- Recent signs in the economy are pointing to late-stage business cycle activity rather than the Goldilocks environment indicated by the Federal Reserve, Ron Insana says.
- That means the Fed will likely have to get more, rather than less, aggressive in its efforts to "normalize" interest rate policy.
- Holding onto winners like Apple and McDonald's is also a smart way to bet in this climate, Insana adds.
It appears Goldilocks has returned to both Main Street and Wall Street, at least from the Federal Reserve's point of view.
For the moment, the three bears of slowing growth, inflation and tighter financial conditions may have been scared off by the Fed's relatively benign description of an economy that is growing moderately, inflation reaching the Fed's 2 percent target and risks that are "balanced" at the moment.
However, the Fed's careful wording belies what is happening on the ground in the economy, which smacks more of late-stage business cycle behavior than a perfectly balanced environment.
There has been a raft of stories in the financial press about specific labor shortages driving up wages at an accelerating pace.
From railroad engineers obtaining $25,000-$30,000 bonus payouts to sign on, to small towns offering relocation payments, tuition reimbursement and bigger paychecks, labor slack has been reduced to near zero.
As mentioned in prior columns, there are 6.1 million open jobs in the U.S., just off a record, and 6.6 million unemployed individuals.
The nearly 1:1 ratio has never been seen before.
Further, there are shortages of welders, construction workers, agricultural workers and a critical shortage of nurses, while nursing schools are oddly turning away applicants.
Tuesday's manufacturing data also show demand exceeding supply of goods produced, with production bottlenecks crimping the ability of producers to keep up with consumer demand. That is something that in past business cycles has pushed up prices of consumer goods.
This is garden-variety late-stage business cycle behavior.
The Fed, Wednesday's statement notwithstanding, will likely have to get more, rather than less, aggressive in its efforts to "normalize" interest rate policy. That could mean four, rather than three, rate hikes this year. That's something the markets are not yet anticipating, and may explain the sudden surge in the U.S. dollar, the one place that is reflecting accelerating growth and widening interest rate differentials between the U.S. bond market and other rate markets around the world.
It is altogether possible that we can have a cyclical downturn in the U.S. economy by early 2019, and a cyclical bear market in stocks this year, anticipating such a development.
This is not a crisis warning. This is the recognition that this business cycle may be long in the tooth.
The tax cut and excess federal spending may boost some areas of the economy, but thus far, it has not produced anything more than a modest boost in capital spending (most of it from capital intensive technology companies) but a surge in stock buybacks and dividend increases, Apple being a case in point.
The associated increase in budget deficit may also set the stage for a more complex response to the next downturn when fiscal stimulus will have already worked through the economy and monetary options may be fewer and less impactful than in other slowdowns.
Still, this is, for now, just an observation that the current environment looks like the final inning of a nine-year economic recovery.
It could go extra innings, if the bulk of the stimulus has yet to deliver some extra base hits.
I think raising cash on stock market rallies and shepherding corporate cash for a coming slowdown is the best way to play this game.
Of course, holding on to winners like Apple and McDonald's is also a smart way to bet on your best players while waiting for new team leaders to emerge when the second game of this double-header begins.