Talisman Talk


June 02, 2022

Along for the Ride: Or How I Learned to Stop Worrying and Love the Market, Part 2 of 3

By Jennifer Kirby, Managing Partner, Senior Wealth Advisor |
"1964 ... 'Dr. Strangelove'" by x-ray delta one is licensed under CC BY-NC-SA 2.0.

Part 2 of a 3-part series

Macroeconomics is confusing. It’s subtle. It moves.

COVID—one of the biggest exogenous events of the last 100 years—sends shockwaves through almost every country on earth. Death, mayhem, disrupted global supply chains, economies grind to a halt, political upheaval. Two years of this drag on.

Here in the US, we’ve had low growth, ridiculous amounts of stimulus, and money flying off the Fed’s printing press. If you recall from Part 1, in the land of exogenous economic shocks where productivity is low, inflation can blow up. So why did that not happen during the pandemic?

I posit that early 2020 to early 2022 was an aberration… something that looked more like what is called demand-pull inflation— “good” inflation—which, as the term indicates, is driven by demand. Demand “pulls” the economy forward driving greater output. This is when the economy heats up at a reasonable pace, with no excessive inflation, and there is economic growth.

Suppressed demand built up during quarantine. In January 2022 a soft economic landing looked promising. We were restarting the global economic engine.

But just when we started climbing out of our quarantine bunkers, Russia invades Ukraine on February 24th. On March 27th, China once again locks down from their latest COVID outbreak. This kills production of goods that would, under normal conditions, get exported around the world. Instead, we have a jammed up global supply chain, exacerbated by a reduction of gas supply from Russia. 

And the year is young.

Despite pent-up demand in the US, now we find costs of so many things have blown up—real estate, durable goods, food, travel, and, of course, gas have skyrocketed at levels not seen since the Great Stagflation.

Because costs are so high and there appears to be no end in sight, demand is starting to slow down and there are signals of decreased output. The only thing missing now is a decrease in employment. There are complex reasons for this having to do with low employment participation rates but arguably this is one of the few things holding everything together right now. And how long will that last?

But this problem is like walking into the middle of a movie. If we pull back the lens further, we can see that we have been moving towards this moment long before Ukraine, long before China, and even long before COVID. Roll all the way back over 13 years to the Global Financial Crisis when the government started buying up toxic assets, lending to Too-Big-To-Fail companies, and infusing the economy with cash.

Over a decade of this supported astounding growth of the stock market, price bubbles in pockets of the economy such as real estate, but little growth in real wages. We got away with it because of low inflation, some gains in productivity, and a slowly tightening labor market.  

Old habits die hard, so the playbook was the same when we stumbled into the COVID era. But government spending got even more extreme. They spent trillions on direct cash payments to the unemployed, tax credits and grants for businesses, research and development of vaccines, cost waivers to make the vaccines free, and even buying the market—stocks and bonds—to keep it all glued together and buy time for things to sort out.

A lot of good came of this “drunken sailor” decade of spending. It soft-landed us from terrible, economically devastating, uncontrollable events.  But there is a dark side to stimulus. A case can be made that the Fed’s and government’s tinkering merely delayed the inevitable and that we’ve run out the clock. 

Is that true? IT DEPENDS.

(Continued in Part 3)