– “Higher for Longer” should read “Normal for Longer”

– The post-Covid, post-globalization era ushers in a world of permanently higher inflation.

– A record 4.1 million “baby boomers” reach retirement age in 2024 … a potential new stressor for an already tight labor market.

– This is all good news!

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Should “Higher For Longer” read “Normal For Longer?”

Sycophant, Damocles, sitting precariously under a sword suspended by a single hair

If you have been sitting around the past year awaiting the Sword of Damocles (5% plus Fed funds) to fall on the market and economy, maybe you should be considering this question: why would rates being higher for longer necessarily disrupt the economy?

I have been writing on the topic of the impact of rate increases since the inception of Kort Session ten years ago.

… When we have this dreaded taper event, it will be a good thing.  It will mean we have survived the worst financial crisis in modern times and the economy is on the way to a healthy recovery.  As a normal consequence interest rates will move back up.  Interest rates moving back up will not have to mean that the economy will be choked off, because they will be coming from QE and fear driven (mostly fear driven) low levels. (Kort Session #41, dated June 17, 2013), The S&P 500 closed that date at 1642.63.

Here’s is another reference to rate normalization referencing a previous post from 2022 (S$P 500 close 4/7/2022–4521.21)

I call it getting back to normal. This is an excerpt from a Kort Session dated 4/7/2022: THE FED IS MOVING RATES OFF EMERGENCY LEVEL LOWS, AND IN THE CASE OF THE BALANCE SHEET, IT IS BEGINNING TO REDUCE IT FROM EMERGENCY LEVEL HIGHS. AS THERE IS NO EMERGENCY WHY IS THERE SO MUCH FEAR AND NEGATIVITY ASSOCIATED WITH THESE MOVES? THE ONLY ANSWER I CAN COME UP WITH IS MEDIA HYPE AND MIS-INFORMATION! (Is the market’s recent strength all about expected rate cuts or is something else at play?–December11,2023– S&P 500 close–4604.37)

Here are comments someone who actually managed fixed income money during the crises, Cliff Noreen as quoted in Barrons, 5/10/2024.  (You will need a subscription to Barron’s or WSJ to open) His observations dovetail with my own:

“The financial crisis was countered by the then-unprecedented federal bailout of the banking system, backed by the Federal Reserve lowering interest rates to zero and letting loose a fire hose of liquidity via quantitative easing, or the large-scale purchases of government securities. That tactic was employed again, squared, to counter the downturn from the Covid pandemic in 2020.”

“As a result, yields have been very low by historic standards since the financial crisis. Over the past 10 years, he says the benchmark 10-year Treasury yield averaged 2.36%. Currently, it hovers around 4.50%, appreciably higher than the experience of the past decade. But it remains significantly lower than the average of 5.93% over the past 60 years, he points out. We’re only a bit more than halfway back to that norm.”

Post Covid, Post Globalization: welcome to the new world of higher chronic inflation.

The advent of globalization three or four decades ago was the beginning of a gut punch to the middle class of this country, especially to those involved in manufacturing. Jobs and income began to hemorrhage to cheaper labor markets in Asia. Business did fine because the effect of lower labor costs allowed them to prosper profitably while their employees either lost their jobs or were force to take lower wages or no wage or benefit increases to keep their jobs. It was definitely deflationary. It was great for prices at your local big box retailer.

Covid and the supply chain disruptions it gave us brought an end to our inflation good times. Manufacturing is coming back in North America. This is good for jobs, good for the middle class, empowers labor and is bad for inflation. Because of all the wealth we’ve shipped overseas we have created hundreds of millions of new consumers who want to live just like us. This is inflationary.

The evil of aging “boomers”

Photo by Simon Godfrey

“A record number of Americans will turn 65 this year — about 4.1 million — the Wall Street Journal reports from an analysis by Jason Fichtner, chief economist at the Bipartisan Policy Center. Why it matters: The surge of 65-year-old Baby Boomers (born 1946-1964) will continue through 2027.Feb 19, 2024″ (Google)

In my mind this creates a huge problem, that of replacing these productive, highly skilled workers in a tight labor market. If only 25% of these workers actually retire, we will need to hire at least 100,000 new workers on average per month to replace them. This is not good news in an already tight labor market. It’s another inflationary bit.

Believe it or not this is all good news!

To begin with the Fed goal to get CPI inflation down to 2% is not consistent with historical rates of inflation. Before the financial crisis inflation and rates had been running at much higher levels. From 1960 through 2022 the average rate of inflation was 3.8% per year. It would be inconsistent with the effects of de-globalization and potential effects of budding consumerism in Asia (another plus – U.S, goods continue to be viewed favorably around the world) to see inflation back at 2%. Tight labor markets and strengthening labor unions in the U.S. should augur well for wage growth at the low end of  the economic spectrum, giving us a small taste of some movement toward income equality. Much of these wage gains will be spent supporting growth in the economy. With a 4.5% handle on 10-year treasuries and better than 5% available in market funds savers will be getting real returns, which should equate to further spending. Finally, the yield on the 10-year is nowhere near back to the level it was trading at in March of 2000 (6%+). The S&P 500 was peeking at that time near 1550.

It is time to break away from the narrative that “higher for longer” is a negative. It is a sign of strong economic fundamentals with moderate inflation. Yet, even as the Dow, S&P 500 and Nasdaq composite made new all-time highs today, I still hear the media narrative that it is all about renewed hope of some action on the part of the Fed to lower rates in June … unbelievable! Rates will be higher for longer. We are returning to normal.

What do you think?

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