Where the US Sits in the Business Cycle

• For as long as there has been economic policy, there has been some form of an economic cycle. 
• For now, the US (and much of the rest of the world) are in “rising interest rates” phase. 
• it will take time to cycle through the rest of the phases, though we are seeing some signs of markets in the process of change. 

I’m sure you are all aware of what’s written on my business card by now, “I am not an economist, nor do I play one on television. And I didn’t stay at a certain motel chain last night.” My economic credentials are such: 

• I passed Econ 101 and 102 in college almost 40 years ago
• I’ve spent the better part of my career arguing with economists (and in one memorable case telling one, my boss at the time, he was completely wrong)

A joke I like to tell at social gatherings goes something like this: You put 10 economists in a room together and you can come away with 11 different opinions. 

I’ve thought of economists recently as I listen to the various arguments about whether the US economy is strong or weak, growing or dying. Like everything else, opinions are clouded by politics meaning the economic theories that have served them throughout time have been tossed aside. For the most part. I say this because so few seem to recall what happens during a normal business cycle. As I reminder, I would have them turn to page 94 of John J. Murphy’s book “Intermarket Technical Analysis” (1991 ed.) and read along with me: 

• Rising interest rates pull the dollar higher.
• Gold peaks.
• The CRB Index (commodities in general) peaks.
• Interest rates peak; bonds bottom.
• Stocks bottom.
• Falling interest rates pull the dollar lower.
• Gold bottoms
• The CRB Index bottoms.
• Interest rates run up; bonds peak.
• Stocks peak
• Rising interest rates pull the dollar higher.

And as we all know, we are in phase one: Rising interest rates pull the dollar higher. But what about the rest? 

• It’s hard to say gold (GCQ22) has peaked unless we go back to its spike high this past March. Otherwise, the trend has been sideways-to-down.
• It’s possible commodities in general have peaked given
  • Crude oil (CLN22) is well off its March high of $130.50
  • The Barchart National Corn Price Index (ZCPAUS.CM), the intrinsic value of King Corn, looks to have topped out near $8.00 (both April and June)
  • Dr. Copper (HGN22) also looks to have topped out this past March

Let’s take a minute to talk about commodities and inflation. Again, for those who have forgotten what they once learned in economics, the ripple effects of trade wars and tariffs is higher prices. Always has been, probably always will be (there are no such things as absolutes in market analysis). Here politics also raises its ugly head as those unabashedly critical of the current administration don’t care to recall Twitter-driven trade wars, broken trade agreements, and tariffs against economic allies. On the other hand, both the previous and current administrations flooded the US with dollars (Trump bucks for agriculture, pandemic payouts for nearly everyone) leading to a workplace revolution and seemingly historic demand for everything. And when demand outpaces supplies, as economists should know, the result is higher prices. 

Let’s continue with our look at where we are: 

• I don’t think interest rates have peaked, not with yields continuing to firm and projections for continued increases through 2022 and possibly 2023. But we have to remember, we aren’t talking about 1980s style interest rates in the teens. 
• Those of you who have been following along know I still see US stock indexes in long-term downtrends. I don’t think these have bottomed just because of Tuesday’s rally. One day does not a trend make. 
• And so on. 

It’s that simple. What we need to look for now is signs of the US economy struggling that could lead the Fed to put an end to its interest rate hikes. Recent reports have shown retail sales and housing demand starting to slow, as has one of my key economic reads: Boxed beef. But we haven’t reached rock bottom yet, and as I mentioned earlier, interest rates haven’t peaked. 

And in case anyone has forgotten, and despite what the previous administration always said, US stock indexes do not equal the economy. But that’s another lesson in economics for a different day. 

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