Notes on the Week Ahead

When our children were very young and they committed some transgression, we had a rule in our house. It wasn’t enough to say sorry. You had to say what you were sorry for. That way, we had some hope that they wouldn’t make the same mistake again.

Despite a disappointing gain in non-farm payrolls in November, numerous recent data points show an extraordinary excess demand for workers.  This excess demand won’t persist forever.  However, it’s important to understand its causes as this can provide some guidance on two crucial questions, namely, how long might it last and how will it be resolved.  The answers to these questions can also help in assessing which asset classes could outperform in 2022 and beyond.

Financial markets tumbled last week as reports spread of a new, highly-mutated variant of Covid-19 which could be more contagious than the Delta variant and which could evade some of the immunity built up around the globe over the past year through vaccinations and infections.

The week ahead will, of course, be dominated by Thanksgiving, leading, appropriately, to less focus on financial markets. That being said, this should also be a week of greater clarity on fiscal and monetary policy. This clarity should reinforce the view that Washington aid will become considerably less generous in the year ahead, reducing inflation fears but posing some threat to recently very strong profit growth.

Financial market commentary in the week ahead will likely center around the question of inflation.  The headlines speak for themselves.  CPI inflation jumped to 6.2% year-over-year in October, its highest reading in 31 years. 

My first summer job as a teenager was in the mailroom of a Dublin law-firm.  The more intellectual duties of this position involved substantial paper-folding, envelope-licking and a daily fight with the franking machine. However, the important part of the job was buzzing around Dublin on my 10-speed bike (with the dropdown handlebars), delivering the mail directly to various law offices and clients and thus eliminating the inevitable delays of the Dublin postal service.

It feels like so long ago, but back in 2019, the economic and financial environment was remarkably placid. Real GDP growth was plodding along at 2.3% pace, unemployment drifted down to end the year at 3.6% and corporate profits were growing slowly from very high levels. Consumption deflator inflation was still running below the Fed’s 2% target and, in recognition of this fact, as well as market volatility at the end of 2018 and a sluggish global economy, the Fed cut the federal funds rate three times to end the year in a range of 1.50%-1.75%. While the political weather in America was stormy, the investment environment was remarkably calm.

Every summer since 1960, the World Lumberjack Championships have been held in Hayward, Wisconsin, a small community in the north west of the state.  Among the featured events in this and similar gatherings is logrolling, where two competitors scamper furiously on top of a very wet and smooth log, floating on a shallow, muddy lake.

On Monday, I have the privilege of running the Boston Marathon for a third time on behalf of the Dana Farber Cancer Institute.  I love being part of the team – despite many difficult personal stories, the volunteers, organizers and runners are a very warm and positive bunch to train with.  Moreover, the research conducted by Dana Farber is critical to winning more of the millions of individual battles which constitute the war on cancer.

I remember the day when I first appreciated the importance of the American consumer.   It was the winter of 1982 and I was huddled around a table with some fellow econ students in the cavernous restaurant of University College Dublin, gulping down the sinister brew which the authorities labeled as “tea”.  As undergraduate students, we were fed a narrow diet of theory and math.  But the Irish economy was once again floundering helplessly in the heavy wake of an overseas recession and the only relevant question was: when would the American consumer bounce back?  I remember being very impressed when someone at the table started reciting the latest U.S. 10-day car sales numbers and asserting that a recent turn up in these data meant that better times were surely ahead for the global economy.