December 2022 Newsletter

A Bit of Christmas Hope Based Upon Fundamental Evidence and Cyclicality


The consensus view on Wall Street is that the Fed may raise interest rates well into 2023 and thereafter, keeping rates high, perhaps until a recession is well underway through most of 2023. While the Federal Reserve has not yet begun easing, the chart below shows that real M2 Money Supply tightening has reached the stage to cause one to begin thinking about a new up cycle. Given the lag effect of the sharply declining money supply, the Fed will have to reverse course, perhaps sometime over the next six months.  Chart 1 is the outline of the infancy of a potential rebound, the recognition that inflation moving back to 2% may be a mirage and that it’s going to take time to normalize economic growth void of physical and monetary stimulus.


The structural transition of an economic cycle rarely begins in the up stage, or ends in the down stage. A new cycle, in its infancy, is still not firing on all its cylinders. There are fits and starts and at any moment the new upward direction may be aborted. Further rate hikes in the face of a slowing economy could hijack investors’ attention even as the Fed is making plans to shift back to an accommodation stance on the money supply, which may foster the unfolding of a new cycle. Such a phase in the economic cycle will immediately support stocks and force a reassessment of the degree to which corporate earnings will be compromised in the coming year.

Monetary Growth

Once intermediate-term inflation has peaked, real monetary growth typically begins to rise. While currently we are experiencing an economic slowdown, that part of the cycle usually advances higher credit yields, higher equity dividend yields and higher wage gains.  All three of these increase cash flow which, in turn, leads to a renewed revival in the pace of the money supply.

Fiscal Stimulus

Fiscal policy has been a contractionary force for months now, but automatic stabilizers are already re-engaging. Fiscal stimulus has improved from about 3% to 4.3%. However, the real fiscal growth has contracted due to rising inflation, and the fiscal deficit which has been delivered to businesses and individual fixed-rate mortgage holders has produced a significant real economic stimulus.

Lower Bond Yields

The bond market has already started a new easing cycle. Yields across the long end of the curve are already down 75 basis points from recent highs. The five-year yield is down 78 basis points and the ten-year is off 80 basis points. Moreover, the 30-year mortgage rate has declined 75 basis points. Even the two-year yield—much more impacted by changes in the fed funds rate—has dropped 45 basis points from its recent high.

Dollar Finally Turning Accommodative

The U.S. dollar has begun to “ease” with the dollar index 8% lower than its September high. There are key dynamics in play that suggest this weakness may continue, including the dollar being impacted by a narrowing yield spread on U.S. assets (from 1.75% in early November down to 1.4% currently). The dollar moderating as the safe-haven trade suggests that global inflation fears are beginning to subside.

Policy Accommodation for Consumers

U.S. consumers are experiencing a substantial drop in gasoline prices, with the national average price of unleaded gasoline falling from over $5 per gallon in June to about $3.30 today. This drop in prices is boosting households’ real purchasing power, and as such creating an upswing in the real wage disposable income.

Policy Juice For Companies

Raw industrial commodity prices have decreased by 20% from April. Companies are benefiting from lower capital costs even as the adage of never bet against the American consumer is assessed.  Unit labor cost has declined to 5.3% as companies lay off workers. It’s not just the Fed that “eases.” The Fed is debating how to raise interest rates, but relief may come before they join the party. Fiscal juice, in the form of a weaker dollar, lower bond yields, and other factors have already begun to bolster the economy. If a recession doesn’t materialize, a new bull market has probably already begun. If so, the October lows may mark the bottom in this cycle of the market. While admittedly it still feels too early, assessing the evidence is giving me hope.



Vaughn L. Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa

La Jolla, CA 92037



Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0281.


The Leuthold Group