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By: Greg Valliere

January 26, 2024

The Least Appreciated Story in Washington

YOU COULD WALK THE HALLS OF CONGRESS all day long and not find more than a handful of lawmakers who understand what the economy is doing. Republicans will say on the record that the economy is in terrible shape, while Democrats will go off the record to bemoan an economy that could cost Joe Biden the presidency in November.

THE TRUTH, OF COURSE, is that the economy is in remarkably good shape — so good that a growing case can be made that the Federal Reserve doesn’t have to cut rates any time soon, not with unemployment at 3.7% and inflation slowly retreating.

THE DEEP THINKERS ON WALL STREET were predicting, a year ago, that a recession was likely by summer. Actually, GDP grew by grew by about 4% in the second half, far above the 2% that Wall Street forecasters expected.

THE PRIZE FOR BAD FORECASTING, as usual, has to go to the Federal Reserve. The central bankers were totally blindsided by inflation three years ago — dismissing it as transitory — and the Fed got the GDP story wrong. Yet the Fed sets the group-think tone in Washington on the economy.

IF THE FED THINKS A RECESSION IS IMMINENT, members of Congress uncritically accept that assessment, and the press — which loves to run with bad news — will lap it up. The gloom and doom from Lawrence Summers got enormous publicity this past summer, which fed into the public’s anxiety and about the economy. Has there been a mea culpa from Summers for his spectacularly inaccurate forecasts?

ADMITTEDLY, PREDICTING THE ECONOMY has been particularly difficult because there were few precedents after a severe pandemic. But a little humility, especially from Wall Street, might have calmed investor anxiety.

AS EVERY FORECASTER KNOWS, there are wild cards that can quickly change the outlook; perhaps a supply chain crisis is looming because of fighting in the Red Sea, or maybe a season of hurricanes later this year could strike the U.S. No one knows.

FOR THE HAPLESS BIDEN, who spent too much money on covid aid and infrastructure, the economy should be a plus for his re-election, but the pervasive national consensus on the economy makes that unlikely. We were at a retail investor conference this week, where the idea of a strong economy was viewed as delusional.

IF IT AIN’T BROKE, DON’T FIX IT: The last thing this economy needs is more monetary or fiscal stimulus, but both parties will be tempted to make promises ahead of the election. Democrats will want to spend more, while Republicans will start agitating for more tax cuts — and everyone will urge rate cuts.

OUR ADVICE is to leave well enough alone — the economy doesn’t need any help because it’s already remarkably strong.

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The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

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