Recently I saw someone share a clip from their weather app. It said, “Rain expected at 3 pm,” right above a little graphic showing a 30% chance of rain at 3 pm. What’s wrong with that picture?

For years I’ve used a sandpile metaphor to describe complex systems like banking. Keep dropping grains of sand long enough and you will eventually trigger an avalanche.

If a picture is worth a thousand words, this will be the “longest” letter I’ve sent you in a while, as there are quite a few pictures. It may also be the most wide-ranging.

If you read and pay attention to the world, you probably know the recent past pretty well. And if you’re a history buff like me, you also know something about the more distant past.

Debt isn’t forever but can definitely seem like it. That feeling is a clue you have too much debt. Wisely used, debt helps build income-generating assets that pay for themselves. The payments are manageable because you’re also getting something else of value.

Federal Reserve officials like to call their decisions “data dependent.” Business leaders say it a little differently, often “data driven.” The point, in both cases, is something like: “We consider relevant data when making important decisions.”

Assumptions can be wise or unwise. They can be unduly optimistic or excessively pessimistic. Slightly different assumptions can produce giant changes in predicted outcomes. Assumptions are necessary but we shouldn’t make them lightly, nor forget we are making them.

These weekly letters, of which I’ve now written well over 1,000 (plus 7 books and multiple papers and articles), are generally about two broad topics: the economy and the financial markets. While related, these aren’t the same. Good news for one can be (and often is) bad news for the other.

In stock investing there’s a management style called “growth at a reasonable price” or GARP. It seeks to achieve steadier results by avoiding both expensive growth stocks and beaten-down value stocks.

The world’s leading CEOs, politicians, and various do-gooders were in Davos, Switzerland, this week, discussing ways to solve our collective problems and create opportunities for their own companies. The most important conversations were off the record and many of the public speeches were simply performance art.

The Federal Open Market Committee’s 12 voting members differ on where they think interest rates should go this year. But we know they’re unanimously against cutting rates until at least 2024—or at least they were as of December, according to that meeting’s minutes.

Welcome to 2023. It’s Forecast Season on Wall Street, the time when everyone tells us what to expect for the new year. Do they really know? Of course not. Forecasters don’t know, investors know they don’t know, yet we all go through this exercise anyway.

This will be my last letter of 2022. I want to use this letter as a set-up for my annual forecast issue the first week of January. That means we will touch on a variety of topics, kind of a snapshot into where my mind is today. Get ready to travel the world but let’s start at home with the Federal Reserve meeting this week.

Economic news—and market reactions to it—increasingly resemble a tennis game. Spectators follow the ball back and forth, thinking something will happen but usually it doesn’t.

Change is constant, in the economy and everything else. We talk about it often. Yet when we talk about the economy changing, we usually mean the economy’s condition is changing—from expansion to recession, deflationary to inflationary, emerging to developing, etc. That’s different from changes in the economy’s actual structure.

This week, around my trip to a far-too-cold Denver, then to Dallas, and ultimately Tulsa to spend the Thanksgiving holiday with family, Keith and I did a 45-minute "interview" via Zoom. Less an interview, perhaps, than the two old friends catching up. I was surprised how many topics Keith and I aligned on perfectly, though our few disagreements about what comes next made for a great debate.

Financial crises are really about trust. They tend to occur when people lose trust in assets, institutions, or people they had thought trustworthy. Whether the lost trust was a consequence of the crisis, or its cause is a different question. But they do seem to go together.

Early this week, with the severe inverted yield curve and other signals flashing recession, I planned to use this letter to delve into the data. Then Thursday’s CPI data convinced markets to blow the all-clear whistle.

Historically speaking, this phase of life we call “retirement” is a new concept.

I literally grew up in the oil patch: Wise County, Texas, 60 or 70 miles northwest of Fort Worth in a little town called Bridgeport. The two first-generation Greek immigrant brothers who became Mitchell Energy talked old man Christie into funding Christie, Mitchell and Mitchell and they drilled (hundreds?) of natural gas wells which they eventually sold to an Illinois utility. This was in the 1950s and ‘60s.

Sandpiles can be fun. Nothing beats taking kids to the beach (or being a kid!) and watching their creativity blossom into all kinds of magical shapes. The problem with sand construction is it doesn’t last. I have it on good authority that building your house on the sand probably won’t end well.

Today I want to talk about why the labor market is so out of balance. Some of this is new and some has been brewing for many years. We will end with some commentary on yesterday’s unemployment report.

This dark symphony was never going to end without sparking a currency crisis, one which allows countries to blame other countries as the source of their own internal problems. We will see that it’s not always the case.

The world will be going from an era of zero rates and loose monetary policy to higher rates and likely slower growth, except in certain sectors. Adjusting to this change will be both problematic and also full of potential opportunities.

Remember when inflation was going to be transitory? Good times. I was in that camp myself early on, as were some serious analysts I greatly respect (and still do). Then the data began to show core inflation would be stickier than expected, and I turned in my Team Transitory T-shirt. I appreciate people who admit their mistakes. We all make them.

Many ask if Jerome Powell can emulate Volcker. We will certainly find out. But much has changed in 42 years. Does Powell even need to emulate Volcker? Here, some prominent economists disagree. Today we’ll talk about the issues.

Everyone’s inflation experience is unique. We all have our particular spending patterns, so our experience will feel worse if inflation is more severe in the goods and services we normally buy. Or we might not notice it as much as others do.

Our own government cannot afford a short end of the curve much higher than it is now, and our own fiscal and monetary decisions have held down the long end of the curve in what I believe is a multi-decade period ahead that is best referred to as “Japanification”

The latest data shows inflation is still with us at an 8.5% annual rate. That means we can expect the Fed to keep tightening, trying to reduce demand and relieve pressure on consumer prices.

It’s a recession! No, not yet!

While it’s likely we are already in an as-yet-undeclared recession, it’s a very weird one if so. I have lived through quite a few of them and I don’t recall any other recession coinciding with record-low unemployment, plentiful job openings, and jammed airports.

We can draw a direct line from the Fed’s low rate regime to today’s surging inflation, asset inflation, and income and wealth inequality. Low rates produce asset bubbles which ultimately pop, but not before blowing themselves larger and multiplying into other bubbles. The process that pushed stock prices higher is the same one that is now pushing food, energy, labor, and every other cost higher. Just follow the bouncing ball.

These people, whose very job is to know the lessons of the past, either forgot them or chose to ignore them. Today we’ll look at how this manifested in the 2008 crisis period—and set up the conditions we face today.

The economics profession has long had a vigorous academic argument over “natural” interest rates. What would rates be if we could somehow remove all the subjective actors—central banks, commercial lenders, government agencies—that conspire to set them? What would nature do if we left it alone?

Let’s start with a basic question. If you have unused property—cash or anything else—why would you lend it to another party?

Interest rates aren’t simply the price of borrowing money. They are also information, providing signals telling economic players what to do. Interest rates are in fact the price of time. Low interest rates don’t value time very much. Bad signals produce bad outcomes… and that’s where we are now.

Today we’ll look at some evidence this period could even be worse than the 1970s. Then we’ll read the mea culpa regrets of someone who had a big part in that drama.

Complaining about federal debt is a time-honored American tradition. Remember Ross Perot and his hockey-stick charts? Then there was Harry Figgie’s 1992 best-selling book, Bankruptcy 1995. It was quite a sensation at the time.

The chance that all the necessary pieces will line up that way? Somewhere between slim and none, and as my dad used to say, “Slim left town.” And while my memory isn’t perfect, I don’t believe any speaker at the conference believed in the possibility of a soft landing. And even if we get one, we have serious problems that predate this inflation. They haven’t gone anywhere.

It looks like the economy will grow for a while, just not very fast. And we simply don’t know what will happen when the Federal Reserve tightens in the face of a slowing economy.

As with bodily atherosclerosis, curing our economic condition may require lifestyle modifications. But in one sense, it will be even worse: We’re all going to get the cure whether we want it or not. We’ll get its side effects, too… and you can bet there will be many.

The Strategic Investment Conference wrapped up this week with another wave of strong, fascinating speakers and panels. Today I have more to share and, as you’ll see, the plot thickened considerably.

I borrowed this letter’s “Soft Now, Hard Later” headline from Dave Rosenberg. It was the title of his leadoff SIC presentation, for reasons I’ll explain.

My good friend Ben Hunt of Epsilon Theory has written what I think is one of his most powerful letters ever. He’s basically saying the Fed just isn’t going to make it. I wish I had written it. He is such a wordsmith. With that, let’s turn it over to Ben.

If you haven’t noticed—perhaps because you live on Mars—inflation is here. Not just in the US but almost everywhere. Prices for everyday goods and services, including necessities like food, are climbing rapidly. The US Consumer Price Index rose 8.5% in the 12 months through March… and we know it understates categories like housing.

It’s Easter weekend, so we are going to revisit a 2018 letter about the yield curve. The yield curve is much misunderstood and misused by many analysts. This letter will give you the tools to understand the correct importance and relevance of the yield curve. And then, a few comments about Ukraine.

Today we’ll consider the risks to my stagflation forecast. Note that’s different from the risks of my forecast, should it prove accurate. I’ve described those already but it’s important to ask how I might be wrong.

What is in store for the capital markets and the economy in 2022? John Mauldin has dedicated more than 30 years to answering questions like that and keeping people informed about financial risk.

The yield curve is really just a symptom. I like to compare it to a fever—not serious in itself, but a sign you have an infection or some other ailment. An inverted yield curve means something is wrong in our economic body. So today we’ll consider what it means.

Today I want to focus just on good news and sometimes great news. The world is getting better, but it doesn’t make the headlines like the problems and catastrophes do. The byword in newspapers when I was growing up was “If it bleeds, it leads.” Today’s online headlines are even more so. Crisis and gloom sell. Good news, not so much.