Today we’ll consider the risks to my stagflation forecast. Note that’s different from the risks of my forecast, should it prove accurate. I’ve described those already but it’s important to ask how I might be wrong.

What is in store for the capital markets and the economy in 2022? John Mauldin has dedicated more than 30 years to answering questions like that and keeping people informed about financial risk.

The yield curve is really just a symptom. I like to compare it to a fever—not serious in itself, but a sign you have an infection or some other ailment. An inverted yield curve means something is wrong in our economic body. So today we’ll consider what it means.

Today I want to focus just on good news and sometimes great news. The world is getting better, but it doesn’t make the headlines like the problems and catastrophes do. The byword in newspapers when I was growing up was “If it bleeds, it leads.” Today’s online headlines are even more so. Crisis and gloom sell. Good news, not so much.

Recession is where we are headed. So let’s review what it will be like.

Recession is here, or will be soon. And unfortunately, it will be a global recession. Like the COVID recession, this one has little to do with the business cycle. It’s a recession of choice—not your choice or mine, but Vladimir Putin’s. He clearly miscalculated how hard capturing Ukraine would be and how the West would react.

Today we’ll start what I’m sure will be a series of letters on Change². I’ve said for some time the 2020s would be a turbulent period leading to a much better 2030s. I still believe that. I also believe the events we’re watching right now will define what that new order will be.

This week’s news is seemingly all about Ukraine and Russia. It is a terrible situation. But as an economic matter, we still have serious economic challenges no matter how it develops.

How much inflation is okay? People have different answers. I think it should be very low, but definitely positive to forestall deflation. Whatever your ideal may be, there’s a range of possibilities that would at least satisfy you. Political scientists call this range the “Overton Window,” a hypothetical box around the limits of acceptable policy. Anything outside the box is, by definition, unacceptable.

Near-zero, zero, and below-zero interest rates changed the incentive calculations and decisions from what they were a mere 30 years ago. You can’t look at policies or almost anything else prior to the early 2000s as a standard for today. The incentives of low interest rates have literally screwed (that’s a technical economic term) things up.

I believe Fed officials are largely responsible for the cycles of bubbles, booms, and busts over the last 30 years. Further, they share some of the blame (clearly not all) for the growing divisions and tribalism in our society. Much of it springs from the wealth disparity they aided and abetted.

We’ll review what may be the most compelling bear case I’ve seen in a long time, along with some other unpleasant data. Then we’ll look at some equally compelling reasons those views may be wrong.

Many analysts project China will soon be larger by GDP than the US—which shouldn’t be so hard with a population four times larger—but it’s not clear to me that China’s seemingly unlimited linear growth will continue three or four more decades. I can remember when the same was said about Japan.

Today I’ll continue the annual forecast I began last week. New COVID developments are unfolding rapidly. If we’re lucky, they may carve out a nice bookend for us. But my worry is that rather than bookends it could be economicus interruptus. 2019 was not portending the most robust of economies. What if, in Groundhog Day fashion, we end up back where we were?

Twenty-two years of tradition dictate I begin the new year by forecasting what lies ahead.

I’ll share a story from my good friend Vitaliy Katsenelson. He immigrated to the US with his family from Russia over 30 years ago. I’ve always been fascinated by this story when we get together. All he knew of America came from movies and propaganda, which wasn’t altogether flattering.

Last week’s What Really Caused Inflation letter generated an unusual number of questions and comments. That tells me I need to go a little deeper. We know inflation by the higher prices it generates, but exactly how it flows through the economy isn’t always obvious.

Today we’ll “war game” what the Fed is facing as it wrestles with inflation, growth, employment, and political considerations. We’ll try to entertain those thoughts as if we’re sitting in the conference room with Jerome Powell.

The employers who kept DB plans without adequately funding them and/or generating returns sufficient to pay the promised benefits. It is a systemic problem that affects others. Today we’ll discuss this problem and some of its macro-level consequences.

The charts and comments below are drawn from the “Clips That Matter” feature of our Over My Shoulder service. Because we know a picture is worth a thousand words, my co-editor Patrick Watson and I select a few important charts and graphics and send them to subscribers each week with some brief comments. Many say these clips are their favorite part of the service.

In some simplistic economic theories, shortages never happen. Supply and demand for any particular good are always perfectly balanced in a given time and place. If you can’t get what you demand at that moment, you pay a higher price or you demand something else.

I am writing in the middle of a whirlwind week in New York. We are going to discuss what I’m learning, some takeaways from the conversations I’ve had, changes in my personal portfolio, and thoughts around the topic of the day: inflation. As well as a few random things that I have read this week. All delivered to you within my 3,000-word limit. Let’s jump in…

We have plenty of other problems and don’t need more, especially rising energy prices as the economy slows. Nonetheless, that seems to be what we will get. Today I’ll dig into what’s happening and what I think would be better.

Today, I’ll describe what I think will happen over the next year or so. I rarely make short-term forecasts because I’m usually early. Reaching the major turning points takes longer than we think.

Today’s letter will be the first of at least two parts. Next week I’ll describe where I think this is heading, and how we still have a chance to save the recovery if certain people/institutions make the right choices. But first, I want to establish three important points. They are foundational to my outlook. Here they are, summarized in one sentence.

The ongoing, intensifying supply chain problems are raising costs in ways that add broad inflation pressure everyone will feel. And the zeitgeist in the workplace is literally changing before our eyes.

Historical comparisons are always risky. This is particularly so when comparing different eras in vastly different countries like the US and China. Similarities can actually obscure more important differences.

A few months ago in Xi’s Big Mistake, I said Beijing risked killing the entrepreneurial activity that had spurred the country’s rapid growth. As we learn more, this is looking less like a mistake and more like a mistakenly-conceived plan.

Today, I want to show you how richly valued the market is and then review some of the top risks that could force it downward. Like those sandpiles I talk about, we don’t know exactly what will trigger a collapse. We know something will do it. Sandpiles don’t grow to infinity.

Today we’ll take another walk through the inflation debate. Is it still transitory or should we expect a light-1970s inflation going forward? The answer is critically important.

Today I’m going to look at several possible futures. There are forces at work in both Congress and the Federal Reserve that could take us down radically different paths. There are also changes in the Zeitgeist, the way we act and think both in and as a society, that are going to have major impacts.

We are in an odd situation where it’s unclear if labor is scarce or abundant. Many employers can’t seem to find enough qualified workers, but the August jobs report said 8.4 million are unemployed and millions more underemployed.

Several potentially big storms are brewing. They could be minor annoyances or catastrophic disasters, or anywhere in between. I truly hope they all resolve with minimal fuss. But they may not. They could even combine into a perfect storm of even greater magnitude… so now is the time to prepare.

You’ve probably heard of Ron Baron, founder of Baron Funds which has grown to a stable of not just mutual funds but a variety of private investments and Ron’s own capital—something like $50 billion in total. We were thrilled to have him on the SIC virtual stage, where my good friend David Bahnsen ably interviewed him. I’ll give you some extensive quotes from that session’s transcript, interspersed with comments from me.

“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”

If you look just at 2021, it seems the US economy is tearing higher.

I am worried the Fed will either let inflation become psychologically entrenched, or wait too long to stop it and spark crisis with a too-hasty response, but there are other possibilities. None are especially good.

Let me be very clear. I believe the Federal Reserve has already made a significant policy error that can lead directly to recession. An accompanying fiscal policy error by the US Congress could compound the Fed’s error, although that remains to be seen, as it is not clear what will pass Congress.

Xi has been trying to balance economic freedom and authoritarian control and it’s not working like it used to. Today we’ll review some recent events that illustrate where Xi went wrong.

TINA has been applied to investing. You must buy stocks because TINA. You can’t make money any other way. Just close your eyes, buy and hold forever. Or at least through a full market cycle. Frankly, I think that’s stupid.

Rather than my usual economic/investment letter, this week I want to take a more philosophical tack, looking at some of the challenges we face as a country and culture, beginning with the freedom of the press but then turning to technology and even wealth disparity. We will have to consider what freedom of speech meant in the 1800s, what it meant at the turn of this last century, and what it means today in a world of social media.

This year’s SIC closing day was a blockbuster. In this letter, I’ll wrap up my conference reviews by wrapping that day for you.

If it seems I have been talking about the Strategic Investment Conference for weeks… well, you’re right. It really was that much to unpack, and I’ve still only scratched the surface.

The interplay between governments and businesses impacts your investments. So does the interplay of governments with other governments. Thus the drive to create an international corporate tax. So you can’t escape politics… but you can try to analyze it calmly, without partisan histrionics.

This week we’ll review some of the SIC technology sessions and think about where the latest innovations will take us. It wasn’t just pie in the sky, either. We talked about real investment opportunities available right now.

If you could ask the world’s top central bankers what really terrifies them, I think the honest answer would usually be “deflation.” It is their greatest nightmare. They think a little inflation is good (thus the 2%+ target), and they’re confident they can subdue it if necessary. Deflation is a bigger problem.

Today we’ll consider the arguments for higher inflation in the near future. As you will see, they are serious and convincing. But there are equally serious and convincing points on the deflationary side as well. We’ll get to those next week.

Last week I teased you about the China panel, so that seems like a good place to start. We’ll review that conversation and then bring in some China comments from later sessions.

I've developed this kind of duality. It's hard to think of the next 20 years or indeed the last 20 years without being very optimistic about the future of humanity.