The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Through the Looking Glass

In 1872, Lewis Carroll wrote the sequel of “Alice in Wonderland” in which Alice crawls through a mirror and discovers everything is reversed. I think about that whenever Wall Street discovers good news is bad news.

The most recent jobs report was stronger than expected, which caused big losses in the stock market. What? That seems illogical! The same thing happened with the latest GDP report, which was also stronger than expected, causing big losses in the stock market. In the last week or so, several other strong economic reports have been associated with weak stock market reaction. Why?

The cause of this reverse logic is inflation. Because the primary cure for inflation is higher interest rates to depress the economy, good economic reports means we need even higher interest rates. Therefore, good news equals bad news.

Compounding the problem, higher interest rates in the U.S. increase the value of the dollar, which hurts our exports and penalizes emerging markets who must buy dollars to pay for their imports and to repay their debt. Again, good economic news cause bad financial reactions.

Traditionally, nations have tried a slow, steady increase in interest rates to reduce the probability of a recession or “hard landing.” The current Fed is trying to shorten the “time of suffering” by “ripping the band-aid off” which increases the probability of a recession. Even so, I expect the recession will be short and mild, due to our strong job market and strong corporate balance sheets among other reasons.

Let it rip!