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OPTO Sessions

“Lag Effects” — Adam Taggart on the Possibility of a Downturn

Adam Taggart, CEO and Founder of Thoughtful Money, discusses the current macroeconomic situation with OPTO Sessions. He explains why an excess of liquidity in the system that predates the recent hiking cycle could come back to undermine hopes of significant rate cuts during 2024.

Adam Taggart is CEO and Founder of Thoughtful Money, a Substack publication that collects and shares the views of market experts in order to provide actionable insights for investors.

Taggart is quick to clarify that he isn’t an economist or market analyst by trade.

Prior to Thoughtful Money, which he launched last November, Taggart ran Wealthion, “one of the fastest-growing financial media properties on the internet”, according to LinkedIn, and the fastest-growing financial channel on YouTube, with 4.5M monthly views. Similarly to Thoughtful Money, Wealthion educates its readers and listeners about financial markets.

Taggart has worked in diverse roles, among them investment banker for Merrill Lynch, at the start of his career, and Vice President of Marketing for North America at Yahoo! Finance.

According to Taggart’s first post announcing the launch of Thoughtful Money, “Going independent gives me the liberty to runs things exactly the way I want”.

When he interviews guests for his latest enterprise, “The lens I look through is the eyes of the many different experts I talk to”, says Taggart in his interview with OPTO Sessions. He dubs his offering a “consensus consolidation” of those experts’ views.

However, even that consensus doesn’t always match what actually happens. Take last year, for example.

“Coming into 2023, everybody was rock-solid sure that we were going to have a recession in early 2023. Everybody was super bearish. Of course, everybody got surprised by the market action that year.”

Taggart’s 2024 Outlook

There is one simple explanation for why 2023 defied the pessimistic consensus.

“I think what really drove the markets in 2023 was rising net liquidity. There are a number of people who say, ‘Look, that’s all that matters. You can almost forget everything else. If the tide is rising, it’s going to bring financial asset prices up with it. And if it's sinking, it's going to bring them down.’”

However, there is a more complex dynamic playing out, which Taggart describes as an arc that starts with a very positive Q1, before a potentially steep decline.

One person who holds this view is Felix Zulauf, founder of Zulauf Consulting.

Zulauf said in December that he expects the current bull market to peak during Q1 2024, and that this might be followed by a “quite sharp” decline.

Beyond Q2, however, 2024 becomes hard to predict. On the one hand, US election years tend to correlate with positive returns for stock markets. Presidential Election Cycle Theory maintains that presidents entering the fourth year of a term make efforts to shore up the economy in order to improve their chances of re-election.

“I think what really drove the markets in 2023 was rising net liquidity. There are a number of people who say, ‘Look, that’s all that matters. You can almost forget everything else. If the tide is rising, it’s going to bring financial asset prices up with it. And if it's sinking, it's going to bring them down.”

While a healthy stock market may serve as a barometer of economic health, Taggart highlights the possibility that this year, “it may get away from central planners’ ability to control things — especially if inflation resumes”.

Assuming that the US economy weakens, the Federal Reserve (Fed) will at some point step in. “We’re probably going to see a fairly sizable stimulus programme to try to staunch that bleeding, which is going to lead to yet another boost higher for asset prices — and probably more inflation, too”, although that inflationary impact is “probably a 2025 phenomenon”.

Going Strong

The irony is that the bleeding the Fed may have to staunch stems from a wound it made itself.

“The whole reason why the Fed hiked was to bring down economic growth, to bring down inflation and to cool off the jobs market. If you look at the headline data right now, the economy is still going pretty strong.”

Unemployment figures, in particular, are relatively low. Inflation has come down somewhat; however, CPI data released on 13 February logged a 0.3% month-over-month and 3.1% year-over-year increase in consumer prices. The prior disinflation, argues Taggart, could have been a result of fixing supply chain disruptions caused by the Covid-19 pandemic. The ongoing inflation is, likewise, a vestige of that era.

“A lot of people, myself included, have scratched their heads and said, ‘Hey, we’re now a year and a half into this hiking and tightening cycle. Why haven’t the lag effects arrived yet?’”

There is an argument, says Taggart, that these lag effects may have been delayed by the amount of extra money that was pumped into the system via stimulus programs during the pandemic.

“Have we just pushed the lag effects into the future? And we’re now at the point where the can can’t be kicked anymore, and they really start expressing themselves at full strength?

“We put a gargantuan amount of stimulus into the system — more than most people could fathom. And it took a long time for that pig to get through the python.”

Investors have, until now, predominantly bet that the lag effects of the recent cycle won’t materialise, and that “markets are just going to keep coasting from here with all the support they’ve had, and the ‘strong economic data’ we have had”, says Taggart.

“A lot of people, myself included, have scratched their heads and said, ‘Hey, we’re now a year and a half into this hiking and tightening cycle. Why haven’t the lag effects arrived yet?”

While the market has mostly been betting on that data, “the big surprise this year would be if those lag effects start winning out.”

Might Cuts Take a Hike?

Market optimists have been pricing in a reversal of Fed policy that, as Taggart points out, there is little reason to believe will materialise. Fed Chair Jerome Powell has been consistent that rates will remain higher for longer, but given the Fed’s tendency to step in and support markets over the last two decades, “the market would say, ‘I don’t believe you.’”

Since a December pivot in Powell’s rhetoric, when he hinted hikes were over and cuts could be on the horizon, market expectations for rate cuts have risen still further. Taggart estimates the market has priced in up to seven rate cuts since that time.

The catch is that this hypothetical cutting cycle is dependent on inflation being under control — and recent CPI data is a warning that this may not be the case.

LINKS TO THE INTERVIEW:

Apple Podcasts

Spotify

YouTube

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