Taps Coogan – February 21st, 2022

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Evercore ISI Chairman Ed Hyman, one of the fathers of modern market research and perennially ranked as one of the top institutional economic advisors in the world, recently spoke with Fox Business’s Larry Kudlow about his outlook for inflation, earnings, and the market.

 

Mr. Hyman on inflation becoming embedded: 

“Over the last couple of years, the money supply has increased 40% and when that happens inflation shows up everywhere… We have to get the money supply to slow down and you do that in part by slowing the increase in government spending… The CBO budget, which I am not sure you should put much weight on, …has government spending basically flat for a couple years… other things have to happen, the Fed has to basically tighten, but that could do a lot to get money growth to slow down, and then with a lag, and it could be quite a bit of a lag, inflation could start to slow down. But in the meantime… rents are going up and more importantly wages are going up… You have a wage-price spiral (that) has already become intrenched in this country. So inflation looks really bad. Another part of it is it is very good for corporate profits… you should have very explosive profits…”

Indeed, it’s probably best not to put any weight on the CBO budget at all.

On whether profit growth will offset the negative effect of Fed tightening on the market:

“In my judgement, which is based on history, it will. I think about S&P earning in the fourth quarter… at an annual rate of about $220… Looking out I think Fed Funds are likely to be something approaching 3%… but I think S&P earnings are going to be about $300 so I think that balance will work out, but you have to have earnings. In the past, earnings have always driven the stock market and then at the end of the cycle the expansion is murdered by the Fed…” 

On the inflation outlooks for 2022 and how long until we get a recession:

“I just raised our inflation forecast from 4% to 5% for the end of this year… We’re so early in the cycle. What’s going to happen is the Fed is going to tighten. They will get to a point, let’s say the Fed Funds at 3%. Something will break or slowdown, maybe commodity prices or housing, and then the Fed will ease a little bit… and this could be two years from now and then ‘oops’ the Fed will tighten again. This could go on for a decade… but in the end Fed Funds are going to be higher and they’ll be an inverted yield curve.” 

Mr. Hyman is probably correct that we are still somewhat early in this expansion, but the last expansion was unusually long precisely because interest rates were held near the zero bound for roughly seven years. That’s not in the cards this time and, frankly, it’s hard to argue that one is truly early in an expansion when you’ve already arrived at the point where the policy rate is being hiked. ‘Midpoint in a short expansion’ sounds better to yours truly.  

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