Inflation / Recession Obsession Win’s The Day!

By Bill Kort of Kort Sessions

Monday, February 27, 2023 3:00 AM EST

“Where is GDP heading? Don’t ask an economist.”

With all due deference to my economist friends, the prediction business is hard work. In the Barron’s article, the title of which I have stolen to head this bullet, the author could not have chosen a more inappropriate time frame with which to drive the case home, 2020.

“But how accurate are their prognostications? I recently took up that question for PitchBook. Each December from 2000 to 2021, Bloomberg News reported one-year forecasts of the change in real GDP by economists at banks, investment managers, independent research firms, universities, and other organizations. The number of economists reported as participating in this survey varied from 33 to 76. I compared the medians of their forecasts with actual GDP. On average, the median forecast was 0.99 percentage points above or below the actual year-over-year GDP change (which averaged +1.99%). It is often the case, however, that averages conceal as much as they reveal. In December 2019, for example, the median forecast for 2020 was 1.8%. The actual number was minus 2.8%, resulting in a 4.6-percentage-point overprediction.” (Martin Fridson)

Fridson misses the point. There are a lot of moving parts here including unforeseen pandemics. “It is dangerous to make forecasts, especially about the future” (sounds like Yogi Berra but I could not find attribution). Economists in this light appear to be the dare-devils of arm-chair prognostication.

Pardon my loquacious narrative getting to the point: One needs to be very careful tying their investment policy to economic forecasts. This does not imply that we should not listen to their findings and thought process about what is going on in the economy because they can also be early on emerging trends, changes in direction and problems. Some actually do get very close on their numbers. My personal preference when choosing investments is to start at the bottom (with the individual company). If the story is right and the valuation attractive, I’m not going worry whether or not a recession is imminent before pulling the trigger.

One last item:

For some reason (maybe due to the media), when thinking of recession many begin see their most recent calamitous experience (2008/2009 and 2020), as the norm. This is a mistake. These recessions were worst case anomalies. A normal recession is a business slow down, a pause to refresh and to see who’s been swimming naked.

OMG! PCE inflation missed on the hot side by 1/10 of one percent

BTW, personal consumption expenditure inflation is a metric more favored by the Fed as a measurement of inflation. Recent economic predictions on PCE inflation had it at +.5%. It came in at +.6%. As you can remember from my discussion above I would not be too concerned about economist predictions or forecast that miss the mark. That is normal. Yes the number, percentage-wise was quit large. if you are splitting hairs (at .6% an extra 20% above the .5% predicted) it might be of some concern. I am not splitting hairs. This is inconsequential.

This 1/10% miss creates a negative media frenzy

For example the AP ran this headline:

“Key US inflation measure surges at fastest rate since June”

This is true but remember this is not surprising. Economists had been forecasting half of one percent. It came in a 6/10 of one percent. This was by no means a surprise to anyone paying attention.

CNN ran this headline on a number that also should not have been a surprise:

“Inflation surprisingly rose in January, according to the Fed’s preferred gauge”

Here’s one from a Seeking Alpha contributor:

“The January PCE Report Unleashes A Giant Inflation Shockwave”

A few other emotionally heated descriptors showed up like:

” … worst week of the year”

“Stocks fell sharply”

and

“Stocks Plummet”

The headlines above are outrageous overreactions.

Although the broadly based S&P 500 fell 1.02% with the more speculative Russell 2000 was down .92%. This was hardly a disaster.

Feeding the Inflation/Recession Obsession, starving perspective

As you can see from the examples above the media has little interest in providing perspective. Their aim is engagement and bad news (If it bleeds, it leads) sells. To this end they have created a dangerous obsession about a potential recession (a normal economic event) in the minds of investors. Both novice and professional might be kept from making proper moves with their money, maybe even missing a good market entirely.

Last week I attended the 2023 CFA (Chartered Financial Analyst) Forum in Kansas City. The three member panel was composed of Victor Zhang (CIO-American Century), Christopher Dillon (VP-T. Rowe Price) and Bill Greiner (Chief Economist, Mariner Wealth Advisors). Their job was to discuss their views on the 2023 investment outlook. None of the panelists were exceptionally bearish though most acknowledged we could be on our way to some sort of economic slowdown (i.e. The Dreaded “R”). Chris Dillion even raised the possibility that we might make it through this Fed tightening phase without a recession.

Bill Greiner, fearless forecaster

My old friend and former client, Bill Greiner, astutely pointed out (with tongue firmly implanted in cheek) that there was one sure indicator of an imminent recession and that was the inverted yield curve. It was perfect because every time that we’ve seen such an inversion a recession has occurred, on average some (if I remember correctly) 2.5 years later … not much help here. In fairness to the serious side of the recession indicator world, Bill did make a pretty substantial case for use of the Leading Economic Indicators (LEIs) as a better omen of a coming recessionary environment and they are flashing red.

Most of the questioning in the Q and A after the presentation revolved around the “R” word … Recession / Obsession. There was no interest in ‘where’ to invest. Why was this the case? The crowd (usually best avoided when investing) is constantly being fed this concern by the media. Real or imagined, the media keeps it front and center … a short term issue that has little or nothing to do with long term investing–basically a distraction that they gladly, profitably provide for engagement.

My belief is the questions on recessions (if, when and how severe) are moot. The market is a great sifting and winnowing device. It prices in a myriad of datapoints everyday. Ergo, any economic slowdown or recession has already been priced in. When and if it becomes apparent this slowdown has begun (in the rear-view mirror) it will be too late to capitalize on the information. The market will be up significantly.