Darius sat down with Warren Pies on Pro to Pro Live last week to discuss the business cycle, fiscal stimulus, inflation, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. This Has Been An Income-Driven Business Cycle, Not A Credit-Driven Business Cycle… Focus on Income, Not Credit

The current business cycle has been driven by income growth rather than credit expansion. 

This is significant because income-driven growth is typically seen as more sustainable than growth fueled by excessive borrowing.

Additionally, capital misallocation and adverse selection are common precursors to a recession. 

Today’s economy is currently showing no meaningful signs of either.

Although a yield curve inversion has been a reliable indicator historically, we believe assuming that it guarantees a recession may be foolish.

2. Fiscal Stimulus Has Been A Major Contributing Factor to The Resiliency of Household Income… This dynamic Is Dissipating At The Margins

To get an idea of where fiscal policy is headed over the medium term, investors can observe:

  • Individual income taxes, which comprise approximately 49% of the federal revenue, decreased by 15% YoY. This decrease contributed to extra cash on household balance sheets.
  • The cost of living adjustment increased 8.7% in 2023 and is projected to be 3.2% in 2024.
  • The year-over-year nominal delta in the federal budget deficit peaked at +$834 billion in June and decreased to +$320 billion in November. However, we believe it will remain positive, and fiscal stimulus will continue to support the economy, especially with a general election coming next year.

Although the direct impacts of fiscal stimulus on household income may be reducing, fiscal policy still leans towards supporting economic growth.

3. Textbook Core PCE And Super Core PCE Disinflation Are Supportive of Market Expectations For Rate Cuts Throughout 2024

The most recent Core PCE reading indicates an increase of 2.3% on a 3-month annualized rate of change basis and an increase of 2.5% on a 6-month annualized rate of change basis. That is positive.

The most recent Super Core PCE reading indicates an increase of 2.6% on a 3-month annualized rate of change basis and an increase of 3.0% on a 6-month annualized rate of change basis. That is also positive. 

The recent softening in labor market conditions, specifically in terms of a reduction in labor demand indicated by total job openings and not total employment, is significant and suggests that the labor market is cooling without a considerable increase in unemployment.

The current economic environment is likely to continue as long as these trends in inflation measures and labor market conditions persist, along with the fiscal dynamics mentioned above. 

We believe this environment will be one where moderate inflation, a balanced labor market, and supportive fiscal policies create a stable economic backdrop.

That’s a wrap! 

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