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A Tale Of Two Economies
Morgan Stanley's Mike Wilson told a familiar story on Monday.
I won't spend too much time on Wilson's latest given that it broke no new ground. That's not a criticism. There's no new ground to break.
He began by noting that over the past few months, US growth outcomes have surprised on the downside (relative to consensus) while inflation has generally surprised to the upside. The figure below illustrates the point.
Wilson called that "a challenging combination because it has meant the Fed c
What’s better for have-nots: ~2% inflation or sub-4% unemployment?
Recognizing the Fed’s mandate does not, strictly speaking, include what’s better for have-nots.
They feel the inflation all the time. But, unless they or somebody close is unemployed, it’s not their problem.
That.
What this cycle shows is that, politically at least, unemployment is less costly than inflation… Good to know.
The inverted curve is the necessary condition. The sufficient condition is wider credit spreads. As Wilson points out, some are already wide. But some are not yet there. When the rest go, that is Mrs (O’)Leary’s cow kicking over the lantern. When does that happen? If you could tell me that I could tell you when we get the next downturn. That’s when credit gets turned off and things go quickly south from there.
I’m surprised that the writer would seem to conflate individual havenots and corporate have nots in this discussion. I hope the best for individuals and ill-effect of monetary policy on them should be mitigated. However corporate have-nots cannot go bankrupt fast enough to my taste to free workers and capital for better opportunities. Who wants to be 80s Japan? Shouldn’t corps disappear regularly at the end of their original product lifecycle?
Small and medium businesses (SMBs) are inherently “corporate have-nots” in this context, since they cannot tap the bond market.
… and since they are usually simple business, they often have plenty of competition, which means their margins are usually very thin indeed.
Along with what JL mentions, here’s something else he probably knows some things about.
You mention freeing up capital through bankruptcies. A problem with such “Austrian School” theories is that, in the real world, many bankruptcy proceedings don’t only take days or weeks. Would you take the over/under on 2.5 years for the Lehman bankruptcy settlement which freed up capital?
Also, when a SMB goes BK, not much capital is freed up. SMBs don’t usually have much capital, they live on cash flow and loans, when SMB BK rates rise banks cut back lending.