Episodes
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When we bought our first home, the builder neglected to mention that it was built upon a river. Of course a river at the bottom of a garden is a charming sight. Something that seeps up through the cellar is less attractive, and so, in due course, the builder was called back to install a sump pump. Our young sons were fascinated by the hole in the basement floor and the coppery water that flowed at the bottom and wondered whether, with the help of makeshift fishing poles, it could yield some fish.
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When I was growing up, school holidays werenât packed with organized activities. Sometimes, to relieve the boredom of a rainy day, I would tackle a jigsaw â I remember one particularly challenging 1000-piece puzzle which, when completed, promised to reveal a charming picture of Dutch skaters on a frozen lake.
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Missing episodes?
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This week, after a very busy few months, I am putting down my pen, picking up my metaphorical spade and bucket and taking some vacation time. 2025, so far, has been a challenging year for analysts and it is tempting, as Iâm trying to clear my desk, to assert that not much has changed over the past few weeks and so I donât need to update any analysis of federal government policy, the economy and markets. However, the reality is that events in Washington and on Wall Street over just the last two weeks do require a reassessment.
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There have only been two U.S. recessions since 2001 â the Great Financial Crisis and the Pandemic Recession. Both of these were huge â accounting for two of the only three times since the 1940s that the unemployment rate has vaulted to double digits. However, because the recessions of our recent memory have been so dramatic, investors may not appreciate the risks from a softer sort of slowdown.
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A crowd is gathered around the sickbed of the economic expansion. Among the multitude are the workers, consumers and business people who would be most impacted by its demise. There are political partisans too, some fervently praying for recovery, others quietly hoping for the opposite. At the foot of the bed are fiscal and monetary doctors, the former preparing a sugary solution to inject into the patient and the latter casting nervous eyes both on the patient and the fiscal doctors, concerned about a renewal of inflationary fever. Foreign governments and central bankers also stand vigil, from as safe a distance as they can manage, conscious of the infectious nature of the patientâs disease. And close by the door are investors, contemplating a quick exit from American assets but haunted by the memory of the many past remarkable American recoveries. There is a knock at the door. It is the last week in April and a battery of tests are in that should shed further light on the delicate health of the economic expansion.
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Last weekend, I neglected to finish my Notes on the Week Ahead as I got caught up in watching the Masters. In truth, it was mostly a battle between Rory McIlroyâs emotions, which produced two double-bogeys in his final round, and his exceptional skill, which propelled his second playoff shot to within three feet of the hole. I was particularly happy to see his victory since he hails from the same island as myself, But I was also glad to see him win because, at 35, he is no longer in the first blush of youth. It is a sad truth that in athletics, as in life, no-one soars forever. Twenty years from now, McIlroy will probably still be a fine golfer â training and resilience should see to that. But he may no longer be exceptional.
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One clear advantage of getting older, (and I can attest to many of its disadvantages), is that you learn from experience. The financial market chaos, following the Presidentâs tariff announcement, is different from previous market slumps. Every market selloff is. However, a common thread in all crises is that the best decisions begin with a structured approach to analysis.
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I may have mentioned this before, but as a young lad, I had a very healthy appetite. Consequently, when deciding on a hobby, I prudently elected to go with âcookingâ. My experiments included making fudge and my mother dutifully supplied me with sugar, vanilla and helpful advice. However, we possessed no candy thermometer and, as anyone in the fudge-making business will tell you, getting the temperature right is essential. Too hot and you end up with toffee or hard caramel. Too cold and you end up with a grim sludge, which no degree of refrigeration can render palatable. Making fudge is a delicate operation.
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I was running along the roads of our neighborhood last weekend when I came upon a small herd of deer. I often see these beautiful but dopey creatures at dawn as they wander aimlessly in the middle of the road. When a car or truck bears down on them, they stop and stare. Perhaps they are pondering whether it would be more fun to hop into the woods to their right or gambol off into the field to their left. But, of course, the only important decision is to get out of the road. A âwait and seeâ attitude could be fatal.
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I was at a conference last week and a financial advisor asked me what I thought he should say when a client asked him what was so bad about tariffs.
Itâs a fair question. Many people who instinctively believe in free trade would still have a hard time in clearly explaining the trouble with tariffs. And since tariffs are likely to be a big issue this week, with the president promising to impose postponed 25% tariffs on Mexico and Canada and a new, second 10% tariff on China as of March 4th, it seems like a good time to review the problem.
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In December, the Census Bureau announced that the U.S. population had grown by nearly 1% in the year ended July 1st, 2024, marking the strongest annual gain since 2001[1]. Given this, it seems strange to be already talking about slowing population growth. However, the reality is that the gap between births and deaths is continuing to shrink, with almost all of our recent population growth coming from immigration. Going forward, if immigration is dramatically curtailed, overall population growth could turn negative by the middle of the next decade while the working-age population would immediately start to contract.[1] See Net International Migration Drives Highest U.S. Population Growth in Decades, U.S. Census Press Release, December 19th, 2024.
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In the four weeks since he took office, the president has issued an extraordinary number of executive orders, while promising dramatic change across the full reach of the federal government. While these policy moves have broad political, geopolitical and social implications, for investors, the most important concern tariffs, immigration, the federal workforce and the federal budget.
The rapid pace of these moves, along with frequent reversals, court challenges and mixed signals on future policy actions, make it difficult for economists to assess their cumulative effects. Also important, and even harder to analyze, is the potential for policy uncertainty to delay business decisions. Much has been said about the potential for the new administrationâs policies to add to inflation pressures. However, investors should also consider how these actions, and the uncertainty surrounding them, could slow economic growth.
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For investors, Europe seems like a train in a station, perpetually gathering steam and loading up for a long-delayed journey, but clearly advertising only a modest pace when it gets under way. Such has been the case for the European economy and, even more so, for European equities for many years. This has, of course, been deeply frustrating for those investing in European stocks, which, while often producing OK returns, have underperformed U.S. stocks in 12 of the last 15 years.
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On Saturday, the White House announced the imposition of heavy tariffs on goods exported from Mexico, Canada and China and all three nations announced their intention to retaliate. These tariffs threaten to raise prices and slow economic activity across all four countries. While the end game of this trade war remains very uncertain, it has the potential to impact bonds, stocks and exchange rates. For investors, regardless of the early market reaction, the reality of a trade war suggest the need for broad diversification including allocations to real assets and international assets.
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This Wednesday, at 2:00 PM, the Federal Reserve will release a statement on monetary policy. It will, as usual, be a brief and colorless document and will look paler still in comparison to the more than 60 executive orders, proclamations and memoranda that have emanated from the White House in the first week of the Presidentâs new term. However, the Fedâs statement and Jay Powellâs press conference could well be of equal importance to financial markets.
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âUnsustainable!â
To quote Inigo Montoya: âYou keep using that word. I do not think it means what you think it meansâ
For decades, journalists, economists, politicians, and central bankers have said that the U.S. federal debt is on an âunsustainableâ path. However, it has stayed on that path, climbing from a very manageable $3.3 trillion, or 31.5% of GDP, in fiscal 2001, to $28.3 trillion, or 98.2% of GDP in fiscal 2024.
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In football, itâs always better, at the snap of the ball to disguise your intentions. Are you going to pass or run the ball? Is it a zone defense or man-to-man? In business or in military maneuvers the same rule applies â keep them guessing.
However, in macro-economic management, it is better to make your plans clear. That way businesses can feel more confident in hiring and investing, as can consumers when deciding to buy. It is one of the reasons the Federal Reserve publishes a quarterly Summary of Economic Projections (or SEP) and so frequently repeats its determination to achieve 2% inflation.
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Over the holiday season, we got to spend some time with our very charming granddaughter and, as a bonus, I am now fully re-acquainted with all the verses of âThe Wheels on the Busâ.
As we enter 2025, the American economy is rather like an old school bus â slow but steady, reliable and resilient. It generally moves forward. However, it is not invulnerable. The wheels of the bus are being pulled off the ground by ballooning asset prices. The new driver of the bus may or may not try some dangerous policy maneuvers. The wipers of the bus may be obscuring obstacles in the road ahead. And the people on the bus, instead of spreading out and sitting down, are all standing up, crowded to one side so that if something does go wrong, there could be significant injuries.
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When testifying to the Senate Banking Committee back in 1987, the newly-appointed Fed Chairman, Alan Greenspan, provided some insight into his views on communication: âSince becoming a central bankerâ, he said, âI have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.â
His successors have generally tried to be more open with regard to both their opinions and their intentions. However, there are times, when the Fed will want to communicate to financial markets without piquing the interest of either the general public or the administration.
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Many years ago, I worked for the Office of Revenue and Tax Analysis at the State of Michigan and, from time to time, Saul Hymans and his colleagues from the University of Michigan would visit the state government in Lansing to discuss the latest output from their macro economic models of the U.S. and Michigan economies.
As they started into their presentation, I was always eager to hear about their forecast. However, I was rather puzzled about how much time they devoted to the current quarter. I mean they had a big macroeconomic forecasting model â couldnât we just skip the present and move on to the future?
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