Notes on the Week Ahead

Dive into a fascinating econometric model predicting U.S. economic trends. Discover how consumption, investment, and government spending shape GDP growth and labor market dynamics. Explore the significant impact of forthcoming policy changes, including tariffs and immigration reforms, on the economy. Learn how proposed tax cuts may influence fiscal stimulus, inflation, and employment trends through 2026. This insightful analysis ties together economic forecasts with real-world implications.

The most urgent task facing investors in the wake of the 2024 elections is figuring out how much of the Trump agenda, as broadly outlined on the campaign trail, will be put into effect. A full and literal implementation across taxes, trade and immigration could have unwelcome consequences for the economy in both the short and long run. A more partial implementation, (which seemed to be anticipated by financial markets last week), could net out to be positive for stocks and negative for Treasuries in the short run. However, even this more restrained policy path would likely result in sharply-rising government debt and the potential, in some areas, for building economic and market risks. For this reason and because of the further run up in the U.S. equity valuations in the wake of the election, investors would be well advised to continue to rebalance portfolios both across asset classes and around the world.

The last few weeks have seen spectacular weather in New England, with warm temperatures and blue skies almost every day. By now, we would normally have stored the back-yard furniture inside to prevent it getting ruined over the winter. But instead, on weekend afternoons, Sari and I drowsily read our books in the sunshine with the still-loud chirping of the crickets letting us pretend that summer isn’t really over. Nor is there any harsh weather in the near-term forecast – it should be in the 70s on Thursday when the trick-or-treaters set off on their rounds. But the gentle rustle of falling leaves is providing its usual warning of colder days ahead and the need to be prepared.

This discussion delves into the growing concerns around federal deficits and their impact on U.S. Treasury yields. It connects economic overindulgence to potential market reactions during election season. Upcoming budget deficit figures are analyzed, highlighting their implications for the economy and political landscape. The risks of tax cuts and spending in a full employment context are examined, shedding light on inflation and government debt. Key insights on tariffs, Federal Reserve responses, and the importance of portfolio diversification also take center stage.

The Commerce Department's upcoming international trade data will reveal the ongoing U.S. trade deficit and its implications on the dollar's value. A high dollar makes U.S. goods expensive abroad but encourages foreign investment back into American stocks. The podcast further delves into monetary policies of major central banks and their differing approaches to inflation and interest rates. It also examines the influence of countries like Canada, Mexico, and China on the dollar's future, touching on strategies for managing currency exposure.

Delve into the remarkable rise of American household wealth, now at $157.2 trillion, fueled by thriving stock markets and rising home equity. Explore how this wealth surge impacts consumer behavior, confidence in retirement, and overall economic stability. Uncover the contrasting experiences of homeowners versus renters amidst these financial shifts. The discussion urges a reevaluation of investment strategies in light of these dynamics, particularly given the looming government debt and the tech sector's financial concentration.

On Thursday, the Bureau of Economic Analysis, commonly known as the BEA, will release revised data on the national income and product accounts going back to the start of 2019. This is an annual process, usually only mildly interesting to economists and ignored by everyone else. However, this year it’s more important since it could help clarify the trajectory of the economy at a critical time for both political and monetary policy choices. It’s also important because it could help resolve at least some of a yawning discrepancy between the estimates of output produced and income received in the American economy.

Cutting short-term interest rates from a peak is a little like hauling a piano down a flight of stairs. The operation is best done slowly and with care. The Federal Reserve will probably show some awareness of this in their actions and communications this week. That being said, one of the greatest identifiable dangers to the economy and markets today is that the Fed, by acting too aggressively or talking too negatively, increases the risk of the economy falling into recession.

On Wednesday of next week, the Federal Reserve will almost certainly embark on its long-anticipated easing cycle. However, whether the first cut in the federal funds rate is 25 or 50 basis points is still very much in doubt. This is a crucial question for the economy and financial markets since a 50 basis point cut might well do more harm than good if businesses, consumers and investors saw it as a signal that the Fed is worried about recession. The most important issue for the Fed as they debate this decision is the strength of the U.S. labor market. It is quite clear that job growth has slowed over the past year as the post-covid rebound has faded. But is the labor market stalling, or just slowing to a more gradual pace?  

Explore the slow growth of the U.S. working age population and its implications for job markets. Delve into the dynamics of inflation and how it sustains federal deficits while keeping the dollar strong globally. Discover the struggles of currencies like the yuan and euro against the resilient U.S. dollar, along with insights into gold investment. Finally, compare the volatility of Bitcoin with the stability of gold, stressing the importance of diversification in financial strategies as 2024 approaches.