 167,004 employees, according to Layoffs.fyi. Meta CEO Mark Zuckerberg branded 2023 as the company’s “Year of Efficiency,” which included mass layoffs and nixed free laundry services. Salesforce, a company which has long referred to its employees as a family, has laid off thousands of employees and lowered its annual "gratitude" bonuses.

The changes have been jarring to employees who haven't lived through previous downturns. Tech employees have long enjoyed their over-the-top perks, a time-honored tradition of free snacks and bean bags was what drove computer science grads to companies like Meta in the first place — with the expectation that they work long hours to provide shareholder value. If they were going to live at the office, the company would have to entice them with ping pong, IPAs, and high six-figure salaries.

Salesforce CEO Marc Benioff described the challenge in an interview with Fortune's Michal Lev-Ram last month: “It’s hard for them [employees] because they don’t understand why you’re taking certain actions or how it’s going to affect them,” Benioff said. “It’s understandable because we’ve had an up market for more than a decade.”

As Sinofsky explained in his Twitter thread on Tuesday, the situation in 1993 was especially scary within Microsoft because PC industry was still in its infancy.

"The company was going through challenges like much of the macro-economy. Only we were worried 'maybe this is it? PCs were saturated'—MSFT paranoia. GDP was down. Sales were slowing. We were getting complacent," Sinofsky said.

The "Shrimp and Weenies" memo was intended to remind Microsoft employees of the values that made the company successful. But Sinofsky said it could easily have backfired.

In the memo, Murray took aim at various instances of extravagant spending, using a mixture of humorous analogies and theatrical astonishment to get his point across. Among the targets of his exhortations: "T-shirts and Stupid Dog Tricks" (an allusion to the David Letterman late night television show that was popular at the time) and "Headcount growth—and the lack thereof."

"It would not be surprising to see Gucci leather jackets with the MS logo as a reward for attending a required meeting, or for successfully moving from one building to another!" Murray wrote, decrying the unnecessary spending on company schwag.

"One of the reasons we’re successful (and wealthy) is because we’ve been serving weenies (not shrimp) for the past 17 years! No need to change the menu," Murray wrote.

Even then, the tech industry was incredibly competitive, and Murray used Microsoft arch-rival Novell to underscore the stakes.

"Novell recently announced (yet another) record quarter of revenue growth and profitability. The frosting on this cake was to lay off 4% of their 3,600 employees. Novell is serving weenies, not shrimp," Murray wrote. This was his candid way of telling rank-and-file employees to become more cost-efficient or risk becoming a redundancy.

As tech leaders, many guilty of over-hiring during the pandemic, scramble to bring their costs in line with the new market reality, many may be asking themselves the question posed by Microsoft's HR boss three decades ago:

"Excess will destroy success. Is your team fueled by weenies or shrimp?""

MY COMMENT

More companies need to focus on the bottom line and simple business concepts. This should be the GUTS of the culture at EVERY company. Forget the politics, social BS and other distractions. The entire focus of a business should be on business.

As to employees......the best perk for them is to work at a successful, dominant company that allows the employees to share in the financial success through wages, 401K, stock plans, and other financial benefits.

I do TOTALLY agree with the business concept of making employees stakeholders in a business....by allowing them to be shareholders. Any business should make good use of stock bonuses and stock plans for ALL employees. It gives them a clear view of the actual "business" side of the business and a connection to the REALITY of business.

 

To continue my post above. When I was in business.....I was a small business with "usually" between 16-20 employees at the maximum.

I had a retirement plan called a KEOGH PLAN. When I set up my plan there was common way to set up the plan so employees had to work a good number of years to be able to participate and/or vest in the plan. I could have set it up so employee contributions required a good number of years to vest and if someone left before vesting those contributions would benefit the other plan members......primarily ME......as the largest plan member.

I wanted long term loyal employees......so I told the expert drafting my plan documents that I wanted IMMEDIATE VESTING for ALL employees.

I wanted "my people" to know that hey had a stake in the success of the business from day one. I took care of my workers and they took care of me......there was extremely low turnover and when there was an opening it was usually filled by someone recommended by or even a family member or relative of a current employee.

For my time......late 1970's to 1999.......I was way ahead of my time in terms of business and employee management. For example........ I had a number of jobs that I had two people job-sharing the job.....they wanted to work but not full time since they had kids. it worked for them and it worked for me....since one of them was available to cover the job at all times. I had many loyal employees that worked for me for very long times. Some that worked for me from start to finish.

I also paid well.....even for the part time job-sharing.....above market rate. Again I wanted long term loyal workers. EVERY SINGLE person got a good year end bonus connected to the success of the business.....every single year......at Christmas.

I took good care of the people that worked for me and they took good care of me.

BUT.....that was the OLD DAYS.

 

Yes we are Smokie......perhaps because the markets are BORING today.

So.....to continue. With me in business it was all about respecting people, employees. There were a few years that it was a real HIT for me to make the year end bonuses. BUT I bit the bullet and did it.....I knew people counted on that extra money at the end of the year. That is what you do as an owner. You take care of your workers even if it comes at a bad time or hits your pocketbook.

When i was meeting with the Museum CEO/President a few weeks ago i was extremely impressed with her. We walked around the museum as she gave me a tour. We passed various employees....custodians, maintenance, etc, etc,...... and she greeted every single one by name. That is a good manager and leader.....KNOW and RESPECT your people.

 

A nice little article here.

Even a Recession Might Not Tame Inflation
There are a lot of moving parts to the economy, and as the last three years have demonstrated, things don’t always work as you expect.

https://www.bloomberg.com/opinion/articles/2023-04-03/even-a-recession-might-not-tame-inflation

(BOLD is my opinion OR what I consider important content)

"The market has spoken: It’s expecting that the Federal Reserve’s fight against inflation is just about over. Fed Chairman Jay Powell has hinted that rate increases are nearly at an end. But inflation was still at 6% last count, and Powell insists the Fed is still committed to reaching its 2% target.

He may be thinking — along with some other economists — that the Fed has already done enough. After all, interest-rate increases can take a few years to ripple through the economy and lower inflation. The current banking turmoil could be the first sign of that starting to work. Forecasters have swung away from a soft landing for the economy and are again predicting an imminent recession, which should put the final nails in inflation’s coffin.

Unfortunately, we can’t count on a recession to solve our inflation problem. Odds are, the Fed still has more work to do if it’s serious about getting inflation back to 2%.

How monetary policy affects the economy and inflation is not that well understood. Tighter Fed policy reduces the money supply, which is presumed to lower inflation just because there is less money sloshing around. But as former New York Fed President Bill Dudley explained, after the Fed started paying interest on the bank reserves it holds, the money supply became less important because it severed the relationship between the money supply and credit.

Nonetheless, a higher policy rate is presumed to contract the economy because it makes credit scarcer and more expensive. This means less investment, more failing firms, fewer people buying or building homes, and ultimately higher unemployment. At this stage workers get smaller raises, if they get them at all, and people are generally more pessimistic and spend less. Hence, demand falls and brings down inflation. Or so the thinking goes.

There are a lot of moving parts here, and as the last three years have demonstrated, things don’t always work as you expect. There is a possibility we could get a recession and still have high inflation — essentially a return of the 1970s stagflation. This could happen if a recession comes with another supply shock, like a pull-back in trade or an increase in energy prices. Some economists argue that the 1970s stagflation was due to expansionary monetary policy, which means that if a recession prompts the Fed to cut interest rates or restart quantitative easing before inflation is subdued, we could end up with high inflation and a recession.

Another possibility is that a recession lowers inflation some, but not very much. Economist Jason Furman recently pointed out that the last few recessions only brought inflation down between 0 and 1.9 percentage points. Right now we need inflation to fall more than 2.5 points to get back to the Fed’s target. Of course, every downturn is different, and the more severe it is the more it will lower inflation.

But we don’t know exactly how bad a recession has to be to fix inflation. It’s been more than 40 years since we’ve had a serious bout of inflation and a lot has changed in that time. Economists estimate that in the past, it typically took a 2% and 3% fall in GDP to bring inflation down 1 percentage point. But because the relationship between the unemployment rate and inflation has become weaker since the 1980s, a much stronger contraction may be necessary today. The Fed is assuming that unemployment will need to peak at 4.6% to bring inflation down to 2%. But this seems wildly optimistic. If previous bouts of inflation are any guide, it will take a much bigger drop in GDP to get inflation to 2%. Former Treasury Secretary Larry Summers argued last fall unemployment would need to go to 6%.


So a mild recession, or the low-growth scenario the Fed is trying to engineer, probably won’t be enough to achieve the 2% target. It wouldn’t have been enough in the 1980s and there are reasons to believe it will be even less effective now, because while a credit contraction will do some harm, the economy is still fairly resilient. Household and corporate balance sheets are still in good shape from the pandemic. Many households locked in low mortgage rates and their housing decisions aren’t too sensitive to rates anymore.
The other reason a Fed-induced recession might not work is that the Fed has lost some of its credibility. Higher rates have more impact when people believe the Fed has the power and determination to lower inflation. When people expect inflation to be low, they don’t increase prices or demand big pay raises. But if people still expect high inflation, a recession — especially a mild one — won’t be enough to bring it down.

The bond market has a terrible track record predicting inflation. The fact that markets are pricing rate cuts when Fed governors are still talking about increases suggests the Fed’s credibility is running low.

If that’s the case, a recession may damage the economy and boot people out of their jobs without doing much to budge inflation. The Fed will be in an even tougher spot: bring on even more pain, or learn to live with higher inflation."

MY COMMENT

My view is that the PRIMARY cause of ANY inflation is GOVERNMENT. Nothing the FED is doing will have much ipact if the GOVERNMENT is not on board and it is obvious that the current government is doing nothing to stop or help stop inflation. At least till the gridlock, they were doing the opposite.

The second factor with the current inflation is the supply/demand disruptions that were caused by.....yes you got it......government closing down the economy.

My view is that at best the FED might be able to get inflation down to the 4% range.....but not much more. The economy is simply going to ignore what they are doing and continue to do well. GDP will show this. There is a lot of room for lay-offs of employees in big companies.....they are way overpopulated with workers anyway. In fact big company lay-offs will probably increase GDP and the booming economy as companies become more productive as a result of having a smaller and lower cost work force.

As to small business....they are going to continue to be begging for workers.

I am hearing some of the......"professionals/experts"....saying that they expect 2-3 rate drops before year end. This is simply.....DELUSIONAL. BUT...you can be sure that the financial media will be harping on this and trying to trash the markets when it is clear that it is not going to happen later in the year.