J.P.Morgan Insights (audio)

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 “cooking”. 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.

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 “wait and see” attitude could be fatal.

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. It’s 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.

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.

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 administration’s policies to add to inflation pressures. However, investors should also consider how these actions, and the uncertainty surrounding them, could slow economic growth.

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.

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.

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 President’s new term. However, the Fed’s statement and Jay Powell’s press conference could well be of equal importance to financial markets.

“Unsustainable!” To quote Inigo Montoya: “You keep using that word. I do not think it means what you think it means” For decades, journalists, economists, politicians, and central bankers have said that the U.S. federal debt is on an “unsustainable” 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.

In football, it’s 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 – 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. 

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 “The Wheels on the Bus”. As we enter 2025, the American economy is rather like an old school bus – 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.

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: “Since becoming a central banker”, he said, “I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” 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.

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 – couldn’t we just skip the present and move on to the future?

This week will be full of market-moving economic data. We expect purchasing manager surveys and light-vehicle sales to indicate steady demand in November, as investors await Friday’s jobs report. Recent data on unemployment claims point to continued momentum and payroll growth should rebound from October’s meagre reading which was suppressed by both weather and strike activity. Markets will also be focused on wage growth, with futures still only assigning a 64% probability of a December Fed rate cut. That being said, any decision on a December rate cut will also depend on next week’s CPI report and, whether they admit it or not, the Fed’s own quiet assessment of the potential for the new Administration’s agenda to reignite inflation. It will likely be some months, therefore, before investors can more accurately assess the potential path for economic growth, corporate profits, inflation and interest rates. As we note in our year-ahead outlook, while we have emerged from a cyclical storm, we have entered a poli

I’ve been running my own econometric model of the U.S. economy for almost 30 years now. The basic structure is simple. You start by forecasting the components of demand, that is to say, consumption, investment, trade and government spending. This gives you an initial projection of real GDP growth. You then feed this into labor market equations, along with some demographic assumptions, to forecast the growth in jobs, the unemployment rate and wage growth. All of this, along with assumptions about energy prices and the dollar, then drive forecasts of inflation. Given this outlook for growth and inflation, you make an assumption about the path for the federal funds rate and then run forecasts of other interest rates. With all of this in hand, you can forecast productivity, corporate profits, the federal budget deficit and household net worth. And then you go back to the start to see how all these changes impact your original demand forecast. You repeat the process until you arrive at a reasonably consistent solu

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.

Growing up in Dublin, I had a well-earned reputation as a child of very healthy appetite. At birthday parties, I’d always make sure, at the outset, to get my share of any cocktail sausages, cucumber sandwiches or Rice Krispie treats going around. When it came time for cake and ice cream, I made sure my plate was amply stocked. And I know my mother was filled with pride, (and the other young mothers equally filled with envy), as her little man waddled back up to the table in search of seconds. But even I had my limits. I vaguely recall a rather distressing incident on the car ride home from one of these parties. I won’t go into the sordid details – suffice to say that the upholstery in the back of the car neither looked nor smelt quite the same thereafter.

On Tuesday, the Commerce Department will publish international trade data for August. The numbers will, undoubtedly, show a deficit – the U.S. has run a trade deficit every year since 1975. This, in turn, implies that the U.S. dollar exchange rate is too high – we buy everyone else’s stuff because it’s cheap; they don’t want to buy ours because it’s expensive. That being said, even as Americans have sent dollars overseas to buy goods and services, these dollars have returned to buy U.S. stocks and bonds, fueling a booming stock market and allowing the federal government to borrow relatively cheaply.

I have a habit, or so my wife tells me, of staring intently, for minutes at a time, into an open refrigerator, in search of one particular item. When she can no longer stand it, or when the binging of the refrigerator alarm informs the world that its contents are now thawing, she gently asks me what I am looking for and points it out, sitting, as it always is, right in front of my nose. I had a similar feeling of sheepish embarrassment last week, when I reflected on the impact of the extraordinary surge in wealth on the economic and financial environment. I spend a significant chunk of my life looking at stock indices and home prices. And yet, throughout this year, while agonizing about tenths of a percent in the unemployment rate or the inflation rate and how the Fed might interpret them, I have neglected to consider fully how burgeoning stock market and housing wealth has changed both the economic environment and the position of investors.