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Inflation vs Recession

I used to think recession was the absolute worst thing that could happen because recessions do economic damage, harm household finances, break up marriages, cause alcoholism and suicides and could potentially lead to depressions. I don’t think that anymore. Recessions are really bad for the people who are directly affected by them and everybody feels a little bit of pain even if they remain employed.

But there’s something just as bad if not worse. Unchecked inflation. It can just as easily create riots and instability as a lack of job opportunity in an economic downturn. Neither is good, but inflation turns out to be potentially worse given the distribution of its effects.

Most of us who have lived their adult lives after the 1970’s didn’t have any real-world, lived experience in a time of high and rising inflation. All we’ve ever experienced has been the “Great Moderation.” Inflation - and interest rates - peaked in the early 1980’s and outside a few relatively minor episodes like the oil price scare of 2008 and the surprise hikes Alan Greenspan instituted to cool things off in 1994, inflation was just something you read about or heard the old timers carrying on over.

And then, in 2021, inflation returned to center stage, upending everything in its path. It crashed the post-pandemic stock market party in 2022 with a peak to trough fall of 20% for the S&P 500 and a gut-wrenching plunge of 35% for the Nasdaq. The aggressive steps the Fed took to counteract inflation in wages, food prices and shelter costs were too much for the stock market to handle but they played their role in arresting the steepness of the incline. However, prices never returned to their pre-pandemic trend and, even today, we’re still wresting with the same situation. The last inflation print was 3% year-over-year, well above the Federal Reserve’s stated target of 2%.

High inflation is one of the primary reasons Donald Trump was able to take back the White House last fall. The Biden administration pretended the cost of living wasn’t an issue and ignored its own role in prolonging the problem via his outrageous and ironically named stimulus meteor, the Inflation Reduction Act. A trillion dollars smacked into the surface of the earth within a few months of his 2021 inauguration, exacerbating a situation where there were already too many dollars chasing too few goods (and services). Trump seized upon the anger around higher food and rent prices (along with the undeniable lawlessness at the border) and trounced the hapless old man and his ill-suited successor candidate Kamala Harris like it was child’s play.

People are still furious about the cost of living and, this time, it was the Democrats’ turn to wield inflation as their cudgel at the ballot box. The Dems made hay of the situation during the off-season elections of the past week. Nowhere moreso than in the astronomically expensive city of New York where young people and poor people combined to elect Zohran Mamdani. Mamdani is the Trump of the left - to his detractors and the traditionalists, he is wildly unsuited for the position. “He’s never held a job in his life, he’s not even from here, his father openly celebrated 9/11, he makes speeches about ‘seizing the means of production’ like a true communist, he’s virulently anti-Israel and squirrelly about condemning Hamas, he wants to turn the city’s buses into rolling homeless shelters, open the jails and replace police officers on the street with social workers.”

People with families, businesses, well-paying jobs and property ownership are absolutely stunned that this who their fellow New Yorkers would send to the highest office in New York City. Like Trump, the shock will never wear off. Jaws are literally still on the floor. And then you hear that “he only won because Cuomo is so unlikeable and because the Red Beret guy split the vote and because TikTok brainwashed the Gen Zs into thinking they’ll get free shit and because the media covered him like he was Martin Luther King Jr. and because everyone is anti-semitic and because it’s part of a secret plot to overthrow the West from within and institute Sharia law and the Muslim Brotherhood financed it as a new front in the existential battle between Christianity and Islam and blah blah blah.” You get the idea. The cope is titanic.

People are willing to concoct all sorts of reasons rather than accept the very basic truth that a huge number of New Yorkers are currently living on some amount of government assistance and this was the guy saying he’d be willing to give them even more of it. It’s actually quite simple - he had the right message at the right time and he used it effectively enough to the point where it overcame everything else about him and his background. People are struggling to keep up with their costs. Andrew Cuomo had no discernible answer for how to help them. Into that vacuum came a man with potentially wrong answers, but answers nonetheless. Good enough.

The cost of living in New York City has always been high but in the modern era of historic stock market wealth creation, the situation has devolved into total farce. The West Village teems with the impossibly pampered sons and daughters (mostly daughters) of extreme fortune and privilege while the prices of life’s essentials spiral away from the grasp of nearly everyone else. This used to be a city where people came to make it. To those without portfolio’d parents, it’s become a city where you come to scratch your head at how your friends are even able to live. “I don’t understand, how is she even doing this?”

This story went viral at the start of summer and the backlash to it told you everything you needed to know about the mood in NYC. It made people shriek bloody murder about what happened to the city as they once imagined it to be:

Now of course, the kids flocking here with a family-sponsored Amex platinum card and their Netflix rerun-fueled dreams of living like Rachel and Monica are not to blame. They didn’t create the conditions into which they came of age. Their countless number is merely a byproduct of the last fifteen years of investment market returns and the wave of prosperity created as a result. Stocks have averaged 15% annual returns since the Great Financial Crisis and nearly every investable instrument has surpassed what most would have dreamed possible from the outset. Thousands of lookalike West Village girlies in their baggy jeans and white tanks lined up outside the impenetrable Corner Store to eat the same french fries as Taylor Swift is a representation of the issue, not the issue itself.

Don’t blame the Brandy Melville gang, they’re just young, having fun and making the most of their opportunities. If you were 24 years old and your parents were early employees of Google or pre-IPO partners at Goldman, you’d be doing the same shit, stop it.

If you’re looking for who or what is at fault for the city’s divide between haves and have-nots, look no further than the fact that not everyone’s parents had excess savings to invest or a job that bathed them in stock-based compensation during their peak earning years.

The bifurcation within the economy between those with investments and those without is at its most extreme in the five boroughs, which is all at once both a playground for the rich and an un-navigable jungle for the most disadvantaged people in America. Within its confines this city contains Wall Street and the constituency of AOC and everything else in between. It is home to 129 billionaires and over 384,000 millionaires, not to mention the millions of affluent families who live in the surrounding suburbs. Simultaneously, about 1.73 million people - some twenty percent of all New York City residents - are currently receiving Supplemental Nutrition Assistance Program (SNAP) funds so they can eat while over 580,000 New Yorkers are getting cash assistance, the highest level in twenty years. When you consider the extent to which some people can have it all while others have absolutely nothing - all inhabiting the same sidewalks - every day without a civil uprising in New York City is a minor miracle unto itself.

Mamdani’s message crashed through the facade. People were tired of pretending they were in a livable situation paying more than half their salary to a landlord and getting by on two or three different hustles just to pay Verizon. He knew it. He nailed it home. It’s not brainwashing, it’s not manipulation - it’s just politics. Identify the problem and pound your proposed solution day and night until it catches on.

But that was the easy part. The proposals. The campaigning. Now he has to manage this thing. And most of the problems he has identified so effectively are far outside of his control. Not only does the Mayor of New York City not control tax rates - he has absolutely no say over the salaries and compensation of the most talented people from around the world who have chosen to make this town their home (or their adult children’s home). He certainly can’t stifle the returns of the stock market, which is the origin of all this wealth inequality to begin with. I suppose one way to fix inequality would be to wreck the property values by returning us to the crime and filth-ridden era of the early 1990’s, but that’s probably (hopefully?) not what he has in mind.

The bad news is we don’t know how it will turn out. The good news is we all get to find out together.

Inflation did this. If you’re a Democrat and you despise Trump or a Republican and feel physically ill about Mamdani, the skyrocketing costs of everything is the reason you’re in the situation you’re in. If you’re in the center and you hate both, well, same difference. Inflation brought you here.

Those of us who came of age after the 1970’s are realizing the pernicious and lagged effects of an inflationary period for the first time. And we’re learning that inflation could actually be worse than recession.

In a recession, even a severe one in which unemployment climbs to seven percent, this means seven out of every one hundred workers loses their job. The other ninety three people, however, simply carry on. Yes, they are affected too and maybe it hits close to home because a family member has been laid off, but that’s survivable. If only seven out of every one hundred people is directly hurt by a recession due to job loss, it’s bad but not catastrophic. Inflation, on the other hand, is the opposite. It affects all one hundred out of one hundred people in our sample. Everybody hurts. Even the owner struggles to keep employees and maintain his or her cost of doing business. Inflation affects us all and, as such, is potentially more destabilizing than a periodic bout of job loss. It infects us. Turns us against each other. Produces the sort of firebrand politicians and harebrained political solutions that tear at the divides we already face, making them worse and more glaringly apparent. Inflation creates the conditions for outsized and unexpected reactions among the electorate. It turns dissatisfaction into dystopian rhetoric. It turns disagreement into distrust. It eats away at everyone and everything until bad things happen.

If a recession can do all those things to those who lose their jobs, inflation can do all those things to everyone all at once, working or not. And if unchecked, inflation becomes less survivable than an “ordinary” cyclical uptick in joblessness - the thing we used to worry about most. This feels worse. It’s enough to make us vote for something crazy.

Hundred Baggers

My solution to inequality is not political, it’s common sense - if we want more prosperity we should be creating more investors and teaching people the importance of passing on wealth to the next generation. You can’t do that if you don’t know how to accumulate it and manage it during your own lifetime. But that’s a topic for another time. I play my role in this solution every day by creating fire investing videos and podcasts meant to inspire and educate. It’s the most practicable thing I can think of to do.

And here is our latest - Eric Jackson is emerging from his midlife crisis with a new lease on life. He’s made it his mission to uncover the next potential one hundred bagger stock. And the next one after that. It’s an interesting way to think about investing - slugging percentage as opposed to batting average. But what comes along with slugging is striking out. He gets that. It’s all a part of his Rising Dynasty movement and we wish him luck.

Anyway, Eric joined us this week for an all new edition of The Compound and Friends and it was definitely one of the most entertaining shows we’ve done this year. I hope yo like listening to it as much as we enjoyed recording it.

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That’s it from me, have a great weekend! Talk soon - JB