*“And it is our judgment that we’re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate.”-*Jerome Powell.

A mind-blowing Non-Farm Payrolls Number (NFP), a significant easing of financial conditions thanks to tighter credit spreads and an unbelievable rally in stocks, a slight recovery in housing and auto sales and a bump in Services PMI: The data releases in the past fortnight point out that there is a “big flip” in the macro arena in the US.

The GDP estimates by the Atlanta Fed GDPNow tracker further solidifies the fact:

Starting at just 0.7%, estimates for Q1 real GDP have moved significantly upwards to 2.5%.

Time for introspection?

So, after the latest data releases and especially post the NFP numbers, I introspected profoundly as the inherent strength of the labor market came in beyond anyone’s imagination. Though I have been writing for the last two months that the labor market is incredibly tight due to structural factors (low labor force participation post the pandemic and declining demographics), the strength has perplexed me.

After intense work on past business cycles and brainstorming for hours, I have concluded that this cycle has no historical precedent.

We need to do non-linear thinking, assign probabilities to various outcomes, and quickly adjust our portfolio according to the macro developments, as there are multiple moving parts in the current paradigm.

Today we will first understand in detail the 70s/80s era and then examine various probabilities and the possible economic outcomes.

Let us dig in!