Control Panel: 2023 Macro wrap up

Fed Chair Jerome Powell deserves his glass of New Year’s champagne as the soft landing appears to have arrived. Will it stick? Or will the economy slip into recession in 2024, as many economists predicted in early 2023 and has happened with several other Fed rate-raising campaigns over the past 40 years?

Here is an article with many charts showing economic events.

The extreme fiscal and monetary stimulation during the Covid pandemic in 2020 and 2021 led to inflation in consumer and asset prices (stocks, bonds and real estate) in 2022. We need to look at 2022 as well as 2023 to follow the Fed’s rapid increases in the fed funds rate to attempt to control consumer price inflation.

As investors, METARs are deeply interested in the monetary policy that floats the prices of stocks and bonds. The Fed injected massive amounts of Quantitative Easing to support the markets during the 2008 financial crisis, from 2012 - 2014 and during 2020. Only a small fraction of this monetary stimulus went into consumer hands so it didn’t result in consumer price inflation. Instead, it supported bubbles in the stock, bond and property markets. (Bond prices rise when interest rates fall, so the extreme suppression of interest rates by the Fed in 2020 led to a bubble in bonds.)

The Fed began a gradual process of Quantitative Tightening in March 2022. With a slight reversal to shore up the banking system when 3 banks failed during March 2023, the QT program is continuing as scheduled. Along with a reduction in demand for Treasuries by foreign buyers, the Fed’s QT helped depress bond prices and push up bond yields in 2023.

High mortgage rates coupled with high housing costs caused housing affordability to crash. According to a study by Business Insider, during the third quarter of 2023, private equity firms accounted for 44% of the purchases of single-family homes, compared to independent operations.

Inflation has been subsiding. The markets are front-running the Fed, which has not yet begun to cut the fed funds rate. (This has happened 3 times in the past couple of years causing the markets to drop in rebound when the Fed didn’t cut as quickly as the markets bet on.) Currently, speculators are betting that the Fed will begin to cut in March. The Fed’s 12/13/23 dot plot showed a target of 4.5% for 2024.

The year-end rally in stocks and bonds continues. The trade is risk-on as stocks and junk bonds are rising faster than Treasuries even though Treasury prices are also rising. The Fear and Greed Index is in Extreme Greed. Margin debt, which is highly correlated with stock prices, is beginning to rise again.

The METAR for next week is sunny. All charts are favorable. There are no new crises on the horizon.

Happy New Year to all!