2024 Investment Outlook with Don Luskin: A New Paradigm?

In a world fraught with economic uncertainties, Bel Air’s January 2024 market outlook webinar, featuring the astute insights of Don Luskin, Founder and Chief Investment Officer at Trend Macrolytics, offered a contrarian perspective to mainstream economic predictions. Luskin’s firm, revered for its macroeconomic forecasting and market research services, has been a beacon for 120 global institutional investors, including Bel Air Investment Advisors, for the past 22 years. Here is a glimpse into the stances that he and his firm are taking.

Putting History in Context and Defining “Recession”

Against the backdrop of a global consensus that has been prematurely ringing the recession alarm bells since 2022, Luskin and his firm presented a narrative of resilience and recovery. Their prediction of a robust recovery following the COVID-19 pandemic and economic depression proved accurate, laying the groundwork for the economic landscape we navigate today. Luskin underscored the emergence of a new paradigm that follows each global crisis, a common playbook in which an unprecedented productivity-led boom follows crises like the Global Financial Crisis and WWII.

This optimistic outlook challenges the persistent predictions of an impending recession in 2024. Luskin argued that a recession should be simply defined and marked by shrinking employment, a scenario we are not witnessing thanks to the continued addition of jobs nationwide. To curb the fears of those who equate interest rate hikes with recession, he went on to explain that the Federal Reserve’s aggressive rate-raising regime has been a journey towards normalization rather than a harbinger of economic downturn.

A Contrarian View on Inflation

Luskin addressed the topic of inflation with a nuanced approach that diverges from conventional wisdom. He underscored the Federal Reserve’s inflation target of 2% and noted that with the Personal Consumption Expenditures (PCE) index currently at 2.3%, the target is nearly within reach. The Consumer Price Index (CPI), while slightly above the PCE, typically runs hotter, suggesting that even by that measure, inflation is not as far from the Fed’s goal as some might fear.

Luskin’s interpretation of inflation is rooted in the view that inflation is, fundamentally, a monetary phenomenon. Now, with people moving their money from bank accounts into longer-term investments, we’re seeing a contraction of the money supply for the first time in history. Luskin extrapolates that this should logically lead to deflation, if the maxim that inflation follows money supply holds true.

This perspective sets the stage for what Luskin sees as a looming deflationary period. He suggests that while deflation is often associated with economic crises, in his view, the causality is reversed—it’s crises that cause deflation. Hence, he posits that America might soon go “on sale,” sparking a short-term panic over the term “deflation,” but ultimately providing a long-term boon for those who can look beyond the immediate market reactions.

Risks and Uncertainties in an Election Year

Luskin also outlined risks that will require careful consideration this year. One such risk is the stability of the banking sector, particularly as we reflect on the aftermath of the Silicon Valley Bank (SVB) collapse. As the anniversary of this event nears, it’s evident that the banking industry’s reliance on the Federal Reserve’s long-term bank lending program has become a lifeline for many institutions. This dependency presents a precarious situation: should the Fed decide to continue this support, it may signal a lack of confidence in the sector’s resilience, potentially triggering market unease.

Another aspect is the observable contraction in lending, especially among regional banks, which could be a prelude to a broader economic slowdown. While smaller banks have shown some growth, the overarching trend suggests a cautious approach from lenders, perhaps in anticipation of less favorable economic conditions ahead.

The political landscape was not left unexamined. Luskin predicted a divided government post-election, with the presence of a third party potentially leading to a historical outcome where the President and Vice President could be elected by the U.S. Congress.

Impacts of the AI Boom

Luskin sees AI as a revolutionary force, likening its potential impact on productivity to that of the personal computer era, which democratized computing power and spurred economic growth. It’s in these widespread, grassroots-level improvements, he suggests, that the true potential for a sustained productivity boom lies, and this will be the key to unlocking further economic prosperity.

Looking ahead, Luskin emphasized the role of productivity as the engine of the ongoing boom. Productivity gains, as he put it, will not come from grandiose inventions but from a myriad of “invisible” improvements across sectors, much like grains of sand that collectively form a beach.

Luskin anticipates that the boom in global productivity, spurred mainly through AI, will benefit forward-thinking investors who identify and capitalize on emerging technologies. He references the “Magnificent Seven,” cautioning that while not all may benefit equally, innovation will continue to emerge from various sectors.

In Conclusion

Don Luskin’s commentary during the webinar paints a picture of an economy on the precipice of a new era, marked by innovation, productivity, and a challenging but rewarding investment landscape. For investors and analysts alike, his insights offer a blueprint for navigating the complexities of the current economy.