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The Looming Question of Recession: Now that we have entered bear market territory (i.e., stock indices fell 20% from their peaks), the question of a broader economic recession looms. For all we know, we are already amid a recession. (Recessions are better identified in hindsight.) With the Fed’s delayed response in tackling inflation, the threats of overreaction and uncertainty make the situation even more unstable. In the coming weeks, we at Compass Ion will say more about how we have positioned ourselves and our clients, from an investment perspective, for the near future. Indeed, now is the time to consider the question of risk management.

1970s Inflation? You may have heard countless media heads comparing today’s inflation to the 1970s. Economic and market data is harkening back to American days far past. But which days? While many of us might have a living memory of the 1970s, the economic data might be closer to the late 1940s (post-WWII). Excess savings that accrued during the war flooded the economy with goods and services, creating substantial inflation (peaking at 20% year over year in early 1947) followed by deflation two years later, without any change in rates. Some food for thought:

  • Average annual hourly earnings are lower today than at any time between 1968-1982. In addition, they are decelerating. Tough to argue for a wage/price spiral when wages are decelerating.
  • Money supply growth has flattened. The trend over the last few months is weaker than at any time from 1970-1985, and it is likely to get weaker as consumers spend out excess savings.
  • Personal Income Growth is an annualized 5% YTD, lower than at any time from 1970-1985, and is likely decelerating. Even when unemployment was 10%+ in the 1970s, income growth never dipped below 5.5% and was usually much higher.
  • Oil/Gas/Energy Crisis. Sure, they happened in the 1970s, but this also existed in the late 1940s as excess demand put pressure on supply chains that were still recovering from WWII.

That said, surer signs of 1970s-type inflation could come if supply issues lasted for years paired with a compounding of policy mistakes.

Personal Income Rose 0.5% in May: While consumers continue to spend at a healthy clip, they find themselves spending more for less. This probably isn’t news to most of us who feel this reality directly. In the chart below, you’ll see the year-to-year percent change of consumption expenditure. Look at 2022 (far right). The gap between the red line and blue bars is worth noting. That’s the difference between what consumers are paying vs. what they are getting.

Ain’t No Sunshine: Scientists at the University of Delaware and UC Riverside have developed a method of bypassing photosynthesis for plants. That is to say, they found a way to grow plants without sunlight. It turns out that using sunlight is super inefficient. Plants only use about 1% of the light they receive. These scientists found a way to convert carbon dioxide, electricity, and water into acetate (a main component of vinegar). Ironically, they use solar panels to gather the energy needed to power the process. So they only get half-points.