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Iron Capital Insights

  • Iron Capital Insights
  • September 21, 2023
  • Chuck Osborne

Broken Record

Vinyl has made a comeback. My almost 13-year-old daughter, like all the other cool kids, has a record player in her room and is collecting actual albums – lots of classics; she loves the Eagles (like her father), but new music too. I don’t think she has scratched any of them yet, but as soon as she does, she will be introduced to that wonderfully annoying repeat of the last note: the sound of a broken record.

© LFO62

Wall Street is also a broken record today. The Fed met this week and held rates steady, but indicated that they will keep them where they are for longer than they previously thought. The market reacted negatively, and the pundits are back out once again yelling, “Recession is coming, recession is coming!” But is it? They have been wrong for more than 18 months now, but could they be right this time?

We are not in a recession now, that is for sure. The Atlanta Fed’s GDPNOW tracker says that, based on data thus far this quarter, the economy is growing at 4.9 percent. At the beginning of the quarter, the “Blue Chip” consensus view of economists was that we would grow at 0 percent; the most optimistic economist said we would be growing at just over 1 percent, while the most pessimistic said we would be shrinking with worse than negative 1 percent growth. As the quarter has gone on and data has come in – the data that indicates we are actually growing at 4.9 percent – the consensus has been forced to creep upward and is now just under 3 percent. There is more data to come, and it could bring down the 4.9 percent, but it would have to be pretty horrific to take it all the way down to 3, let alone the 0 where they started.

This has been the same pattern for a year now, on the heels of two negative quarters in a row of GDP growth…which, for some reason, was determined by the pundit class to not be a recession, even though that was the very definition of a recession forever. I tease, but this is an important point. I truly believe this denial of the recession that took place last year is what makes this otherwise intelligent group seem so incompetent. They look at the interest rate environment and believe that means we must have a recession; they just fail to admit that we had it, when in fact we had two recessions within two years, which is quite unique and not good.

Today we are still recovering – slowly for sure, but we are in the recovery phase of the economic cycle, and this is being ignored. The other thing that is being ignored is the growing evidence that central banks, including our Fed, simply do not have the power over the economy that they once did. Our economy today is driven by technology and services. These fields do not require the large-scale borrowing of money that the old manufacturing economy required and therefore are just not as sensitive to interest rates. We spoke about this in Episode 2 of our podcast.

Yes, the Fed was too slow to act when inflation began to rise, but the Fed had been historically loose with monetary policy for almost 20 years at that point without triggering inflation. It was the return to Keynesian stimulus through extraordinary government spending which caused inflation to spike, as it had done in the 1970s. It is energy policy, not interest rates, that is causing the high price of oil, as it did in the 1970s.

The focus on the Fed is misplaced. We need to focus on Congress, who needs to get its act together and actually pass a budget. If we do end up in yet another recession in 2024 it won’t be because of interest rates; it will be because of irresponsible fiscal policy.

In the meantime, the market should get back to being focused on what is actually happening in the companies whose stocks make up the market. While the S&P 500 index looks expensive, it is because of the undue influence of seven mega-companies. The price-to-earnings ratio for the S&P 500 is 22.6, which is expensive, but the price-to-earnings ratio for our core portfolio is 16.6, which is pretty normal. The majority of stocks in the market are not overvalued. A growing economy means growing company earnings, so reality indicates we should be moving up. Why aren’t we?

The downside to vinyl records is that they are easy to scratch, and once they do, my daughter will soon learn that they get stuck and keep repeating until we manually move the needle. September is a historically bad month, and no one has the courage to move the needle, so we keep listening to this broken record. But October will come, and the needle will get moved. Until then, patience is in order.

Warm regards,

Chuck Osborne, CFA
Managing Director