Is the Boogeyman Coming?

Most adults have experienced some fear as a child.  It may have been monsters under the bed, dark shadows in a hallway, or something lurking in the closet.  Or the worst of all, older brothers.  If there is one word that seeped into a child’s consciousness, it was probably “boogeyman”.  No one was really sure what or who it was, or where it come from, but there was an almost unconscious fear of the boogeyman coming to get you.

In a scene from the action movie, John Wick, the Russian describes Keanu Reeves as “Baba Yaga”.  Another character asks, “The Boogeyman?”.  Everyone has heard of a boogeyman.  It is described in many different cultures.  Surprisingly, many of the names used can be traced to some variation of boogeyman.  I am not sure many children today are threatened with a boogeyman to keep them in line, but sometimes legends live on.

As the threat of an inverted yield started to raise its head in late 2018, I began charting yields of the 2-year Treasury against the 10-year Treasury.  An inverted yield curve lasting several months is often used by economists to predict the onset of a recession.  When the yields of the short-term treasuries and mid-term treasuries started to separate in mid-March of 2020, the threat of recession receded, but a new threat began to raise its head: inflation.

Inflation has been a non-factor for almost 40 years. Why should we worry about it now?

If anything represents a boogeyman for many economists and market watchers, it is inflation. In the United States, the decade of the 70’s seared into the mind of many experts, the fear of inflation.  Once unleashed, it is not easily tamed.  I will not detail here the hellish experiences in some other countries. There is growing concern that the Fed has forgotten the hard learned lessons of the past.

Gerald Ford took over for the disgraced Richard Nixon in 1974.  He immediately was presented with one of the worst economies in decades.  Faced with high inflation and a recession, Ford’s response was a widely mocked public relations campaign.  The “Whip Inflation Now” initiative comprised pledge cards for individual citizens to propose ways to curb price increases.  The haphazard effort was crowned with a red button with the letters WIN on them.  Alan Greenspan was known to remark what a blunder this approach had been.

Jimmy Carter fared no better.  His administration was faced with the Energy Crisis and inflation hitting 13.5% in 1979.  With additional challenges, such as the Iran Hostage Crisis, he never recovered and went down to defeat to Ronald Reagan in 1980.

Today’s environment is not as nearly as dire, but concerns are out there. Gas, lumber, housing, mortgage rates, auto loan rates have all increased over the last few months if not longer.  Some of that is demand, of course, and that will wane as supply catches up.  Unfortunately, some of it is fiscal and monetary policy.  The Fed will have to deploy a deft hand to fight future inflationary pressures.

The recent passing of the $1.9 trillion relief package is eye-watering to fiscal conservatives.  Just 13 years ago, President Obama shepherded the $800 billion stimulus package through Congress.  At the time, it was considered a once-in-a-lifetime program.    It remains to be seen how the economy will react to this latest cash infusion.

The most recent proposal bandied about is a $3 trillion infrastructure program.  This seems reminiscent of President Obama’s “shovel ready” initiative.  While proposed with all good intentions, the government program found it quite difficult to identify where to dig.  If you have any concerns about government spending, this might be the boogeyman you find in your closet tonight.

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