Why The US Will Fix It's Inflation Problem Without a Recession

The Weekly Recap

Some homeowners feel trapped in their homes by their low rate mortgages, Morgan Stanley thinks home prices will fall next year nationwide while foreign purchases of US homes hit an all-time low, job openings hit a two year low as the private sector added 324k jobs in July, far exceeding expectations. US consumer sentiment hit its highest level in two years. Some ratings firm named Fitch lowered the US credit rating to AA+ out of nowhere confusing most and making Jamie Dimon and Janet Yellen angry. Bud Light posted a nearly $400 million loss last quarter, probably because in some markets the beer has been marked down so much, bottles of water are actually more expensive and Uber FINALLY posted a profit.

The 3 Reasons Why the US Will Fix It’s Inflation Problem Without a Recession

A newsletter I posed quite some time ago asked the question, Why is a Recession Better than Inflation? Hopefully we’re on the verge of not having to experience the former because the latterr may be getting corrected without it. Even after the Fed raised rates last week, they announced that they are no longer projecting a recession for the US economy and that the ‘soft landing’ is well within reach. Here are a few reasons why that will be the reality.

The Labor Market is Finding Normalcy

The labor market has proven to be stubbornly resistant. In environments where quantitative tightening occurs and rates are raised, the thought is that business investment and confidence would start to decrease because consumer confidence decreased which meant less spending, which would mean less revenue which would then lead to lower levels of employment and lower wages for talent which is how you would end up in a recession. But with jobs reports continuing to show better than expected numbers, unemployment has remained at around 3.5% over the past year even with consistently rising rates. This can be explained that in a post covid environment, some industries like entertainment, healthcare and retail are still trying to get back to ‘full employment’.

Economic Freebies and Backlogs Due to Covid Are Over

As we so fatefully remember, when the world shut down, the supply chain crumbled. People had more cash on hand than in any time in history with nothing to do except stay home and order things online. Production in some cases completely stopped because the backlog in orders created such a bottleneck that goods could not be shipped. And even though over 20 million people lost their jobs in a relatively short time period, Congress passed sweeping relief bills and programs that put a lot of money into the system and people’s pockets. Peak inflation occurred when Russia invaded Ukraine and energy costs went through the roof, combined with the panic purchasing of homes in secondary markets from those fleeing major cities, the large increase in housing prices contributed to the overall growth in CPI. None of these issues exist anymore, due to quantitative tightening, with the exception of the Ukraine war which no analyst thought could go on this long.

The Economy is Very Human

Markets are not just numbers on a ticker. Those numbers reflect hundreds of thousands of micro decisions from hundreds of thousands of people. People are inherently emotional beings and the most powerful emotion humans experience is fear. Fear is dictated by uncertainty and speculation. The biggest driver for why we won’t hit a recession is because the market economy overall, did not panic. The biggest difference between this time in economic history versus the housing collapse of 2008 or even the Great Depression in 1929 was that the government in 2020 just told everyone to ‘stop’. Stop going to work, stop traveling, stop going to events. All though those things briefly happened, but what never stopped was the consumer demand or the financial ability to do those things. Pent up demand lead to a furious revival of the economy where once the economy opened there were job openings galore, people spending all the money they had saved from not going out and the immediate desire to return to some sense of normalcy. This inflation cycle was completely made by the fear of markets in the early stages of Covid and it will be corrected by the immense fortitude of those same markets post Covid.

Market Performance

Here are how some other indexes and asset classes have performed as of this mornings opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past week as well as newly signed contracts in Manhattan. An almost 20% increase in contracts signed week over week.

Mortgage Rate Update

The combination of upbeat economic data and the US government credit rating downgrade, caused mortgage rates to rise this week. Despite higher rates and lower purchase demand, home prices have increased due to very low unsold inventory.

News You Can Use

• Yellen Calls Fitch Downgrade of US Credit Flawed Bloomberg

• US Job Openings Fall to Lowest Level Since 2021 as Layoffs Ease Bloomberg

• Fitch’s Downgrade Wont Break Washington’s Spending Habits Wall Street Journal

• JPMorgan CEO Jamie Dimon calls Fitch US Downgrade Ridiculous CNBC

• US Consumer Sentiment Rises to Highest Since 2021 as Prices Ease Bloomberg

• Why So Many Americans Feel Trapped In Their Homes By Their Low-Rate Mortgages CNBC

• Private Sector Added 324,000 Jobs in July CNBC

• US Productivity Jumps By Most Since 2020 Bloomberg

• Foreign Purchases of US Homes Slump to All-time Low Wall Street Journal

• Young, Rich Americans Don’t Trust the Stock Market Yahoo Finance

• Why the US Economy is So Immune to Rate Hikes Axios

• Wall Street Pessimists Are Getting Used to Being Wrong New York Times

• Fitch Downgrades US Long-Term Rating to AA+ CNBC

• US Stocks Notch Longest Monthly Winning Streak in Two Years Financial Times

• Private-Equity Fundraising Falls to Lowest Level in Five Years Wall Street Journal

• Small Businesses Boost US Private Payrolls in July Reuters

• Home Insurers Are Charging More and Insuring Less Wall Street Journal

• The Most Predicted Recession Ever Maybe Won’t Happen Yahoo Finance

• Bill Ackman Says He’s Short on 30-Year Treasuries Bloomberg

• Banks Lean on ‘Hot’ Deposits to Shore Up Balance Sheets Wall Street Journal

• Uber Finally Makes Money Wall Street Journal

The Deep Insight

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