The Two Americas
In 2021, the constant refrain we heard from Fed commentators was that inflation was “transitory” meaning it wasn’t really real, was not going to stay long, and was a non-issue nothing burger.
Inflation was finally solidified as persistent following Russia’s invasion of Ukraine in February of 2022, and rose to 9.1% during its peak in June of 2022, the highest it had been in 40 years.
The Fed was late on raising interest rates, and in turn there was a whiplash as from December 2021 to December 2023, it raised interest rates by a total of 425 basis points (or 4.25 percentage points). Specifically, the fed funds rate was increased from near-zero levels in 2021 to a range of 5.25% to 5.5% today, December 2023.
What’s interesting to me, is all of this was done with the current administration claiming that, at no point during 2021, 2022, or 2023, were we ever in a recession.
A recession being defined as two consecutive quarters of decline in a country's real (inflation-adjusted) gross domestic product (GDP).
But I think this metric misses the point. On the Lex Fridman podcast, Jeff Bezos has an incredibly salient point that bears discussion here.
Proxies are substitutes for more rigorous analysis that can make a complex story a bit too simple. When taken too far, proxies can cause an organizations’ decisions to become too disconnected from the underlying reality. The risk is that the organization shifts more focus to proxies than outcomes.
Decision-makers, who aren’t skeptical of proxies, will inevitably be mislead by their analysis. These tools are merely a starting point. You need to check under the hood.
-Jeff Bezos, 2016 Letter to Shareholders
Howard Marks says much the same thing in his November 2022 memo to shareholders, just in different words:
It’s clear from observation that security prices fluctuate much more than economic output or company profits. What accounts for this? It must be the fact that, in the short term, the ups and downs of prices are influenced far more by swings in investor psychology than by changes in companies’ long-term prospects. Because swings in psychology matter more in the near term than changes in fundamentals – and are so hard to predict – most short-term trading is a waste of time . . . or worse.
Investor and consumer psychology in the short term matters much more than KPIs like GDP or company profit and loss statements. And on that basis, I posit that we have been in a recession since early 2022 and, if we play our cards right, are about to come out of it.
The Vibe-session
The vibe-session recession we have been experiencing since Q3 2022 has been most pronounced in tech, specifically SaaS, and is just now pulling out of that slow down.
This sector has been rife with layoffs as the free capital of the ZIRP era has dried up.
But a vibe-session recession as I’m defining it is less about concrete numbers in this instance, and more about consumer psychology.
While the jobs report has remained consistently strong year over year, and unemployment low, some of that is because people have had to take on more than one job to make ends meet, and both of those jobs are counted as “jobs added” to the economy.
Americans are dipping into their 401ks and taking on record amounts of credit card debt. It’s clear to anyone paying attention that the average American consumer is hurting.
And yet the current administration seems to have adopted a strategy of gaslighting the public, shaking data in our faces which contradicts the reality of the average American’s experience.
This strategy culminated in an article published in the Atlantic that was literally titled Inflation Is Your Fault.
It’s not the fault of the Fed keeping rates at near zero for longer than was wise.
It’s not the fault of the Fed and political commentators who claimed that any inflation you may have experienced in 2021 was “transitory”.
And once inflation was here to stay in 2022, it’s not a recession because the GDP is excellent, the jobs report is strong, and unemployment is low.
And once inflation got really bad, and rates were higher for longer, it’s *your* fault.
And the reason why “people keep buying expensive things”, Annie Lowrey of the out-of-touch-Atlantic, is because young people are prioritizing $1,300 Taylor Swift tickets and travel because saving for a house just feels so out of reach for them.
The age of the average homeowner is 56 years old.
The age of the average homeowner increased by 10 years or 21.3% between 2001 and 2019 for an average annual increase of 1.18%.
In 2011, the median age was 54 years, increasing to 55 by 2013 and 56 by 2015.
The median age of homeowners is on an upward tend. Basically this means that older people with more wealth are buying second homes, and the ages of first time home owners continues to skew older, as it takes longer and longer to be able to afford a house.
2024 Predictions
I think we have been in a vibe-session recession since Q3 2022 and we are about to come out of it.
If the Fed can cut rates (if appropriate) before the consumer stops being so bullish (read nihilistic), then we have a chance at the soft landing.
If inflation continues into 2024 and we have to keep rates higher for longer, or if we cut rates and inflation spikes again, we may be in trouble.
To finance Taylor Swift as Person of the Year and to take that trip to Mykonos, Americans have been taking on more credit card debt than ever. During the summer of 2023, credit card usage in the U.S. reached a new milestone—with balances totaling over $1 trillion.
Beyond that, with student loan repayments restarting for the vast majority of borrowers, 40% of student loan borrowers missed their first payment.
Somewhere along the line, if people begin to default on their obligations in 2024, we could see a massive slow down in consumer spending, or ability to spend, as we hit a credit crunch.
And that’s when we’d hit a major recession, much bigger than the vibe-session we’ve been experiencing since mid 2022.
Conclusion:
I’m not sure why I’m the one who has to say this, but I would appreciate some accountability from the people who govern us, and who’s job it is to guide macro policy.
Rather than gaslight us with that constant refrain that Bidenomics is working, (which its not, because they stopped saying it) please give us the actual lay of the land so we might work together to fix the problem.
And if they need a masterclass on how to communicate honestly to a skittish public, perhaps a renewed watch of Franklin D. Roosevelt’s first inaugural address would be in order.
I am certain that my fellow Americans expect that on my induction into the Presidency, I will address them with a candor and a decision which the present situation of our Nation impels. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself--nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days…
…Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
-Franklin D. Roosevelt, First Inaugural Address 1933
2024 can be a great year. An amazing year. A groundbreaking year. I have such tremendous optimism for the future.
But that optimism is naïve at best and delusional at worst if we don’t use correct measures to ensure the continued prosperity of the greatest nation to have ever existed.
You and I have a rendezvous with destiny.
We'll preserve for our children this, the last best hope of man on earth, or we'll sentence them to take the first step into a thousand years of darkness.