The US economy is still stuck in the stall its been in since early spring. Sometime in mid-March everything just seems to have gone into suspended animation. Interest rates and the copper/gold ratio stopped rising. Real interest rates (TIPS) stopped rising. The US dollar started falling. But nothing has fallen so far as to warrant concern about a double-dip recession. And nothing has risen far enough to warrant any enthusiasm about future growth. Inflation expectations did continue to rise a while longer but have recently started to fall back too even as the inflation data itself continues to at least look hot. The economic data has recently been disappointing but not incredibly so. In short, we’re stuck in the middle, not good enough to be on the verge and not bad enough to be on the precipice:

Clowns Bears to the left of me!
Jokers Bulls to the right!
Here I am stuck in the middle with you.
Yes, I’m stuck in the middle with you,
And I’m wondering what it is I should do.
It’s so hard to keep this smile from my face.
Losing control and running all over the place.

Just because I chose to quote a 1970s song doesn’t mean I’m in the camp that believes we’re on the verge of a rerun of that decade that was so bad in so many ways. No, inflation does not yet seem to be much of an issue despite it getting so much attention lately. Inflation expectations, as measured by the TIPS market are still within the range they’ve been in since 2003. Closer to the top of the range than the bottom but in the range nonetheless. And the dollar, which really deserves most of the blame for that inflationary period, is still in the range it’s been in since 2015. Closer to the bottom of the range than the top but in the range nonetheless.

Will the dollar finally break down from here? There does seem to be a sizable contingent that believes so – that is at least part of the rationale for holding Bitcoin – but there aren’t many betting on it yet. Positioning in the futures markets remains wildly neutral with no big one-way bets against the dollar. If it does finally break down, I would expect to see the trend followers jump in quickly though so a little more down may mean a lot more down. That has implications for investors obviously, most prominently in the real asset side of your portfolio – commodities, gold, and real estate. It also has implications for the US economy and the rest of the world too, especially emerging markets. EM economies have always been boom and bust, the boom part coming when the dollar is falling and capital is looking for a new home, the bust coming when the dollar is strong and capital is heading for safer climes. As for markets, a falling dollar is generally associated with foreign stock outperformance and rising real asset prices.

I’ve heard plenty of reasons why the dollar should be heading south soon but frankly, the arguments for both sides of the debate seem more about politics than honest economic assessment. Republicans have rediscovered their disdain for deficits after it went missing during the Trump years. Democrats believe large deficits will do under Biden what they failed to do under Trump (Trump’s weren’t big enough). I guess the argument is that Democrats will spend other people’s money better than Trump. To paraphrase Joshua, the computer in the classic movie War Games, describing Thermonuclear War, the only way for taxpayers to win is for the politicians to not play the game. Unfortunately, that isn’t an option either party seems to embrace these days; intervention in the private sector has become one of the few areas of bipartisan agreement. Trade policy under the Biden administration is distinguishable from that of the Trump administration only in that it is more protectionist. There are differences in other ways I’m sure but the market seems to be telling us that they are not big ones. Even if you just look at Trump’s first three years, annual real GDP growth only averaged 2.5%. Yes, it was marginally better than the Obama administration’s 2.2% (excluding 2009 just to be fair) but far from the boom Trump wants you to believe happened under his watch.

What the data seems to be telling us now is that not much has changed. The Chicago Fed National Activity Index, released last week, was at 0.24 for April with the 3-month average at 0.07. Just to refresh your memory, a reading of 0.00 means the economy is growing at trend. And what is trend? About 2% now according to the Chicago Fed but the trend changes over time obviously. Back in the 1960s, it was closer to 4%. So, the data right now is consistent with trend growth and that is around 2%. Not exactly a boom is it? Of course, that could change in the coming months if people really do go on a spending bender but I remain skeptical. We may see a rebound in services spending but goods spending is probably going to moderate. Wholesalers and retailers sure seem to think so. The total business inventory to sales ratio is at an all-time low of 1.23. That doesn’t scream confidence if you ask me.

Markets confirm the trend growth reading with the 10 year Treasury note yield still stuck well below 2% and the 10-year TIPS yield stuck well below zero. That isn’t an indication of an impending economic boom. And no, it isn’t because the Fed is holding down rates. QE just isn’t enough to do that even by the Fed’s own admission. If investors decide that growth or inflation (nominal growth) is about to take off, they will sell bonds, rates will go higher and the Fed won’t stop it unless they announce an unlimited purchase program. I don’t currently expect that but the next time they do it won’t be the first so who knows. If they do, inflation will go higher – as it did the last time – and the dollar will go down.

The dollar is probably the most important price in the world today. How it goes from here will affect the entire global economy but we can’t know which way it will go. As the song says you have to fight to keep from “losing control and running all over the place”. As is so often the case, the best course of action is inaction.

The economic data last week was not great but not terrible either. The CFNAI really told us what we already knew, that the economy has slowed recently and is now growing around trend. Meh. Home prices, on the other hand, are screaming higher. I have to say, it is strange to me that we are talking about inflation as being calm when house prices are rising at a double-digit pace. But the dollar has been pretty steady and inflation expectations are what they are. Prices may be affecting the new home market though as sales were down again. This is quite concerning because homebuilding has a pretty direct impact on GDP and it isn’t positive right now. Durable goods orders were down too but that was primarily a function of aircraft orders. Ex-transportation orders were up and core capital goods orders continue to rise at a decent pace. Personal consumption was better than expected as was personal income although the latter was down after last month’s surge-on “stimulus” payments.

This week is holiday-shortened but we will get an all-important employment report. Estimates are that the economy added 650K jobs last month but we know how good those estimates have been lately. It will be interesting to see how last month’s big miss is revised.

Stocks were up last week with growth leading the way for a change. Small-cap stocks also had a good week and commodities rebounded. Real Estate continued its roll, continuing to lead the major asset classes YTD. Foreign markets also had a good week with even China beating the large-cap US index. Copper rebounded smartly, up 4.4% and crude oil was also up over 4%. Gold was up 1.5%.

Cyclicals and Communication Services led the sector scorecard last week while defensive stocks were down.

Markets and the economy both seem to be in a state of limbo right now. Investors don’t seem to want to make any big bets about what comes next and neither do I. Lao Tzu said:

If you are depressed you are living in the past.
If you are anxious you are living in the future.
If you are at peace you are living in the present.

Another great philosopher said:

All we have is now

Wayne Coyne, lead singer of the Flaming Lips

Be at peace and live in the now.