Darius recently joined our friend Andreas Steno-Larsen on Real Vision, where they discussed the economy, inflation, the labor market, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. What Is The Overall Outlook On The Economy?
From a fundamental standpoint, we are at a crossroads in the economy, coming off a period of strong, uninterrupted, accelerating growth that began in the second half of 2022.
Although growth is slowing, we expect it to surprise consensus to the upside over the medium term.
On the inflation side, we have accurately called for the current deceleration, and we anticipate inflation will continue to meander lower over the next few months before bottoming out.
However, by the first half of next year, we project inflation is likely to accelerate again. There is no historical precedent for inflation sustainably breaking durably below trend without a recession, so our view diverges from consensus, which currently expects a durable return to 2%.
2. How Will Inflation Behave In The Fourth Turning Regime?
We believe the Fed is yielding to fiscal dominance in this Fourth Turning regime, which is consistent with what the Fed has historically done in such periods. One key dynamic investors should anticipate during a Fourth Turning is the explosive growth of public debts and deficits and how those contribute to above-trend inflation.
As a result, the Fed will likely use its balance sheet and monetary policy toolkit to create excess demand for Treasuries relative to actual market demand for those securities.
Because of this Fourth Turning-style monetary policy, we believe inflation is likely to bottom at a level higher than 2%. As investors, we will likely realize this as we move throughout 2025. However, we do not see any immediate market risks associated with this today.
3. Should Investors Be Worried About The Rising Unemployment Rate?
Our research shows the unemployment rate is rising primarily due to the growth of the labor force, not because more people are losing their jobs.
While we acknowledge that the labor market is softening, we do not see an elevated risk of a recession in the medium term, based on current leading indicators of the business cycle and how they are trending.
That’s a wrap!
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