J.P.Morgan Insights (audio)

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. 

Like most people, I suppose, I get my hair cut every four weeks. If, either by consulting the calendar or the mirror, I am “due” for a haircut, I head off and get one. The passage of time or the growth of my hair since my last visit, is a very reliable predictor of the timing of my next one.

There is an old house with a box of dynamite in the attic. Every few years, for as long as anyone can really remember, the children of the house have brought the box downstairs and played games with its contents.  The owners have never seemed very concerned – after all, so far, it has never exploded.  But each generation of kids seems just a little more reckless and irresponsible than the last and it takes just one mistake……

The parking lot of our local high school is fortified by great ranges of speedbumps. These ancient mounds of asphalt were erected in the distant past by school authorities, presumably in tribute to the precision and focus demonstrated by our town’s youngest drivers.

Investors, in the week ahead, will have little time for financial analysis. The headlines will be dominated by the U.S. withdrawal from Afghanistan and the terrible impact of Hurricane Ida in Louisiana. Meanwhile families will be trying to stretch out summer days, while making all the adjustments necessary for a return to work and school in a still-untamed pandemic.

On March 23rd of last year, at the start of the coronavirus pandemic, the S&P500 briefly traded below 2,200.  Since then it has more than doubled, surfing on a wave of corporate profits, in a sea of central bank liquidity.  However, investors should recognize that this wave will face challenges going forward while the tide of monetary easing should turn.  As this happens, a focus on valuations should be more rewarding than has been the case in recent years.

Much has been written about the mutating virus and how its more contagious Delta variant has spurred a surge in cases, hospitalizations and fatalities. However, the economy is also mutating and adapting. These adaptations are reducing the ability of pandemic waves to slow the economy. They are also boosting productivity and profits. However, a failure to recognize this resilience is promoting inappropriately easy monetary and fiscal policy, potentially setting the stage for higher inflation and interest rates and a significant rotations in asset class performance.

Every few years our talented colleagues in marketing tell us we need a new palette for the Guide the Markets. They’re right of course – staring at the same colors, year after year, gets boring. But a new palette requires us to change almost every color on every page which is fairly labor intensive work. Moreover, if we do it right, the new chart will just convey the same message as the old one.

The week ahead will be a quiet one for economic data and a busy one for corporate earnings. It could also be a pivotal one in Washington as the Biden Administration tries to advance its agenda in Congress.

My wife, Sari, was born with a lead foot.  By all rights, she should have accumulated a bountiful harvest of speeding tickets over the course of her career.  But she understands how the system works.  If she is, for example, buzzing along at 75 in 55 mile-an-hour zone and sees the state police ahead, she dons a sunny smile and gently taps on the brakes.  This action, of course, still leaves her well above the limit.  However, for some reason, the police seem to appreciate the gesture as a respectful acknowledgement of the majesty of the law.  Speeding more slowly is apparently regarded as akin to not speeding at all.

When my wife, Sari, was 9 years old, a tornado touched down in Grand Rapids, Michigan and destroyed most of her home.   Luckily she and her family were at her grandparents that evening and so weren’t there when the storm hit.  But the next day, when they all drove back to the neighborhood, it was barely recognizable with many houses destroyed or badly damaged.  Her great concern, at the time, were the family pets who thankfully managed to ride out the storm unscathed.  But her parents must have been traumatized by the destruction they saw all around them, wondering how long it would be before everything could get back to normal and whether there were some things that would just never be the same.

After a long period of absence, I’ve visited New York multiple times in the last month. Each time, the city has seemed more bustling than the week before, with fewer masks, more crowded restaurants and more New Yorkers expressing their emotions by their habitual cheery and liberal use of their car horns. As cases of Covid continue to fall, it is as if springtime has arrived in the city and in the nation.

Some months ago, as the snow melted off the lawn, a rabbit appeared at the end of our back yard. Our twin shih tzus, Buddy and Bruiser, spotted the intruder and, barking furiously, headed off in pursuit. The bunny, having given our fearless duo a head start, then bounced off into the undergrowth, cotton-tail waving in the air, leaving them barking at each other as if to say “Where’d he go? Where’d he go?”

Next week, the Federal Reserve holds its fourth FOMC meeting of the year.  After the meeting, they will release a statement, very likely communicating no change in policy.  Fed Chair, Jerome Powell will likely emphasize the same message in his post-meeting press conference.  However, for investors, the most important information will be delivered in numbers rather than words, as the Fed discloses the median forecasts of FOMC members in their June Summary of Economic Projections.

I recently read a book, entitled The Code Breaker by Walter Isaacson, about a revolution in gene editing prompted by the discovery of something named CRISPR in bacterial DNA. I won’t delve into the details except to say that the book is a great read and made me appreciate, once again, the relative simplicity of the economic systems I spend most of my life pondering compared to the extraordinary structure and machinery within a single human cell.

In 1895, at the age of 60 and in some financial difficulties, Mark Twain embarked on a speaking tour of the British Empire to pay the bills. He later published an account of his travels in a book entitled: Following the Equator.

The all-boys Catholic school where I spent my formative years was a traditional establishment.  The air was thick with chalk dust and a steady tension between a rebellious student body and an establishment which resorted to corporal punishment to maintain discipline.  However, a second line of defense for the authorities was the issuance of report cards every six weeks.  Twice a quarter, the Headmaster would stride into the class room brandishing a batch of colored cards to be signed by parents and returned.  A rare pink A-Card, containing all 8s and 9s would be a cause of domestic celebration.  A B-Card, colored blue, would contain some 7s and would generally receive little comment from my parents.  A green C-Card, was a more serious matter requiring more elaborate explanations at home.  For most of my school career, it was B-cards, but the Headmaster seemed to enjoy my nervousness as he toyed with the cards before revealing my fate.   

Last Friday’s April Jobs report was clearly much weaker than expected. On average, analysts expected a payroll job gain of 1,000,000, with the unemployment rate falling from 6.0% to 5.8%. In the event, non-farm payrolls rose by just 266,000 and the unemployment rate rose to 6.1%.