Are We In A Recession?

The initial estimate for the quarter ended 6/30/2022 is that the economy contracted for the second consecutive quarter.

This is a major news story because two consecutive quarters of contraction has typically been the rule of thumb for the big “R” word: recession.

GDP contracted 1.6% in the first quarter and 0.9% in the second quarter.

Although, the body responsible for officially declaring recessions, the National Bureau of Economic Research (NBER), does not use two consecutive quarters in its technical definition. It considers a variety of other factors so we cannot say for certain that we are in a recession yet. Continue reading “Are We In A Recession?”

On Interest Rates: The Federal Reserve is in a Difficult Position

The most common discussion with clients recently has been about interest rates (and bonds) as interest rates have been rising swiftly as of late.

It’s a popular topic because interest rates impact our lives in various ways; rising interest rates causes bond prices to fall, rising interest rates means things purchased with borrowed money cost more (houses / mortgages, autos / auto loans, credit cards, etc…), future cash flows from investments / projects become less valuable, etc… 30-year mortgage rates have doubled to over 5% from 2.5%

On the other hand, rising rates also motivate us to save more as savings vehicles yield more and motivate us to take on less debt / pay down debt faster. When’s the last time we’ve earned any notable interest in our checking and savings accounts? Many young people probably don’t even realize that banks used to pay interest on those checking and savings balances. Continue reading “On Interest Rates: The Federal Reserve is in a Difficult Position”

Inflation or Deflation?

There is an important debate currently raging between experts within the financial industry. Since it involves a question I’ve been receiving increasingly as of late I am going to address here.

The debate is whether we get significant inflation / falling U.S. Dollar or deflation / rising USD. It should be noted that there are very smart, successful investors, advisors, hedge fund managers and economists on both sides of the debate.

The recent year-over-year Consumer Price Inflation (CPI) prints have been quite high at 4.16%, 4.99%, 5.39%, and 5.37%. However, the bigger question we’re exploring here is if high inflation will be sustained for the foreseeable future or if the inflation is truly “transitory” as some policymakers are suggesting. Continue reading “Inflation or Deflation?”

Stealth Inflation Example

Inflation does not always show up in higher prices for the things you buy but often shows up in lower quantities for the same prior price.

Check out the paper towel quantity difference between these two rolls.

Image

Now, this guy circled the wrong thing but compare the square footage of each roll. The prior roll included 85 square feet of paper towel while the new one included just 74 square feet. So, in order to get the same quantity as before, you need to buy 14.9% more (i.e. 85 / 74 – 1 = 14.9%)!

If the cost was previously $1.67 per roll, and the new smaller rolls cost the same amount, the equivalent quantity today would cost $1.92 or 15% more! That’s a very SIGNIFICANT inflation rate especially considering this inflation is not solely impacting paper towel but likely many of the goods we buy on a daily basis.

Putting $6 Trillion “Stimulus” in Perspective

The most recent COVID relief bill was signed by President Biden yesterday. In one year’s time our government (two different administrations) has passed about $6 trillion worth of stimulus. We’re so used to “trillions” being thrown around I believe we’ve become numb to the mind-blowing magnitude of it all so I’ll try to put it in perspective:

  • $6,000,000,000,000 (that’s twelve zeros) divided by a population of 330 million is about $18,000 for every man, woman and child.
  • The average household is about 2.5 people (130 million households) so $6 trillion of stimulus is about $46,000 for every household on average. For our family of five, it’s about $90,000 (no, we didn’t get any of that).

Continue reading “Putting $6 Trillion “Stimulus” in Perspective”