Author Archives: Michael Murphy

Dear New World Investor: Well, the Fed finally broke something. This morning, Yahoo Finance wrote: “The once-difficult job now facing Federal Reserve chair Jay Powell and his central banker colleagues just became a seemingly impossible dilemma — continue its fight against inflation by raising rates and tightening credit markets even further or battle a new banking crisis that poses systemic risk.” I call BS. There is no “systemic risk” because the Fed or the ECB is totally able to bail out any overleveraged banks without impacting inflation a bit. The idea that Chairman Powell will not raise the Fed funds...

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Dear New World Investor: Date: Tuesday, March 7, 2023 Scene: Senate Banking Committee Hearing: Humphrey-Hawkins Testimony Presenter: Jerome Powell, Chairman, Federal Reserve Chairman Powell: Due to the persistence of inflation, we may have to raise rates in larger steps again, and to higher levels than previously expected. Senator Murphy (I-OR): Chairman Powell, why do you think inflation is so persistent? Chairman Powell: The economy is stronger than we expected. Senator Murphy (I-OR) So corporate earnings will be better than expected, and stocks will go up. What will you do if the economy weakens and inflation slows? Chairman Powell: We’ll slow...

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Dear New World Investor: “It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. ‘Efficient’ markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.” – Warren Buffett, February 25, 2023 Last Friday’s Personal Consumption Expenditures Index was higher than expected. We are told it’s the Fed’s favorite inflation indicator, so it weighed on the market all week. The problem is services (gray: non-durable goods; black: durable goods; red: services). Click for larger graphic Service inflation is mostly wage inflation. The Employment Cost Index...

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Dear New World Investor: From the Fed minutes of their February meeting, released yesterday: “Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management.” It looks to me like the economy is stronger than expected (good news), which will require the Fed to raise interest rates a little higher than expected for a little longer than expected (bad news). If the economy slows faster than now expected (bad news), the Fed will slow, pause, end, or cut interest rates (good news). Either way, as long as Powell et. al....

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Dear New World Investor: December quarter real GDP of +2.9% came in “stronger than expected” – but not by us. This is why I regularly post the Atlanta Fed’s GDPNow forecasts. Their final December quarter update, published last Friday, forecast +3.5%: Click for larger graphic Yes, they were too high by 0.6 percentage points – maybe. Today’s advance estimate will be revised twice, on February 23 and March 30. It probably will be revised higher toward the Atlanta Fed’s estimate. But what I am looking for is the element of surprise to the consensus. As you can see, the Blue...

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Dear New World Investor: The economy is slowing faster than the Fed is (publicly) acknowledging. December retail sales decreased -1.15% versus the consensus expectation for -0.9%. Gas stations, car and auto parts dealers, restaurants, and online sales were especially weak. We are seeing a sequential deceleration in the quarterly trend relative to the yearly trend. This is the monthly evolution of the data relative to its 12-month trend and consensus expectations: Click for larger graphic Inflation also is coming down rapidly. Ignore the misleading, lagging housing numbers. Inflation is flattening in services: (h/t @PrometheusMacro) Click for larger graphic and we...

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Dear New World Investor: This morning’s Consumer Price Index report showed prices in December increased 6.5% from last year, less than November’s 7.1% year-over-year increase, and decreased 0.1% from November. But even as price pressures eased from the 9.1% peak of the current inflation cycle, last month’s reading marked the second-hottest December CPI print since 1981, topped only by 7.1% in December 2021. Click for larger graphic The core CPI, which excludes the volatile food and energy components, climbed 5.7% year-over-year and 0.3% over November. Both the headline and core CPI were in line with expectations. I expect the Fed...

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