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May 23

Weekly Report: May 28, 2023


Soft Landing?

Inflation is coming down, but I remain skeptical that we’ll get a soft landing.

A soft landing supposes that, by keeping interest rates roughly where they are, inflation will start to moderate back down to its 2% target and low unemployment and positive productivity growth will be maintained. Paul Krugman suggests things will be more resilient than the doom and gloom suggest.

But interest rates have skyrocketed in the last 12 months, after more than a decade of ZIRP and a generation of workers who haven’t experienced an environment in which money was not cheap.

Rate rises have never occurred so quickly in history, and I don’t think they’ve had a chance to bite. The longer you keep rates at this level, the longer the situation gets worse for people and businesses who are sensitive to rate rises. People are not used to interest rates being over 1%, much less over 5%. The effects of high rates should eventually flow through in the form of increased bankruptcies, defaults, and restructurings. The regional banks aside, we haven’t seen much of that yet, but it doesn’t gel with me that whoever levered up to the gills in the last few years isn’t going to face some sort of reckoning when their interest rates have suddenly multiplied. It will take some time to play out.

We’re already seeing some signs of stress.

Credit card debt did not decline in Q1 like it normally does and delinquencies are rising. The commercial real estate market is a ticking time bomb. The regional banking crisis is still lurking in the wings.

Economic cycles have tended to consist of periods of gradual growth followed by short and sharp declines. I’m not sure why it would be different this time when the powder keg is so large. Eventually, something will spark a prolonged panic and precipitate the next recession.

And maybe we’ll see cycles that are more volatile — a sudden slowdown could push the Fed to cut rates back down to zero again in a knee jerk reaction, and you end up with an economy in pilot-induced oscillation (“when the airplane begins a departure from the desired flight path, and the pilot applies inappropriate, excessive or mis-timed corrections that result in ever-increasing excursions that threaten to force the airplane out of control”).

Perhaps something at play is that things happen so fast these days, and attention spans are short. The lack of bad things happening quickly might be interpreted as a sign that the bears are forever crying that the sky is falling, but we’re actually on a path to recovery.

I just don’t see it happening.

Further Observations

  • Ron DeSantis launched his presidential campaign on Twitter Spaces in a conversation with Elon Musk and David Sacks. As is common for Musk’s events, it started late and then just got more awkward as the servers overloaded.
  • Uber’s Chief DEI Officer was placed on leave after a couple “Don’t Call Me Karen” talks she hosted went sideways after various employees felt antagonized by what she said. Things feel a bit out of control, and it’s telling that I don’t really feel comfortable publicly expressing a view what was said, knowing that it could come back to bite me at some stage. All I’ll say is that this chilling effect on speech isn’t a good outcome.
  • This was NVIDIA after earnings release on Wednesday. That stratospheric price reflects $180B+ of market cap added in the space of an hour, all because of AI. (Only Apple and Amazon have recorded larger one-day increases.) Its PE ratio is now over 200.


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