Friday gave us more stagflation vibes, with UofM inflation expectations hitting their highest since ‘93 at 4.1% and PCE sitting at 2.8%—while growth seems fleeting (just check the Atlanta Fed GDPNow). But as a counterpoint, I’ll just throw it out there: 1993 was a solid year for rap and rock music, and, call me crazy, but the economy from ‘93 to ‘01 wasn’t half bad either.
Let’s take a quick trip back. The U.S. economy in that period? Absolutely cooking. GDP growth averaged around 4% annually, job creation was strong, and by the end of the decade, unemployment had fallen to a near 30-year low of 3.9%. Productivity surged, fueled by the tech boom—back when dot-com wasn’t just a punchline.
Inflation? Tame. The Fed, under Alan Greenspan, mostly kept CPI in check, with inflation averaging just above 2%. Meanwhile, the federal budget actually ran a surplus from 1998 to 2001—yes, a surplus, a concept so foreign today it might as well be a VHS tape. This was helped by a mix of spending restraint and tax hikes under Clinton, plus a flood of capital gains revenue from the stock market euphoria.
Speaking of markets, the S&P 500 went on an absolute tear, gaining over 400% from 1993 to its peak in early 2000. Then, of course, came the dot-com bust, reminding us all that stocks don’t just go up forever.
So yeah, the ‘90s economy had its share of good times—before the hangover of 2001 hit with the recession, tech crash, and all.
The lesson might be something we talked about early in the year, I call it the “trees don’t grow to the sky” narrative, one that deals with cycles and mean reversion. In the case of the ‘90s economy, the stability and complacency that resulted from numerous favorable conditions coming together over that period may have sowed the seeds for future problems as investors assumed these conditions would go on indefinitely and given little attention to the underlying imbalances that were building up.
Speaking of Nostalgia: The Fed Dusts Off 'Transitory'
The Fed has been so nostalgic for the word “transitory” that they’ve revived it. We’ve reached peak nostalgia—now ‘transitory’ and ‘tariffs’ are like a toxic couple that just won’t break up. For example - Don’t worry the impact of tariffs will be transitory.
Second-Order Thinking: The Market’s Favorite Trick Play
If I told you that inflation data all pointed to inflation being stronger than expected and asked you to guess the direction of bond yields, my assumption is you would say yields would move higher. But despite higher inflation expectations and sticky inflation, yields fell. Of course you’ll say something like, but growth concerns and stock market volatility led to a “flight to quality”.
The lesson? Second order effects - we talked about this as the separator of good and bad economist. We don’t always understand “what’s priced in”, “positioning”, and overall second order effects and beyond. The most poignant example of second order effects that I can recall was during the start of Covid in 2020, when yields on the presumptive safe-haven assets, U.S. treasuries unexpectedly rose during March 2020. If you focused solely on first-order effects of a global pandemic, the sale of risky assets like equities and the purchase of U.S. Treasuries made perfect sense and indeed it's what happened from February until March 9, 2020. From there however second-order effects began to dominate. It turned out investors needed to sell Treasuries to raise cash for all kinds of reasons - meeting investor redemptions, meeting margin calls, to factors impacting foreign holders of treasuries.
I call to mind the Treasury market dynamics of 2020 because of the recent media attention around a paper arguing that the Fed should set up a program to close out hedge funds treasury basis trades in times of market stress.
More Lessons: Twain, Housel, and the Art of Being Wrong
Perhaps the real lesson is immortalized in the words of Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“
We’re tempted to draw quick and certain conclusions from data or market narratives - but as Morgan Housel reminds us, “if you’ve relied on data and logic alone to make sense of the economy, you’d have been confused for a hundred straight years.”
You don’t have to wait 100 years to be confused, I’m sure this week will suffice.
The Week Ahead: Can Liberation Day Be A Holiday Yet?
We enter the week with the S&P 500 index at 5,580. The 2Y treasury yield at 3.91% and the 10Y at 4.25%.
Tariffs and Jobs will be the focus.
Today: take a breather and finish month end/ quarter end
Tue: ISM mfg, JOLTs and April Fools Day
Wed: Liberation Day
Thur: Jobless Claims, ISM services
Fri: Jobs Day in ‘merica, Powell speech
XTODs
XTOD: New: Trump privately pushing aides to go bigger on tariffs as April 2 “Liberation Day” nears President revived idea of flat universal tariff single rate on most imports Feels 1st term advisers went too small & soft with exemptions Bannon pitches “Liberation Day” as federal holiday next year
XTOD: Shocking report by @andrewtlevin at @mercatus showing that growth in Fed salaries massively outpaced other sectors. In my own experience at the New York Fed I affirm that there the organization is massively overstaffed and overpaid.
XTOD: Probably no better formula than “high passion and low status” for an area to go work in and create things https://pbs.twimg.com/media/GnOtm__WQAAzrZa?format=jpg&name=900x900
XTOD: Reminder: If you don’t prioritize your life, someone else will.
https://x.com/JStein_WaPo/status/1905947983062904832
https://x.com/FedGuy12/status/1905637468746977400
https://x.com/patrick_oshag/status/1906057956988219392
https://x.com/GregoryMcKeown/status/1906058792795865343