interest rate cuts and the stock market

We all know that the Fed has reached the end of its hiking cycle and now has interest rate cuts in sight. From a historical perspective, the start of the easing process has been bullish. Going all the way back to 1921 and spanning 24 periods, the DJIA advanced an average of 15% a year following the first cut.

The narrative surrounding interest rate cuts becomes even better when we factor in whether or not the economy was in a recession. When the Fed has avoided recession, stocks have ripped higher, up 24% on average a year later.

In addition, the Fed has made it clear that it plans to cut rates slowly. The S&P 500 widely outperforms in the 1st year of slow easing cycles versus fast ones. Why is that the case? Because in fast easing cycles, it usually means something has gone wrong (such as the start of easing cycles in 2001 and 2007). But in this case, with the economy on sound footing, a slow easing cycle should bode well for stock returns.

Regardless of what you've heard in the financial media, interest rate cuts don't have to doom stocks, particularly when there is no recession and a slow easing cycle.

Election And Seasonal Cycle Stats Point to More Strength Ahead

We're in the 4th year of President Biden's term. Another reason to be bullish is the fact that election years tend to see enhanced gains when we have a new President that's still in his first term. Dating back to 1950, the S&P 500 gains an average of 12.2% under new Presidents, far above the typical election year return of 7.3%.

-- Weekend Wisdom, 3/23/24

Presidential Election Cycle

The stock market has historically performed better in the third year of a presidential cycle. The theory behind this is that politics and its effect on economic policies can cause the stock market to perform better. Investors expect better business conditions, corporate bottom lines and stock prices in the year before a presidential election.

On this page, we study the effect of the presidential cycle and political parties and their effects on stock market performances. The data is from 1928 to 2023, and updated daily.

As shown in the table below, the market indeed performs the best during the third presidential year of a four-year term. The average gain of the third presidential year is 13.96%. The second best year is the fourth presidential year, with an average gain of 7.38% . The worst year is the second presidential year, with an average gain of just 3.33%. On average, the market has gained 7.82% a year since 1928.

Average annual gains in different presidential years and political parties (%) since 1928

         Democrat Republican    Average

Year 1  12.89%   -0.76%    6.63%

Year 2   3.70%    2.89%    3.33%

Year 3  15.42%   12.23%   13.96%

Year 4   9.39%    5.21%    7.38%

Average  10.35%    4.90%    7.82%

The table also shows a much higher average gain when a Democrat is in the White House. On average, a Democratic president sees an average annual return of 10.35%, while a Republican president just sees an average gain of 4.90%. The third year of a Democratic president would see the highest gains, with the annual average of 15.42%. Among the different combinations of political parties and presidential years, the third years with Democratic presidents see the best returns, followed by the third years with a Republican president. The worst years are the first years with a Republican president.

Out of the last 97 years, there were 65 positive years, or 67%. These are the percentages of the years that have seen positive returns. Again the third years stand out with more positive returns. A first year with a Republican president did the worst.

The Seven Virtues of Great Investors

I started reading Morgan Housel's Psychology of Money because it was recommended by my Kindle.  I can give no higher recommendation than that I am continuing to read it.  I borrowed it on Libby, but it's one of those books that I would actually buy!

Anyway, on the cover is a blurb by Jason Zweig, "one of the best and most original finance books in years".

Zweig is a columnist for the Wall Street Journal and I googled him.  Turns out he has a blog and one of the blog entries is The Seven Virtues of Great Investors.  I'm reading it and it sounds OK to me (but it's not as interesting as Housel's book).

All Hail Munger

Warren Buffett’s great friend and business partner Charlie Munger recently died a little short of his 100th birthday. Buffett has said that Munger made him a better investor — via advice such as: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” Here are more nuggets credited to Munger:

• On investing: “The world is full of foolish gamblers, and they will not do as well as the patient investor.” And: “Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”

• On risk: “When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence. Follow this, and you’ll save yourself a lot of misery.”

• On succeeding in life: “It’s so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life. … And do a lot of deferred gratification because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don’t, you’re gonna need a lot of luck.”

• On learning: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

• On thinking: “We all are learning, modifying or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

Search for “Charlie Munger” online, and you’ll find much more Munger wisdom that might make you a better investor — or person.

-- Star Advertiser, 1/1/24

Charlie Munger

NEW YORK, Nov 28 (Reuters) - Charles Munger, who died on Tuesday, went from working for Warren Buffett's grandfather for 20 cents an hour during the Great Depression to spending more than four decades as Buffett's second-in-command and foil atop Berkshire Hathaway Inc.

Munger's family had advised that he died peacefully on Tuesday morning at a California hospital, said Berkshire.

The union of Munger with Buffett is among the most successful in the history of business; they transformed Omaha, Nebraska-based Berkshire into a multi-billion dollar conglomerate with dozens of business units.

Yet the partnership that formally began when they teamed up in 1975 at Berkshire, where Buffett was chairman and Munger became vice chairman in 1978, thrived despite pronounced differences in style, and even investing.

Known almost universally as Charlie, Munger displayed a blunter form of musings, often in laconic one-liners, on investing, the economy, and the foibles of human nature.

He likened bankers to uncontrollable "heroin addicts," called the virtual currency Bitcoin "rat poison," and told CNBC that "gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939 but I think civilized people don't buy gold. They invest in productive businesses."

Munger was no less pithy in talking about Berkshire, which made both he and Buffett billionaires and many early shareholders rich as well.

"I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick," Munger said in 2010. "It's not brilliance. It's just avoiding stupidity."

EXPANDING BUFFETT'S HORIZONS

Munger and Buffett did differ politically, with Munger being a Republican and Buffett a Democrat.

They also differed in personal interests.

For example Munger had a passion for architecture, designing buildings such as a huge proposed residence for the University of California, Santa Barbara known as "Dormzilla," while Buffett claimed not to know the color of his bedroom wallpaper.

Yet at Berkshire, the men became inseparable, finishing each other's ideas and according to Buffett never having an argument.

Indeed, when Munger and Buffett would field shareholder questions for five hours at Berkshire's annual meetings, Munger routinely deadpanned after Buffett finished an answer: "I have nothing to add."

More often, he did, prompting applause, laughter or both.

"I'm slightly less optimistic than Warren is," Munger said at the 2023 annual meeting, prompting laughter after Buffett expressed his familiar optimism for America's future. "I think the best road ahead to human happiness is to expect less."

Like Buffett, Munger was a fan of the famed economist Benjamin Graham.

Yet Buffett has credited Munger with pushing him to focus at Berkshire on buying wonderful companies at fair prices, rather than fair companies at wonderful prices.

"Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me," Buffett has said. "It was the power of Charlie's mind. He expanded my horizons."

ORACLE OF PASADENA

Fans dubbed Buffett the "Oracle of Omaha," but Munger was held in equal esteem by his own followers, who branded him the "Oracle of Pasadena" after his adopted hometown in California.

Munger reserved many of his public comments for annual meetings of Berkshire; his investment vehicle Wesco Financial Corp, which Berkshire bought out in 2011; and Daily Journal Corp, a publishing company he chaired for 45 years.

To fans, Munger was as much the world-weary psychiatrist as a famed investor. Many of his observations were collected in a book, "Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger," with a foreword by Buffett.

"I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself," Munger told Daily Journal shareholders in 2020.

"That notion," he added, "has served me enormously well."

In 2009, during the worst U.S. recession since the Great Depression, he tried to put his followers at ease.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said at Wesco's annual meeting.

After that gathering, Los Angeles Times columnist and Wesco investor Kathy Kristof wrote about Munger: "He gives us hope."

TETE-A-TETE

Born on Jan. 1, 1924, Munger as a boy once worked part-time at the Omaha grocery run by Buffett's grandfather Ernest.

Buffett also worked there though he and Munger, who was 6-1/2 years older, did not work together.

Munger later enrolled at the University of Michigan, but dropped out to work as a meteorologist in the U.S. Army Air Corps during World War II.

Despite never getting an undergraduate degree, Munger graduated from Harvard Law School in 1948.

He then practiced law in Los Angeles, co-founding the law firm now known as Munger, Tolles & Olson, before turning in the mid-1960s to managing investments in stocks and real estate.

Munger was a success, easily outperforming the broader market between 1962 and 1975 at his investment partnership Wheeler, Munger & Co.

According to Buffett biographer Alice Schroeder, Munger met Buffett in Omaha in 1959, where at a private room at the Omaha Club they "fell into a tete-a-tete" after being introduced.

More conversations followed, and they were soon talking by phone for hours on end.

"Why are you paying so much attention to him?" Munger's second wife Nancy reportedly asked her husband.

"You don't understand," Munger replied. "That is no ordinary human being."

KNOWING HIS MILIEU

The two shared the "value investing" philosophy espoused by Graham, looking for well-run companies with undervalued share prices.

Sometimes Munger and Buffett deemed those companies "cigar butts," meaning they were out of favor but had a few "puffs" of life left, but they often proved worth holding onto for decades.

Both generally shunned technology companies and other businesses they claimed not to understand, and they avoided getting burned after the late 1990s dot-com bubble went bust.

Instead, they oversaw purchases such as the BNSF railroad in 2010, and ketchup maker H.J. Heinz Co, which Berkshire and private equity firm 3G Capital bought in 2013. Berkshire and 3G later merged Heinz with Kraft Foods.

It was Munger who suggested that Buffett make one of Berkshire's few non-U.S. investments, in Chinese automobile and battery company BYD Co.

Munger was also responsible for introducing Buffett to Todd Combs, who along with Ted Weschler run parts of Berkshire's investment portfolio.

Unlike Buffett, who opened a Twitter account - seldom used - Munger resisted heading into social media.

"That's not my milieu. I don't like too many things going on at once," he once told Reuters.

But in many other ways, he was much like his business partner, especially in not chasing the latest trends.

"I am personally skeptical of some of the hype that has gone into artificial intelligence," Munger said at the 2023 annual meeting. "I think old-fashioned intelligence works pretty well."

Munger lived modestly and drove his own car, though he used a wheelchair in his final years.

He was also a generous philanthropist, pledging more than $100 million in 2013 to build housing at the University of Michigan.

Nancy Munger died in 2010. Charlie Munger had six children and two stepchildren from his marriages.

***

Yahoo Finance

Becky Quick looks back

Final CNBC interview

CNBC looking back

Whitney Tilson

Bob Farrell's 10 Rules

Who is Bob Farrell?

Twelve years after the conclusion of the Second World War, Bob Farrell started his career at Merrill Lynch as a technical analyst. Before kickstarting his illustrious career at Merrill Lynch, Farrell studied at the prestigious Columbia business school under Benjamin Graham and David Dodd. Graham and Dodd are widely hailed as the “godfathers of modern value investing” and are best known for their best-selling book “Security Analysis,” which was first published in 1934. In fact, Graham and Dodd are so synonymous with value investing that Warren Buffett (also a student of Graham at Columbia) attributes much of his success to the classic work and teachings of the two value investing legends.

A Wall Street Pioneer

While Mr. Farrell was educated under the value investing umbrella, he found his niche and success on Wall Street at the intersection of technical analysis, sentiment, and market psychology. Though this type of analysis was considered unconventional and even frowned upon at the onset of his career, by the end of Farrell’s nearly five-decade run on Wall Street, it had become mainstream. Farrell became so respected in market circles that his daily newsletter was read by several of the world’s sharpest money managers, including the likes of multi-billionaire George Soros. There is little Mr. Farrell hasn’t seen or experienced throughout his career. Below are Farrell’s 10 Rules:

1.   Markets tend to revert to the mean over time. Like a rubber band stretched in one direction, markets tend to snap back to the other direction eventually.

2.   Excesses in one direction will lead to an opposite excess in the other direction. Think about the internet boom and bust. At one point, stocks like Pets.com would rocket 200% in a single trading session just because they had “.com” in the name. During 2000-2003, the market unraveled just as violently in the opposite direction. The COVID-19 crash and subsequent rally afterward is another prime example:

3.   There are no new eras – excesses are never permanent. History is littered with boom-and-bust periods – nothing lasts forever. The great “Tulip Mania” of the 17th century, the dot com bust of 2000, and the 2008 housing debacle personify this rule.

4.   Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. The meme craze that occurred a few years ago is a good illustration of this rule. In 2020, GameStop (GME - Free Report) ran from $1 to $5.50 in five months. After more than a 500% move in such a short time, that wasn’t the end. The following month, shares soared 1600% to $120 a share before correcting to their current price of $18 per share.

5.   The public buys the most at the top and the least at the bottom. Most investors let their emotions get the best of them. Generally, if the public invested when they were most fearful and sold when they were most giddy, they would be much more profitable. In late 2022, most sentiment gauges showed fear. Over the next few months, the market went on a tear.

6.   Fear and greed are stronger than long-term resolve. The fast-moving pace of Wall Street can wreak havoc on investor emotions. When the opening bell rings and real money is on the line, it is akin to having a volume dial on emotions for most investors. The lack of discipline to create and stick to a well thought out investing plan can be detrimental to investors. Even if a well-thought-out plan is created, execution always supersedes intentions.

7.   Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. A “blue chip” is a well-established mega-cap company such as Apple (AAPL - Free Report) . Breadth refers to the number of stocks participating in a rally. The participation gauge is an important measure to follow because it can provide clues to a market breakdown prior to it occurring. In early 2021, Apple and other mega-cap blue chip stocks continued higher as the market began to stall slightly – a subtle, early caution flag for savvy investors who were paying attention.

8.   Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend. Because the public typically buys the dip at the wrong time or shorts “in the hole” when stocks have already moved down rapidly, equity markets usually have a violent “bear market rally” before trending lower.

9.   When all the experts and forecasts agree – something else is going to happen. Contrarian, independent thinking is the clearest path to success on Wall Street. Following the Global Financial Crisis, David Tepper bought Bank of America (BAC - Free Report) in 2009. Later when he recounted the trade, he said, “I felt like I was alone”. The trade ended up netting him $4 billion. To achieve outstanding results, you must think differently.

10.  Bull markets are more fun than bear markets! While making money in a down market can be done, bull markets are much more forgiving. Who can argue this?

Conclusion

Over Farrell’s 45-year career at Merrill Lynch, he saw bull markets, bear markets, and everything in between. While investors can educate themselves by reading books or attending seminars, nothing beats decades of seat time. Through his successful and deep experience, Farrell’s rules challenge investors to study history, the madness of crowds, and their inherent “humanness” and emotions.

Kevin Matras outlook

[12/23/22] Regardless of how this year ends, statistically, next year should be much better.

The 4-year Presidential Cycle shows that year 3 (that's 2023), is the best year of all 4 years. In fact, since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%.

[9/30/22] It’s been a rough year so far.

40-year high inflation, which forced the Fed to aggressively raise rates in an effort to bring it down, has been weighing on stocks.

As tough as this year has been, I’m reminded of the comparison that was made between the first half of this year, and the first half of 1970.

This year’s first half performance (the S&P was down nearly -21%), was strikingly similar to that of 1970 (also down -21%). And in both periods, high inflation was an issue.

But in the second half of 1970, the S&P was up 27%.

Of course, that doesn’t mean that’s how it’ll go for the back half of this year. But it doesn’t mean it won’t either.

Granted, the last few months haven’t been any easier. And there’s only 3 months left of this year. But with plenty of economic positives backstopping the economy right now, not the least of which is a strong labor market, there’s definitely a chance that the market is being too pessimistic.

While we unofficially saw a recession after Q2 GDP fell by -0.6%, which followed Q1’s -1.6% (two quarters in a row of negative GDP is the technical definition of a recession), consumer demand remained strong throughout. So did corporate earnings. And the jobs market stayed sizzling hot.

You can also see that in the GDI numbers (Gross Domestic Income), which measures U.S. economic activity via the income earned for these activities. Usually, the GDI and GDP (Gross Domestic Product) are statistically very similar. But unlike the GDP, the GDI was up in the first half of the year with a positive 0.5% annualized growth rate, while GDP was down.

Will these two measures converge? If so, will GDP rise to meet GDI, or will GDI fall to meet GDP? Or maybe a little bit of both? TBD. But, at the moment, GDP forecasts are pointing to plus signs for the rest of the year.

Q3 GDP is only expected to eke out a 0.3% gain. But Q4 is expected to be better, with full year estimates showing another year of growth. (It’s no longer a recession when the economy starts growing again.)

And the Fed is predicting 2023 to be even better still with a 1.8% GDP growth rate.

So there’s plenty of positives in the market right now. (The market happens to be ignoring them at the moment. But they are there nonetheless.)

And with the market seemingly pricing in the worst-case scenario (deep and long recession), stocks are primed to rally once it looks like the worst-case scenario won’t come to pass (shallower and shorter recession).

Peak Inflation Is Behind Us

One of the key factors which will likely determine where the market goes from here, will be inflation, and therefore, interest rates.

Even though inflation is still too high, it has been ticking down for the last few months.

Headline inflation, according to the Consumer Price Index (CPI), is at 8.3% y/y, with core inflation (less food & energy) at 6.3%. That’s down from its peak of 9.1% and 6.5%.

While that dip is not a lot, and it’s a far cry from the Fed’s goal of getting it back down to 2%, the mere fact that it’s no longer making new highs, and instead is ticking lower, is a step in the right direction.

(Oil prices, for example, have fallen sharply. After trading over $130 a barrel, crude oil is now trading at $82. That’s a decline of -37% in a matter of months. And that’s helping to ease inflation concerns.)

A few months ago, many were expecting inflation to soar above 10% or more. Now, expectations are for it falling to 5-6% next year, with the core rate falling even lower.

And that means the Fed may not have to raise rates as much as people are fearing.

Are Stocks Undervalued?

Let’s also not forget that valuations are down.

The P/E ratio for the S&P is at multiyear lows, and is trading below its five-year average.

And that makes stocks a bargain.

Of course, if earnings drift lower, valuations will creep up. But there’s plenty of room for stocks to remain relatively cheap.

And the earnings outlook is still forecasting growth.

Add in another trillion dollars in stimulus between the CHIPS Act and the Inflation Reduction Act, and that should extend the growth outlook even further.

How Do Stocks Perform Around Midterms?

Many are familiar with the Presidential Cycle and the markets. But many may not know that the Presidential Cycle covers all for years of a presidency.

Of particular interest is the midterm portion of the cycle, which is where we are right now.

And historically, it’s amazing to see how favorable this cycle is for investors at this point in time.

Developed by Yale Hirsch, of the Stock Trader’s Almanac, the theory suggests that the stock market follows a pattern which correlates with a U.S. president’s four-year term. The election cycle consists of the post-election, midterm, pre-election, and election years. 2022 is an example of a midterm year, i.e., the second year in the 4-year presidential cycle.

In the first two years after an election, the second year tends to be the weakest. In fact, it’s the weakest of all four years. Congressional elections take place – and with them, they bring the potential to shift the political backdrop.

Hirsch discovered that wars, recessions, and bear markets (sound familiar?) tend to start in the first two years of a president’s term. This year, the market entered the weak spot of the cycle. And with an aggressive Fed, high inflation, and the ongoing Russia-Ukraine war, the weakness in stocks was amplified.

Those who know their market history will find it somewhat unsurprising that the start to this year was rough. The second and third quarters of midterm years are historically quite weak. (History repeating itself once again.)

But more prosperous times typically lie ahead in the latter half of the cycle.

In fact, we’re entering the most bullish part of the calendar – Q4 of year 2 in the 4-year presidential cycle (the second-strongest quarter of all 16 quarters), sporting an average return of 6.6% (since 1950); and Q1 of year 3 (the strongest quarter of all 16 quarters), with a 7.4% average gain.

And when we factor in that the third year of the presidential cycle has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.

-- Kevin Matras, Weekend Wisdom, 9/30/22

inflation is high

[12/13/22] Inflation up 0.1% from October to November (7.1% year-over-year)

[8/3/22] Gasoline prices drop for 50 straight days

[7/13/22] Inflation continued to surge as the consumer price index rose by 9.1% in June compared to last year. It was an increase of 1.3% from May. Economists expected inflation to increase by 1.1% from May to June and top out at 8.8% for the last 12 months. It is the fastest increase in inflation since 1981.

According to the latest data from the Bureau of Labor Statistics, the biggest driver of inflation was energy prices, which rose by 7.5% from May and have jumped by 41.6% over the past 12 months. While the cost of gasoline has been dropping since reaching record highs, it was still up by 11.2% from May to June.

The price of food was also higher, rising by an average of 1% last month. In addition, the cost of shelter was 0.6% higher, and the average cost of rent increased by 0.8%, the largest monthly increase since 1986.

[6/20/22] Clyburn blames inept Trump administration coronavirus response for inflation 

[6/10/22] Inflation rate highest in 40 years

[4/12/22] U.S. consumer price increases quickened in March, underscoring ongoing inflationary pressures as supply chain disruptions and shortages lingered across the economy.

The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, according to the latest report released Tuesday. That marked the fastest rise since December 1981. This followed a 7.9% annual increase in February. Heading into the report, consensus economists were looking for an 8.4% jump for March, according to Bloomberg data. 

On a month-over-month basis, prices rose 1.2% in March following a 0.8% monthly rise in February. 

Some of the biggest contributors to the latest increase in inflation were food, shelter and gasoline, according to the BLS. In fact, the index tracking gas prices surged to rise 18.3% month-on-month in March, comprising more than half of the total monthly increase in CPI. In February, gasoline had posted a 6.6% monthly increase.

But even excluding more volatile food and energy prices, the CPI also posted a marked move higher in March. The core CPI jumped 6.5% in March over last year, accelerating from a 6.4% increase in February and representing the fastest increase since August 1982.

A number of other major categories also contributed to the March increase in CPI, however. Shelter prices rose 0.5% month-on-month in March and by 5.0% over last year, representing the biggest annual rise since May 1991. Airline fares also soared by 10.7% on a monthly basis and by nearly 24% over last year, as rising fuel costs and increased demand for travel pushed ticket prices still higher. 

Headline consumer price increases have accelerated on an annual basis for seven consecutive months now. Imbalances between supply and demand have persisted, especially in labor — with job openings still far outpacing new hires — and in commodities amid Russia's ongoing war in Ukraine. Many of these costs have been passed on continuously to the consumer.

With definitive signs of a peak yet to be seen in inflation, members of the Federal Reserve have escalated their rhetoric on using monetary policy tools to bring down fast-rising prices. Last week, Fed Governor Lael Brainard said that bringing down inflation was "our most important task," while San Francisco Fed President Mary Daly said that high inflation was "as harmful as not having a job."

Meanwhile, the Federal Reserve's March meeting minutes suggested that "many participants ... would have preferred a 50 basis point increase" in benchmark interest rates, with the larger-than-typical rate hike serving as an aggressive move toward raising borrowing costs and bringing down demand.

The Federal Reserve is set to convene for a policy-setting meeting May 3 and 4. 

the market and the midterms

If you have money in stocks during this bear market, you are probably having a rough year. The bond market has been miserable, too. There have been few bright spots for investors.

Yet there is one positive portent right now: the calendar.

With a surprising degree of consistency over the past 100 years or so, stocks have followed a broad pattern that coincides with presidential terms. The months leading up to midterm elections have generally been the worst in what is known as the four-year presidential election cycle. But the stock market is about to enter a sweet spot. Stocks have usually rallied in the year after the midterms — no matter which side wins.

Market veterans take these patterns seriously but aren’t counting on them in an economy plagued by soaring inflation, rising interest rates and fears of a recession.

“We’ve studied the presidential cycle carefully, and there’s something to it,” said Philip Orlando, the chief equity market strategist for Federated Hermes, a global asset manager based in Pittsburgh. “But it’s possible that this year we will need to invoke the four most dangerous words in investors’ lexicon: ‘This time is different.’”

Gloom in the markets

Consider, first, the overall pessimism in the markets.

In the current climate, this comment, from Mark Hackett, the chief of investment research at Nationwide, counts as fairly upbeat. “We are now entering a stage where all signs point to a recession — assuming we aren’t already in one,” Hackett said. But, he added, “the recession may already be priced into the markets, in which case the next bull run may be faster and come earlier than many investors expect,” he said.

The latest government figures show that the economy grew at a 2.6% annual rate in the third quarter. But the Federal Reserve says interest rates need to rise and stay high until the inflation numbers come down. The Fed’s monetary tightening is aimed at slowing the U.S. economy. Whether the consequences for working people will be mild or savage isn’t clear.

In the meantime, the coronavirus pandemic festers, the death toll from Russia’s war in Ukraine mounts, interest rates are rising elsewhere around the world, global energy costs remain elevated and U.S. relations with China are fracturing. All these concerns are weighing on the markets.

The presidential cycle

The party of a sitting president tends to lose seats in Congress in midterm elections, and high inflation makes matters worse for incumbents. Those are key findings of Ray Fair, a Yale economist whose long-running election model relies only on economic factors and shows the Democratic Party in an uphill climb this year.

His model, along with the polls, the prediction markets and many forecasters, suggests that Republicans are likely to win control of the House of Representatives. The Senate is up for grabs.

The issues in this election are enormous, and the vast differences between the two political parties are well chronicled.  Yet, for the stock market, history suggests that the outcome of the elections may not matter much. Shocking though this may be, since 1950, the midterm elections have brought an upturn for stocks, no matter which party has won, and no matter the issues.

The market has generally flagged in the months before the midterms and prospered after them. And it has often excelled in the year after the midterms, typically the best of the four-year presidential cycle.

Ned Davis Research, an independent investment research firm, compared stock returns for 1948 through 2021, broken down by the four years of a standard presidential term. It used the S&P 500 and a predecessor index:

12.9% for Year 1.

6.2% for Year 2, the year of the midterms.

16.7% for Year 3, the year after the midterms.

7.3% for Year 4.

[But why?  There is no certain answer.  The explanation I prefer is that presidents try to stimulate the economy - and, indirectly, bolster stocks - for maximum effect in presidential elections.

Their first year in office is the best time to make politically painful moves, which often lead to weak markets by the time the midterms come around.  After losses in the midterms, though, presidents try to give the economy a surge through expansionary fiscal and monetary policy, settring themselves (or their successors) up well fo the election.

Is this an exception?

Two powerful factors — the negative effect of a slowing economy and the beneficial influence of the midterm elections — may be in conflict, Ed Clissold, the chief U.S. strategist of Ned Davis Research, said in an interview.

On the positive side for stocks, Wall Street usually responds well to gridlock — the stasis that can grip Washington when power is divided — and such a division is the consensus expectation for the midterms. But, over the last century, when bear markets have been associated with recessions, no bear market has ever ended before a recession started, Clissold has found. The last time there was a recession in the year following the midterms occurred after the 1930 elections, during the Great Depression, a terrible era for stocks and the economy.

“A recession would be expected to be more important than the election cycle,” he said.

Practical steps

There are many ways of making bets on specific election outcomes, though they entail risk that I don’t favor.

For example, if Democrats defy the odds and hold onto both houses of Congress, infrastructure spending will be expected to increase. Matthew J. Bartolini, the head of exchange-traded fund research at State Street Global Advisors, said, to bet that way, you might try SPDR S&P Kensho Intelligent Structures ETF. It includes “intelligent infrastructure” companies — like Badger Meter, which supplies utilities with water-metering equipment, and Stem, which provides software and engineering for green energy storage.

If you want to bet on gridlock, you may assume that a split government will be bullish for the overall market. Then again, the need to raise the federal debt ceiling in 2023 could become a market crisis. Republicans have vowed to use the issue as leverage, forcing President Joe Biden to cut federal spending. Similar maneuvering in 2011 led to the downgrading of U.S. Treasurys by Standard & Poor’s, sending tremors through global markets.

Tactical bets on election or economic outcomes are unreliable. That’s why what makes sense to me, regardless of the immediate future, is long-term investing in diversified stocks and bonds using low-cost index funds that track the entire market. This approach requires a steady hand, a horizon of at least a decade and enough money to safely pay the bills.

Short term, try to fortify your portfolio and build up your cash so you can handle any economic or electoral outcome.

-- Jeff Sommer, New York Times (Star-Advertiser, 11/6/22)

Jay Powell wants you to lose money

Seeking to quell inflation, the Federal Reserve has raised its benchmark interest rate from near zero to above 3% in record time. And at its most recent meeting, on Sept. 21, the central bank projected it would add an additional one and a half percentage points in the coming months—promptly sending markets into a nosedive.

We’ve officially entered a very different financial climate, where prudent investors may want to reassess where they put their money. The Fed’s principal policy lever is interest rates; when they go up, the value of future cash flows goes down—hurting assets from stocks and bonds to housing and many currencies. So when Fed Chair Jerome Powell tells you he wants to reduce inflation by raising rates (aka tightening), he’s telling you the central bank needs investors to lose money. The goal is for those losses to seep into the rest of the economy when capital investment and consumption decline, slowing growth, demand, and—ultimately—inflation.

To understand how we got here, you have to go back to the 2008 financial crisis, when the Fed was doing exactly the opposite. The central bank felt forced to take rates to zero to alleviate the distress indebted households and companies were feeling. Lower rates meant smaller interest payments for debtors seeking to repair their balance sheets. In 2008, household debt topped 97% of gross domestic product; today, it’s about 75%, the lowest in 20 years.

For savers, though, high-interest accounts that once yielded 5% interest suddenly paid 1%. The annual return on $50,000 in savings fell to $500 from $2,500, forcing people who relied on interest as a principal source of income to rethink their strategy. That usually meant turning to riskier assets, so money poured into stocks, pushing the S&P 500 index up sevenfold from its post-crisis nadir to its peak in January.

With the Fed funds rate near zero, ordinary savings accounts paid minimal interest, spurring some to quip that “cash is trash.” This mantra seeded the psychology that fueled crypto assets and meme stocks, even as it created a windfall for the economy, allowing companies from Amazon.com to General Motors to Marriott to boost capital investment. Sure, some of that was foolhardy. Australia’s BHP Billiton, for example, poured $20 billion into US shale oil projects early in the 2010s. That paid off when crude rose to more than $100 a barrel, but it looked less wise when oil fell below $30. By 2017, BHP was taking billions in writedowns on those investments as shale oil flooded the market.

By that time, the US economy was back on track. With unemployment sinking to 4.3%, cheap money had served its purpose, and the Fed slowly began raising rates. It soon found the economy was still too weak to handle them, so it reversed course in 2019. Then it had to try other stimulative measures in 2020 to reduce damage done by the coronavirus pandemic.

Now the economy can handle higher interest rates—and with inflation above 8% for the first time in four decades, the Fed desperately wants to apply them. In fact, it’s rushing to make up for lost time. As a result, investors are quickly discovering that cash is no longer trash—it’s an important asset class that provides a haven. Imagine if, next summer, your bank were to offer 5% interest on a three-year certificate of deposit. Would you take the sure thing?

Many Americans will, showing just how quickly the psychology of investing has changed. If the slowing economy lowers inflation to more acceptable levels, a host of investment opportunities will look better. Treasury yields and investment-grade bond yields are rising now. At some point soon, interest rates will top out, and the returns from those less risky options will look enticing.

This change in psychology won’t be limited to safe assets. Wall Street is in the midst of a bear market: The S&P 500 this year is down more than 20%, and the Nasdaq 100’s decline has topped 30%. Those returns won’t get much better with interest rates rising, the economy slowing, and corporate earnings taking a hit. So investors have already begun to withdraw money from stocks, with equity mutual funds registering 32 straight weeks of outflows, according to the Investment Company Institute.

They won’t come out and say it, but when members of the Fed’s Board of Governors see this reaction, they’re probably pleased. Capitulation makes their job easier. The quicker asset prices react to the tightening of conditions, the faster inflation will fall. But after the slowdown induced by higher interest rates, the selloff will end and inflation will decline. We’ll be in a new investing regime for the first time in more than a decade. Now is the time to prepare.

-- ByEdward Harrison, September 28, 2022

what the Volcker era teaches us now

When inflation soared 40 years ago, people with patience came out fine.

The cost of living is sky-high, and Jerome H. Powell, the chair of the Federal Reserve, says that battling it is his highest priority. He has raised interest rates to damp down inflation, which hit its highest point in 40 years. Financial markets don’t know quite how to react.

Something similar happened the last time inflation was out of control. Paul A. Volcker was the Fed chair then. He wrung inflation out of the economy, but at a great cost — hurling the nation into not just one recession, but two. Unemployment soared, stocks fell repeatedly, interest rates oscillated and, for a while, bonds looked shaky, too.

It’s worth looking at his era for guidance. 

First, because it had multiple, severe downturns, the Volcker era was disastrous for anyone who traded actively and bet wrong on the direction of the markets. Short-term trading is especially dangerous when the market’s currents are opaque and treacherously strong, as they were back then and may be now.

But, second, the Volcker era was wonderful for those with the patience and resources to ride it out. While Mr. Volcker’s stern treatment of the economy was deliberately disruptive, it ushered in awesome bull markets, in both stocks and bonds.

When Mr. Volcker became Fed chair in 1979, inflation was running above 11 percent annually, and the unemployment rate was almost 6 percent. A bull market in stocks had started in 1974 and it continued months more, even though the Volcker Fed had begun to tighten monetary policy.

On Saturday, Oct. 6, 1979, Mr. Volcker announced that, “No longer would the Federal Reserve set interest rates to guide policy,” Jeremy J. Siegel, the University of Pennsylvania economist, wrote in the book “Stocks for the Long Run.” “Instead, it would exercise control over the supply of money without regard to interest rate movements.”

By reducing the money supply, and letting short-term interest rates float, the Fed was, effectively, letting rates spiral upward.

“Stocks went into a tailspin, falling almost 8 percent on record volume in the 2½ days following the announcement,” Professor Siegel wrote. “Stockholders shuddered at the prospect of sharply higher interest rates that would be necessary to tame inflation.”

By March 1980, the Fed funds rate was an astonishing 17 percent, compared with just 2.5 percent today. It would exceed 19 percent the following year.

The economy slowed so much that it fell into a recession from January through July 1980.

But it wasn’t until Nov. 28, 1980, that a bear market in stocks began.

The S& P 500 lost more than 27 percent during a miserable 20-month period that ended in August 1982. If you were on the wrong side of that move, you lost a ton of money. The second Volcker recession began in July 1981 and lasted until November 1982.

If you hung in during the entire Volcker era, you experienced turmoil but went on to enormous gains in both stocks and bonds. From the day Mr. Volcker took office until the day he left in 1987, shares in the Vanguard S& P 500 stock index fund — the first lowcost broad index fund available to ordinary investors — would have gained 215 percent, according to FactSet data.

An index of the broad bond market, now known as the Bloomberg U.S. Aggregate, would have gained 143 percent in that period. And on the day Mr. Volcker started as Fed chair, the 30-year U.S. Treasury bond provided a yield of more than 9 percent — a guaranteed doubling of your money every eight years, if you had just held onto it. Even better, you could have bought a Treasury bond in September 1981 that paid a guaranteed 15.19 percent for 30 years.

There were big ups and downs in shorter stretches. They scared me away from stocks for a while.

What we’ve been experiencing over the last year is frightening, too. It’s not clear whether the July rally in the stock market was more like an early sucker’s rally in the Volcker era (leading to a recession and bear market) or like the second big rally — the one that became a great bull market. Or, perhaps, it’s another variation.

No one knows. But remember that those long-term bets on stocks and bonds paid off, even in that era of market turmoil.

- Jeff Sommer, New York Times (via Honolulu Star-Advertiser, 8/14/22)

bull rally in a bear market

(Reuters) - The U.S. stock market's rebound in recent weeks has analysts and investors questioning whether 2022's deep downturn has ended, but how to spot an expiring bear market or a new bull market is not something everyone on Wall Street agrees on.

Equities have rebounded thanks to better-than-expected corporate earnings and bets the worst of soaring inflation may be over. The Nasdaq (.IXIC) index's drop of about 0.6% on Thursday left the tech-heavy index up 20% from recent low on June 16, while the S&P 500 (.SPX) has also rebounded in recent weeks, now up 15% from its recent low in June.

The recent gains led analysts at Bespoke Investment Group to declare on Thursday morning the Nasdaq had exited its recent bear market, even though the index remains down about 21% from its record high close last November, with trillions of dollars in stock market value still lost.

On Wall Street, the terms "bull" and "bear" markets are often used to characterize broad upward or downward trends in asset prices.

Both indexes are widely viewed as having been in bear markets in 2022, but not all analysts define bull or bear markets the same way, and many investors use the terms loosely.

"We could write for hours on the semantics of bull and bear markets," Bespoke wrote in its research note, saying a new bull market was now confirmed to have started on June 16.

The Merriam-Webster dictionary defines a bull market simply as "a market in which securities or commodities are persistently rising in value."

Some investors define a bear market more specifically as a decline of at least 20% in a stock or index from its previous peak, with the peak defining the beginning of the bear market, which is only recognized in hindsight following the at-least 20% decline.

Similarly, some define a bull market as a 20% rise from a previous low, and by that measure, used by Bespoke, the Nasdaq could now be viewed as having begun a fresh bull market.

The Securities and Exchange Commission says on its website that, "Generally, a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period."

The Nasdaq's steep declines

S&P Dow Jones Indices, which administers the S&P 500 and Dow Jones Industrial Average (.DJI), has an even more nuanced definition of a bull market.

A drop of 20% or more from a high, followed by a 20% gain from that lower level, would leave an index still below its previous peak, a situation S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt describes as a "bull rally in a bear market".

Analysts warn against relying too much on backward-looking definitions of market cycles that do little to capture current sentiment or predict where stocks will go in the future.

Factors like the velocity of the market’s rise or fall and how much average stocks have changed contribute to whether investors view a major move as a turning point in sentiment or a short-term interruption to an existing bull or bear market.

Indeed, investors can only be sure they are in a new bull market once a new record high has been reached, and at that point, the previous low would mark the end of the bear market and beginning of the new bull market, according to S&P Dow Jones Indices.

For example, during the bear market caused by the 2008 financial crisis, the S&P 500 (.SPX) rallied over 20% from a low in November 2008, raising hopes the stock rout was over. But the S&P 500 tumbled another 28% to even deeper lows in March 2009.

It was not until an all-time high was reached in March 2013 that investors were able to say with certainty that a new bull market had been born four years earlier.

"We retroactively go back and say, 'OK, when did the market hit the bottom?'" Silverblatt said. "That's when the bear would end and the bull starts."

Kevin Roose explains Cryptocurrency

Until fairly recently, if you lived anywhere other than San Francisco, it was possible to go days or even weeks without hearing about cryptocurrency.

Now, suddenly, it’s inescapable. Look one way, and there are Matt Damon and Larry David doing ads for crypto start-ups. Swivel your head — oh, hey, it’s the mayors of Miami and New York City, arguing over who loves Bitcoin more. Two N.B.A. arenas are now named after crypto companies, and it seems as if every corporate marketing team in America has jumped on the NFT — or nonfungible token — bandwagon. (Can I interest you in one of Pepsi’s new “Mic Drop” genesis NFTs? Or maybe something from Applebee’s “Metaverse Meals” NFT collection, inspired by the restaurant chain’s “iconic” menu items?)

Crypto! For years, it seemed like the kind of fleeting tech trend most people could safely ignore, like hoverboards or Google Glass. But its power, both economic and cultural, has become too big to overlook. Twenty percent of American adults, and 36 percent of millennials, own cryptocurrency, according to a recent Morning Consult survey. Coinbase, the crypto trading app, has landed on top of the App Store’s top charts at least twice in the past year. Today, the crypto market is valued at around $1.75 trillion — roughly the size of Google. And in Silicon Valley, engineers and executives are bolting from cushy jobs in droves to join the crypto gold rush.

As it’s gone mainstream, crypto has inspired an unusually polarized discourse. Its biggest fans think it’s saving the world, while its biggest skeptics are convinced it’s all a scam — an environment-killing speculative bubble orchestrated by grifters and sold to greedy dupes, which will probably crash the economy when it bursts.

I’ve been writing about crypto for nearly a decade, a period in which my own views have whipsawed between extreme skepticism and cautious optimism. These days, I usually describe myself as a crypto moderate, although I admit that may be a cop-out.

I agree with the skeptics that much of the crypto market consists of overvalued, overhyped and possibly fraudulent assets, and I am unmoved by the most utopian sentiments shared by pro-crypto zealots (such as the claim by Jack Dorsey, the former Twitter chief, that Bitcoin will usher in world peace).

But as I’ve experimented more with crypto — including accidentally selling an NFT for more than $500,000 in a charity auction last year — I’ve come to accept that it isn’t all a cynical money-grab, and that there are things of actual substance being built. I’ve also learned, in my career as a tech journalist, that when so much money, energy and talent flows toward a new thing, it’s generally a good idea to pay attention, regardless of your views on the thing itself.

My strongest-held belief about crypto, though, is that it is terribly explained.

Recently, I spent several months reading everything I could about crypto. But I found that most beginner’s guides took the form of boring podcasts, thinly researched YouTube videos and blog posts written by hopelessly biased investors. Many anti-crypto takes, on the other hand, were undercut by inaccuracies and outdated arguments, such as the assertion that crypto is good for criminals, notwithstanding the growing evidence that crypto’s traceable ledgers make it a poor fit for illicit activity.

What I couldn’t find was a sober, dispassionate explanation of what crypto actually is — how it works, who it’s for, what’s at stake, where the battle lines are drawn — along with answers to some of the most common questions it raises.

This guide — a mega-F.A.Q., really — is an attempt to fix that. In it, I’ll explain the basic concepts as clearly as I can, doing my best to answer the questions a curious but open-minded skeptic might pose.

Crypto boosters will likely quibble with my explanations, while dug-in opponents may find them too generous. That’s OK. My goal is not to convince you that crypto is good or bad, that it should be outlawed or celebrated, or that investing in it will make you rich or bankrupt you. It is simply to demystify things a bit. And if you want to go deeper, each section has a list of reading suggestions at the end.

CRYPTO WILL BE TRANSFORMATIVE

Understanding crypto now — especially if you’re naturally skeptical — is important for a few reasons.

The first is that crypto wealth and ideology is going to be a transformative force in our society in the coming years.

You’ve heard about the overnight Dogecoin millionaires and Lamborghini-driving Bitcoin bros. But that’s not the half of it. The crypto boom has generated vast new fortunes at a clip we’ve never seen before — the closest comparison is probably the discovery of oil in the Middle East — and has turned its biggest winners into some of the richest people in the world, essentially overnight. Some riches could vanish if the market crashes, but enough has already been cashed out to ensure that crypto’s influence will linger for decades.

Crypto’s madcap, meme-crazed online culture can make it seem frivolous and shallow. It’s not. Cryptocurrencies, even the jokey ones, are part of a robust, well-funded ideological movement that has serious implications for our political and economic future. Bitcoin, which emerged out of the ashes of the 2008 financial crisis, first caught on among libertarians and anti-establishment activists who saw it as the cornerstone of a new, incorruptible monetary system. Since then, other crypto realms have fashioned similarly lofty goals, like building a decentralized, largely unregulated version of Wall Street on the blockchain.

We are already starting to see a swell of crypto money headed toward the U.S. political system. Crypto entrepreneurs are donating millions of dollars to candidates and causes, and lobbying firms have fanned out across the country to win support for pro-crypto legislation. In the coming years, crypto moguls will bankroll the campaigns of crypto-friendly candidates, or run for office themselves. Some will peddle influence in the familiar ways — forming super PACs, funding think tanks, etc. — while others will try to escape partisan gridlock altogether. (Crypto millionaires are already buying up land in the South Pacific to build their own blockchain utopias.)

Crypto is poised to soon become one of a handful of true wedge issues, with politicians all over the world forced to pick a side. Some countries, like El Salvador — whose crypto-loving president, Nayib Bukele, recently announced the development of a “Bitcoin City” at the base of a volcano — will go full crypto. Other governments may decide that crypto is a threat to their sovereignty and crack down, as China did when it outlawed cryptocurrency trading last year. The divide between the world’s pro-crypto and no-crypto zones could end up being at least as big as the divide between the Chinese internet and the American one, and maybe even more consequential.

In America, we have already seen how crypto can scramble the usual partisan allegiances. Former President Donald J. Trump and Senator Elizabeth Warren, the Democrat from Massachusetts, are united in crypto skepticism, for example, while Senator Ted Cruz, Republican from Texas, is in the same bullish camp as Senator Ron Wyden, the Democrat from Oregon. We have also seen what can happen when the crypto community feels politically threatened, as happened last summer, when crypto groups rallied to oppose a crypto-related provision in President Biden’s infrastructure bill.

What I’m saying, I guess, is that despite the goofy veneer, crypto is not just another weird internet phenomenon. It’s an organized technological movement, armed with powerful tools and hordes of wealthy true believers, whose goal is nothing less than a total economic and political revolution.

CRYPTO COULD BE DESTRUCTIVE

The second reason to pay attention to crypto is that understanding it now is the best way to ensure it doesn’t become a destructive force later.

In the early 2010s, the most common knock on social media apps like Facebook and Twitter was that they just wouldn’t work as businesses. Pundits predicted that users would eventually tire of their friends’ vacation photos, that advertisers would flee and that the whole social media industry would collapse. The theory wasn’t so much that social media was dangerous or bad; just that it was boring and corny, a hype-driven fad that would disappear as quickly as it had arrived.

What nobody was asking back then — at least not loudly — were questions like: What if social media is actually insanely successful? What kind of regulations would need to exist in a world where Facebook and Twitter were the dominant communication platforms? How should tech companies with billions of users weigh the trade-offs between free speech and safety? What product features could prevent online hate and misinformation from cascading into offline violence?

By the middle of the decade, when it was clear that these were urgent questions, it was too late. The platform mechanics and ad-based business models were already baked in, and skeptics — who might have steered these apps in a better direction, if they’d taken them more seriously from the start — were stuck trying to contain the damage.

Are we making the same mistake with crypto today? It’s possible. No one knows yet whether crypto will or won’t “work,” in the grandest sense. (Anyone who claims they do is selling something.) But there is real money and energy in it, and many tech veterans I’ve spoken to tell me that today’s crypto scene feels, to them, like 2010 all over again — with tech disrupting money this time, instead of media.

If they’re wrong, they’re wrong. But if they’re right — even partly — the best time to start paying attention is now, before the paths are set and the problems are intractable.

The third reason to study up on crypto is that it can be genuinely fun to learn about.

Sure, a lot of it is dumb, shady or self-refuting. But if you can look past the carnival barkers and parse the convoluted jargon, you’ll find a bottomless well of weird, interesting and thought-provoking projects. The crypto agenda is so huge and multidisciplinary — drawing together elements of economics, engineering, philosophy, law, art, energy policy and more — that it offers lots of footholds for beginners. Want to discuss the influence of Austrian economics in Bitcoin development? There’s probably a Discord server for that. Want to join a DAO that invests in NFTs, or play a video game that pays you in crypto tokens for winning? Dive right in.

CRYPTO IS A GENERATIONAL SKELETON KEY

Mind you, I am not suggesting that the crypto world is diverse, in the demographic sense. Surveys have suggested that high-earning white men make up a large share of crypto owners, and libertarians with dog-eared copies of “Atlas Shrugged” are likely overrepresented among crypto millionaires. But it’s not an intellectual monolith. There are right-wing Bitcoin maximalists who believe that crypto will liberate them from government tyranny; left-wing Ethereum fans who want to overthrow the big banks; and speculators with no ideological attachments who just want to turn a profit and get out. These communities fight with one another constantly, and many have wildly different ideas about what crypto should be. It makes for fascinating study, especially with a bit of emotional distance.

And if you do learn some crypto basics, you might find that a whole world opens up to you. You’ll understand why Jimmy Fallon and Steph Curry are changing their Twitter avatars to cartoon apes, and why Elon Musk, the richest man in the world, spent a decent chunk of last year tweeting about a digital currency named after a dog. Strange words and phrases you encounter on the internet — rug pulls, flippenings, “gm” — will become familiar, and eventually, headlines like “NFT Collector Sells People’s Fursonas for $100K In Right-Click Mindset War” won’t make you wonder if you’re losing your grip on reality.

Crypto can also be a kind of generational skeleton key — maybe the single fastest way to freshen your cultural awareness and decipher the beliefs and actions of today’s young people. And just as knowing a little about New Age mysticism and psychedelics would help someone trying to make sense of youth culture in the 1960s, knowing some crypto basics can help someone perplexed by emerging attitudes about money and power feel more grounded.

Again, I don’t really care whether you emerge from these explainers as a true believer, a devoted skeptic or something in between. Participate or abstain as you wish! All I’m after is understanding — and possibly, a little relief from the question that has consumed my social and professional life for the past several years:

“So … can I ask you a question about crypto?”

Let’s start from the beginning: What is crypto?

A decade or two ago, the word was generally used as shorthand for cryptography. But in recent years, it’s been more closely associated with cryptocurrencies. These days, “crypto” usually refers to the entire universe of technologies that involve blockchains — the distributed ledger systems that power digital currencies like Bitcoin, but also serve as the base layer of technology for things like NFTs, web3 applications and DeFi trading protocols.

Ah yes, blockchains. Can you remind me, without going into too much technical detail, what they are?

At a very basic level, blockchains are shared databases that store and verify information in a cryptographically secure way.

You can think of a blockchain like a Google spreadsheet, except that instead of being hosted on Google’s servers, blockchains are maintained by a network of computers all over the world. These computers (sometimes called miners or validators) are responsible for storing their own copies of the database, adding and verifying new entries, and securing the database against hackers.

So blockchains are … fancy Google spreadsheets?

Sort of! But there are at least three important conceptual differences.

First, a blockchain is decentralized. It doesn’t need a company like Google overseeing it. All of that work is done by the computers on the network, using what’s called a consensus mechanism — basically, a complicated algorithm that allows them to agree on what’s in a database without the need for a neutral referee. This makes blockchains more secure than traditional record-keeping systems, proponents believe, since no single person or company can take down the blockchain or alter its contents, and anyone trying to hack or change the records in the ledger would need to break into many computers simultaneously.

The second major feature of blockchains is that they’re typically public and open source, meaning that unlike a Google spreadsheet, anyone can inspect a public blockchain’s code or see a record of any transaction. (There are private blockchains, but they’re less important than the public ones.)

Third, blockchains are typically append-only and permanent, meaning that unlike with a Google spreadsheet, data that’s added to a blockchain typically can’t be deleted or changed after the fact.

Got it. So blockchains are public, permanent databases that nobody owns?

You’re getting it!

Now remind me: How are blockchains related to cryptocurrencies?

Blockchains didn’t really exist until 2009, when a pseudonymous programmer named Satoshi Nakamoto released the technical documentation for Bitcoin, the first-ever cryptocurrency.

Bitcoin used a blockchain to keep track of transactions. That was notable because, for the first time, it allowed people to send and receive money over the internet without needing to involve a central authority, such as a bank or an app like PayPal or Venmo.

Many blockchains still perform cryptocurrency transactions, and there are now roughly 10,000 different cryptocurrencies in existence, according to CoinMarketCap. But many blockchains can be used to store other kinds of information, too — including NFTs, bits of self-executing code known as smart contracts and full-fledged apps — without the need for a central authority.

OK, but can we back up a second? Weren’t tech people telling us, years ago, that crypto was a new and exciting form of money? And yet, nobody I know pays their rent or buys groceries in Bitcoin. So were those people just … wrong?

Good question. It’s true that today, hardly anyone pays for things in cryptocurrency. In part, that’s because most merchants still don’t accept crypto payments, and hefty transaction fees can make it impractical to spend small amounts of cryptocurrency on daily living expenses. It’s also because the value of popular cryptocurrencies like Bitcoin and Ether has historically gone up, making it somewhat risky to use them for offline purchases. (The counterexamples are usually cited with pity, like the guy who, in 2010, bought two Papa John’s pizzas using Bitcoin that was worth about $40 at the time, but would be worth roughly $400 million today.)

It’s also true that the value of cryptocurrencies has grown enormously since the early Bitcoin days, despite them not being most people’s daily spending money.

Part of that growth is speculation — people buying crypto assets in hopes of selling them for more later on. Part of it is because the blockchains that have emerged since Bitcoin, like Ethereum and Solana, have expanded what can be done with this technology.

And some crypto fans believe that the prices of cryptocurrencies like Bitcoin will eventually stabilize, which could make them more useful as a means of payment.

What are the actual uses of crypto, beyond financial speculation?

Right now, many of the successful applications for crypto technology are in finance or finance-adjacent fields. For example, people are using crypto to send cross-border remittances to family members abroad and Wall Street banks using blockchains to settle foreign transactions.

The crypto boom has also led to an explosion of experiments outside of financial services. There are crypto social clubs, crypto video games, crypto restaurants and even crypto-powered wireless networks.

These non-financial uses are still fairly limited. But crypto fans often make the case that the technology is still young, and that it took the internet decades to mature into what it is today. Investors are pouring billions of dollars into crypto start-ups because they think that someday, blockchains will be used for all kinds of things: storing medical records, tracking streaming music rights, even hosting new social media platforms. And the crypto ecosystem is attracting tons of developers — an auspicious sign for any new technology.

I’ve heard people calling crypto a pyramid scheme or a Ponzi scheme. What do they mean?

Some critics believe that cryptocurrency markets are fundamentally fraudulent, either because early investors get rich at the expense of late investors (a pyramid scheme), or because crypto projects lure in unsuspecting investors with promises of safe returns, then collapse once new money stops coming in (a Ponzi scheme).

There are certainly plenty of examples of pyramid and Ponzi schemes within crypto. They include OneCoin, a fraudulent crypto operation that stole $4 billion from investors from 2014 to 2019; and Virgil Sigma Fund, a $90 million crypto hedge fund run by a 24-year-old investor who pleaded guilty to securities fraud and was sentenced to seven and a half years in prison.

But these cases aren’t usually what critics are talking about. They’re generally arguing that crypto itself is an exploitative scheme, with no real-world value.

And are they right?

Well, let’s try to understand the case they’re making.

Unlike buying stock in, say, Apple, a purchase that (theoretically, at least) reflects a belief that Apple’s underlying business is healthy, buying a cryptocurrency is more like betting on the success of an idea, they say. If people believe in Bitcoin, they buy, and Bitcoin prices go up. If people stop believing in Bitcoin, they sell, and Bitcoin prices go down.

Crypto owners, then, have a rational incentive to convince other people to buy. And if you don’t think that cryptocurrency technology is inherently valuable, you might conclude that the entire thing resembles a pyramid scheme, in which you primarily make money by recruiting others to join.

I’m sensing a “but” coming on.

But! Even though there are scams and frauds within crypto, and crypto investors are certainly fond of trying to recruit other people to buy in, many investors will tell you that they are going in with their eyes wide open.

They believe that crypto technology is inherently valuable, and that the ability to store information and value on a decentralized blockchain will be attractive to all kinds of people and businesses in the future. They would tell you they’re betting on crypto the product, not crypto the idea — which, on some level, isn’t all that different from buying Apple stock because you think the next iPhone is going to be popular.

Matt Huang, a prominent investor, spoke for many crypto fans when he said on Twitter: “Crypto may look like a speculative casino from the outside. But that distracts many from the deeper truth: the casino is a trojan horse with a new financial system hidden inside.”

You can argue with that position, or dispute how much this “new financial system” is actually worth. But crypto investors clearly believe it’s worth something.

Is crypto regulated?

Only slightly. In the United States, certain centralized crypto exchanges, such as Coinbase, are required to register as money transmitters and follow laws like the Bank Secrecy Act, which requires them to collect certain information about their customers. Some countries have passed more stringent regulations, and others, like China, have banned cryptocurrency trading entirely.

But compared with the traditional financial system, crypto is very lightly regulated. There are few rules governing crypto assets like “stablecoins” — coins whose value is pegged to government-backed currencies — or even clear guidance from the Internal Revenue Service about how certain crypto investments should be taxed. And certain areas of crypto, like DeFi (decentralized finance), are almost completely unregulated.

Partly, that’s because it’s still early, and making new rules takes time. But it’s also a property of blockchain technology itself, much of which was designed to be hard for governments to control.

This question comes from the (apparently crypto-curious) rapper Cardi B: Is crypto going to replace the dollar?

Sorry, Cardi. The dollar is the world’s reserve currency, and dislodging it would be a huge, costly project that isn’t likely to happen any time soon. (To give just one small example of the enormity of the task: every financial contract that is denominated in dollars would have to be re-denominated in Bitcoin or Ether or some other cryptocurrency.)

There are also technical hurdles crypto needs to overcome if it’s ever going to displace government-issued currency. Today, the most popular blockchains — Bitcoin and Ethereum — are slow and inefficient compared with traditional payment networks. (The Ethereum blockchain, for example, can process only about 15 transactions per second, whereas Visa says it can process thousands of credit card transactions per second.)

And, of course, for a cryptocurrency like Bitcoin to replace the dollar, you’d need to convince billions of people to use a currency whose value fluctuates wildly, that isn’t backed by a government and that often can’t be retrieved if it’s stolen.

What kind of people are investing in crypto? Is it all — to quote a recent “Curb Your Enthusiasm” episode — “nerds and Nazis”?

It’s hard to say who’s investing in crypto, especially since a lot of activity takes place anonymously or under pseudonyms. But some surveys and studies have suggested that crypto is still dominated by affluent white men.

Gemini, a cryptocurrency exchange, estimated in a recent report that women made up only 26 percent of crypto investors. The average crypto owner, the group found, was a 38-year-old man making approximately $111,000 a year.

But crypto ownership does appear to be diversifying. A 2021 Pew Research Center survey found that Asian, Black and Latino adults were more likely to have used crypto than white adults. Crypto adoption is also growing outside the United States, and some studies have suggested that crypto adoption is growing fastest in countries like Vietnam, India and Pakistan.

My colleague, Tressie McMillan Cottom, has made the case that crypto — because it relies on permanent, irrefutable records of ownership of digital goods and currencies — is particularly attractive to people from marginalized groups, who may have had their property unjustly taken from them in the past.

“If I live in a community where the police absolutely use eminent domain to claim my private property and I cannot do anything about it,” she wrote, “that sense of everyday powerlessness would make the promise of blockchain sound pretty good.”

That said, some recent studies have also found that a small number of people own the vast majority of crypto wealth — so it’s not necessarily an egalitarian paradise.

And what about extremists? Are they into crypto?

Some are. Because you can buy and sell cryptocurrency without using your name or having a bank account, crypto in its early days was a natural fit for people who had reasons to avoid the traditional financial system. They included criminals, tax evaders and people buying and selling illicit goods. They also included political dissidents and extremists, some of whom had been kicked off more mainstream payment services like PayPal and Patreon.

As a result of their well-timed entry into the crypto market, some extremists have gotten rich. A recent investigation by the Southern Poverty Law Center found that several prominent white supremacists have made hundreds of thousands or millions of dollars by investing in crypto.

Of course, there are millions of crypto owners, the vast majority of whom are not white supremacists. And the same properties of anonymity and censorship-resistance that make crypto useful to white supremacists might also make it attractive to, say, Afghan citizens fleeing the Taliban. So labeling the entire crypto movement an extremist group would be overkill. Regardless, it’s safe to say that crypto has become attractive to all kinds of people who would rather not deal (or can’t legally deal) with a traditional bank.

Another criticism I’ve heard is that crypto is bad for the environment. Is that true?

This is a real can of worms — and one of the most frequent objections to crypto.

Let’s start with what we know for sure. It’s true that most crypto activity today takes place on blockchains that require large amounts of energy to store and verify transactions. These networks use a “proof-of-work” consensus mechanism — a process that has been compared to a global guessing game, played by computers all competing to solve cryptographic puzzles in order to add new information to the database and earn a reward in return. Solving these puzzles requires powerful computers, which in turn use lots of energy.

The Bitcoin blockchain, for example, uses an estimated 200 terawatt-hours of energy per year, according to Digiconomist, a website that tracks crypto energy usage. That’s comparable to the annual energy consumption of Thailand. And Bitcoin’s associated carbon emissions have been estimated at roughly 100 megatons per year, which is comparable to the carbon footprint of the Czech Republic.

Holy moly! How do crypto fans justify that kind of environmental impact?

Crypto advocates often quibble with these statistics. They also argue that:

• Our existing financial system also uses a lot of energy, between powering millions of bank branches, A.T.M.s that sit idle for most of the day, gold mines and other energy-intensive infrastructure.

• Many crypto-mining computers are already powered by renewable energy sources, or by energy that would otherwise be wasted.

• Most newer blockchains are built using consensus mechanisms that require much less energy than proof-of-work. (Ethereum, for example, is scheduled to switch to a new type of consensus mechanism called proof-of-stake sometime in 2022, which could reduce its energy usage by as much as 99.5 percent.)

And are those arguments valid?

Partly. It’s true that most newer blockchains are designed in a way that requires considerably less energy than Bitcoin, and that Ethereum’s switch to a proof-of-stake consensus mechanism will greatly shrink its environmental footprint, if and when it happens.

But it’s also a bit convenient to steer attention away from Bitcoin, which is still the most valuable cryptocurrency in the world. Bitcoin’s energy needs aren’t expected to fall significantly anytime soon. And even if every Bitcoin miner ran entirely on renewable energy — which, to be clear, isn’t the case — there would still be an environmental cost associated with maintaining the blockchain.

All told, it’s clear that crypto as we know it today has a significant environmental impact, but it’s hard to measure exactly how significant. Many frequently cited statistics come from industry groups, and it’s hard to find trustworthy, independent data and analysis.

But few crypto fans would dispute that blockchains consume substantially more energy than a traditional, centralized database would — just as 100 refrigerators use more energy than one refrigerator. They just argue that crypto’s environmental impact will shrink over time, and that the benefits of decentralization are worth the costs.

Got it. And those benefits, again, are …

Some crypto proponents will tell you that the biggest benefit of decentralization is the ability to create currencies, apps and virtual economies that are resistant to censorship and top-down control. (Imagine a version of Facebook, they’ll say, in which Mark Zuckerberg couldn’t unilaterally decide to kick people off.)

Others will say that the biggest perk of decentralization is that it allows artists and creators to control their own economic destinies more directly by giving them a way (in the form of NFTs and other crypto assets) to bypass platform gatekeepers like YouTube and Spotify, and sell unique digital works directly to their fans.

Still others will say that crypto is most useful to people who don’t live in countries with stable currencies, or to dissident groups living under authoritarian regimes.

There are a million other hypothetical benefits of decentralization and crypto, some of which are realistic and some of which probably aren’t.

How do you actually use crypto? Is it like sending a payment over Paypal or Venmo?

It can be. The quickest way to get started using cryptocurrencies is to set up an account with a crypto exchange like Coinbase, which can link to your bank account and convert your U.S. dollars (or other government-issued currency) into cryptocurrency.

But many crypto users prefer setting up their own “wallets” — secure places to store the cryptographic keys that unlock their digital assets.

Once you’ve got some crypto in your wallet, the process can be pretty simple — just type in the recipient’s crypto wallet address, pay a transaction fee (if applicable), and wait for the payment to clear.

Other types of crypto transactions, like buying and selling NFTs, can be significantly more complicated, but the basic act of sending a payment to someone typically takes only a few minutes.

I’m ready to dive into the rest of your explainers. But first, I have one final question about crypto’s culture: Why is it so weird and insular?

This is maybe the question I get asked most about crypto. People see their friends, co-workers and relatives diving down the crypto rabbit hole and emerging days or weeks later with a new obsession, new internet friends, a bunch of new jargon and the seeming inability to talk about anything else. (There’s even a word for this — getting “cryptopilled.”) People who believe in crypto tend to really believe in it — to the point that they can appear to the outside world more like evangelists for a new religion than fans of a new technology.

I was a religion reporter once, and I don’t think the comparison is totally inapt. (It’s also not necessarily a bad thing: Plenty of people find meaning and community and intellectual stimulation in religion.) As people like the Bloomberg journalist Joe Weisenthal have pointed out, crypto has similar elements to an emerging religion: an enigmatic founder (the still-anonymous Satoshi Nakamoto), sacred texts (the Bitcoin white paper) and rituals and rites to mark yourself as a believer, such as tweeting “gm” (crypto speak for “good morning”) to your fellow believers, or photoshopping laser eyes onto your profile picture.

It’s fun to laugh at the (often cringeworthy) ways crypto fans try to entertain and inspire each other. But focusing too much on their behavior and customs might mean missing what’s genuinely novel — and, depending on where you sit, either exciting or dangerous — about the technology itself. Which is why, when my friends ask me how to talk to their cryptopilled relatives, I advise them to start by trying to understand what’s gotten them so excited in the first place.

inflation 2022

WASHINGTON (AP) — Last year, it was a nasty surprise. And it wasn’t supposed to last. But now, inflation has become an ongoing financial strain for millions of Americans filling up at the gas station, lined up at a grocery checkout lane, shopping for clothes, bargaining for a car or paying monthly rent.

For the 12 months ending in January, inflation amounted to 7.5% — the fastest year-over-year pace since 1982 — the Labor Department said Thursday. Even if you toss out volatile food and energy prices, so-called core inflation jumped 6% over the past year. That was also the sharpest such jump in four decades.

Consumers felt the price squeeze in everyday routines. Over the past year, prices rose 41% for used cars and trucks, 40% for gasoline, 18% for bacon, 14% for bedroom furniture, 11% for women’s dresses.

The Federal Reserve didn’t anticipate an inflation wave this severe or this persistent. In December 2020, the Fed’s policymakers had forecast that consumer inflation would stay below their 2% annual target and end 2021 at around 1.8%.

But after having been an economic afterthought for decades, high inflation reasserted itself last year with brutal speed. In February 2021, the government’s consumer price index was running just 1.7% ahead of its level a year earlier. From there, the year-over-year price increases accelerated steadily — 2.7% in March, 4.2% in April, 4.9% in May, 5.3% in June.

By October, the figure was 6.2%, by November 6.8%, by December 7.1%.

For months, Fed Chair Jerome Powell and others characterized higher consumer prices as merely a “transitory” problem — the result, mainly, of shipping delays and temporary shortages of supplies and workers as the economy rebounded from the pandemic recession much faster than anyone had anticipated.

Now, many economists expect consumer inflation to remain elevated well into this year, with demand outstripping supplies in numerous areas of the economy.

“Inflation remains the single largest near-term challenge to the economy,″ said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Although price pressures are expected to ease as the year progresses, inflation will remain above the Fed’s 2% target for some time to come.″

So the Fed has radically changed course. Last month, the central bank signaled that it will begin a series of rate hikes in March. By doing so, the Fed is moving away from the super-low rates that helped revive the economy from 2020′s devastating pandemic recession but that also helped fuel surging consumer prices.

WHAT’S CAUSED THE SPIKE IN INFLATION?

Good news — mostly. When the pandemic paralyzed the economy in the spring of 2020 and lockdowns kicked in, businesses closed or cut hours and consumers stayed home as a health precaution, employers slashed a breathtaking 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in 2020′s April-June quarter.

Everyone braced for more misery. Companies cut investment and postponed restocking. A brutal recession ensued.

But instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by vast infusions of government aid and emergency intervention by the Fed, which slashed interest rates, among other things. By spring of last year, the rollout of vaccines had emboldened consumers to return to restaurants, bars, shops and airports.

Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to fill job openings — a near record 10.9 million in December — or buy enough supplies to meet customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became seized up.

With demand up and supplies down, costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic.

But critics, including former Treasury Secretary Lawrence Summers, blamed in part President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households, for overheating an economy that was already sizzling on its own.

The Fed and the federal government had feared an agonizingly slow recovery like the one that followed the Great Recession of 2007-2009.

HOW LONG WILL IT LAST?

Elevated consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ demand for goods and services. A recovering job market — employers added a record 6.7 million jobs last year and tacked on 467,000 more in January — means that many Americans can continue to splurge on everything from lawn furniture to electronics.

Many economists foresee inflation staying well above the Fed’s 2% target this year. But relief from higher prices might be coming. Jammed-up supply chains are beginning to show some signs of improvement, at least in some industries. The Fed’s sharp pivot away from easy-money policies toward a more hawkish, anti-inflationary policy could slow the economy and reduce consumer demand. There will be no repeat of last year’s COVID relief checks from Washington.

Inflation itself is eating into household purchasing power and might force some consumers to shave back spending.

Omicron or other COVID’ variants could cloud the outlook, either by causing outbreaks that force factories and ports to close and disrupt supply chains even more or by keeping people home and reducing demand for goods.

“It’s not going to be an easy climb down,″ said Sarah House, senior economist at Wells Fargo. “We’re expecting CPI to still be roughly 4% at the end of this year. That’s still well above what the Fed would like it to be and, of course, well above what consumers are used to seeing.″

HOW ARE HIGHER PRICES AFFECTING CONSUMERS?

A strong job market is boosting wages, though not enough to compensate for higher prices. The Labor Department says that hourly earnings for all private-sector employees fell 1.7% last month from a year earlier after accounting for higher consumer prices. But there are exceptions: After-inflation wages were up more than 10% for hotel workers and more than 7% for restaurant and bar employees in December from a year earlier.

Partisan politics also colors the way Americans view the inflation threat. With a Democrat in the White House, Republicans were nearly three times as likely as Democrats (45% versus 16%) to say that inflation is having a negative effect last month on their personal finances, according to a University of Michigan survey.

***

This story has been updated to correct that U.S. economic output dropped at a 31% annual rate in 2020′s April-June quarter, not last year’s