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Clear and Opaque

Clear and Opaque

May 26, 2022

Clear and Opaque 

In the 23 years I’ve been an advisor, I don’t think I’ve ever seen a time when the direction of the economy and the markets were so clear, and at the same time, so opaque.

What is clear.

It’s clear “the market” thinks we’re going into a recession, and we’ve witnessed the painful adjusting of corporate profit expectations.  And there are several clear reasons why.

  1. First, it is clear we are at the end of a 30-year reduction in interest rates and rising bond prices. The Fed has started to raise rates and will continue to do so until it believes inflation is under control. 
  1. The Federal Reserve is clearly behind the curve on inflation and raising interest rates should have begun in early 2021. They will likely need to be more aggressive than normal in their rate increases. 
  1. According to POLITICO, the Federal Reserve has a lousy track record when it comes to raising rates. Since 1961, 8 of 9 times they’ve raised rates, the economy has slipped into recession.  As I wrote in my January piece, we’ll see if they can pull this off without running the economy into the ditch. 1
  1. Home sales have started to slow as higher interest rates have discouraged buyers. According to, the median home price in April was $425,000 and the monthly payment on that home has increased by $560 per month. 2
  1. Too much fiscal stimulus, higher oil prices and supply chain issues have led to a spike in inflation we’re all feeling.

What is opaque

There are several things that are opaque at this time and will have an impact on future earnings, the markets, inflation etc.

  1. It’s unclear how much of our inflation is “transitory”. We know some of it is.  The war in Ukraine has a definite effect on global oil prices, plus supply chain issues and a lack of workers have led to higher prices in food, energy, and retail. 
  1. It’s unclear whether the labor market stays as tight as it is now, and if so, how will employers handle it. 
  1. If inflation proves to be somewhat transitory, it’s unclear whether Fed be willing or able to ease up on their rate hikes. There are some who believe inflation has already peaked and if so, will the Fed take their foot off the gas in August or September? 
  1. The mid-term elections. Which party is in power matters. 
  1. Will the consumer continue to spend? This is a big one since consumer spending is 70% of our economy.  We’re already seeing a softening of spending in used autos and homes, and consumers are beginning to run up their credit cards after several years of reducing their balances. 

Lastly, remember the Federal Reserve has a dual mandate – full employment AND inflation below 2%.  I believe the longer it takes for the transitory part of inflation to abate, the higher the chances of a recession.  They have indicated they plan to raise rates by .5% in both June and July.  If they feel there is reason to pause in August because prices have indeed peaked, you may see a softer economy and slightly higher unemployment, but the chance of a recession will be lower.

One last thing is clear - it’s going to be a heck of a balancing act on the part of Jerome Powell and the rest of the Fed can pull this off.  History is clear – they probably won't.


The opinions voiced in this material are for general information and are not intended to provide specific advisor or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risk including loss of principal. No strategy assures success or protects against loss.


2 homebuyers/