February 16: State of the Economy

Two things drive long-run interest rates: Inflation and economic growth. Some inflation is on the supply-side and those bottle-necks should continue to abate. Inflation due to too much consumer demand can be effected by the Fed through monetary tightening and raising short-term interest rates (the discount rate). But, by tightening, the Fed will increase borrowing costs for some small businesses and industries and worsen the supply-side problem as well. Still, the broadest effects will be on consumption, making monetary policy essentially a demand-side policy.

So the Fed tightens and expects to slow economic growth and reduce some inflation, with the rest of the supply-side inflation eventually taking care of itself. This will take the pressure off of long-term interest rates and because the Fed will not want to invert the yield curve (short-rates becoming greater than long-rates) the Fed will be in a box. Essentially, it cannot raise short-rates too much or too fast. Thus, it seems that much of the fear and hysterics over the Fed drastically raising short-rates are way overblown.

The wild card is Ukraine. A Russian invasion and resulting sanctions will adversely effect supply-side driven inflation through gas and oil markets, and possibly other effected markets such as food production. Thus, supply-side inflation that cannot be controlled by Fed tightening could become much worse. That might allow long-term interest rates to rise a little more and give the Fed more wiggle room to up the discount rate. This extra bad stuff is hard to price in and contributes to greater fear and hysteria which adds to volatility or market instability.

So, with world piece, the Fed is more or less boxed in on raising short-rates. On the other hand, the situation for inflation could get worse and allow the Fed to raise short-rates even more.

Stock and Fund picks:

For those feeling comfortable ignoring what is actually mostly noise regarding Fed policy, I suggest you consider the following stock picks: CVCO, PATK, SKY, WGO, CCS, KBH, LSEA, LOMA, RE, AA, KFRC, ADM, MSBI, LRN, USAK, CVE, BOOT, and FLGT. Dividend growth stocks to consider are: FRG, VLO, BAK, ENI, ETD, XOM, and ZIM. Over the last 3 months the top ETFs are: SPVU, SPYD, FXZ, VYM, and MGV.

For those fearing the one who lost his old empire and now doesn’t know what to do about it — Putin — and don’t want to bet on him excepting reality, then continue to pile up stable coins in BlockFi at 9%. When their is “blood in the Ukraine streets” then consider going back in.

I wish you well and good investing!