The Knowns and Unknowns of the Economy

Unknowns always exist. Some unknowns are known, and some are unknown. For example, one may know that they do not know calculus, a known unknown. However, there are infinite things that the same person doesn't know that they don't know. In December 2021, Federal Reserve Chairman Jerome Powell said, "No one knows with any certainty where the economy will be a year or more from now." In the same speech, he predicted the economy would expand at a "robust pace" in 2022 but would require a "gradual pace of policy firming." Asset prices are down by double digits, and interest rates have not risen faster in 40 years. There was neither robust growth nor a gradual pace of tightening.

 Treasury Secretary Yellen and every Administration official given a microphone repeatedly said inflation was transitory. Her assessment has changed drastically. She told 60 Minutes on December 11 that inflation will reduce in 2023. "I believe by the end of next year (2023), you will see much lower inflation if there's not an unanticipated shock," said Yellen. Secretary Yellen believes the Fed will still be fighting inflation down to 2% one year from now. 

Throughout the year, the rhetoric surrounding interest rates continued to change. After the first rate hike of 25 basis points (0.25%) in March, the Fed estimated interest rates would need to be around 2% at the end of 2022. Today is December 13, 2022, one day before the final FOMC meeting of the year. The current Federal Funds Rate is 3.75- 4.0%. The market thinks there is a 79.4% chance the Fed will raise rates another 50 basis points (.50%) tomorrow. 

The Fed and Treasury are filled with fancy-degreed economists and have access to the most accurate data. Yet, they have been consistently wrong in their predictions. How should we understand the missing and moving targets? Is there incompetence, malice, or perhaps an unknown skewing their modeling? Are they gaslighting the general inflation expectation? 

Chairman Powell acknowledged the Fed's mistakes in remarks made last month at the Brookings Institute. His candid statement is a wise warning to anyone listening. "We'll continue to make forecasts, but we're going to have to be humble and skeptical about forecasts, I think, for some time. And that calls for a lot of risk  management," said Chairman Powell.

A balanced portfolio consists of stocks, bonds, real estate, and precious metals. Sophisticated investors diversify into other assets also, but these four are the basics. Several theories exist about the best portfolio allocation depending on goals, age, and risk tolerance. Honest advisors will universally recommend reducing risk as you age. Financial advisors recommend between 5-20% of a portfolio in precious metals. For most people, precious metals represent the smallest percentage of their portfolio. 

There is a simple strategy to build a healthy portfolio to weather the unknowns. If you want advice about stocks and bonds, ask a financial advisor. If you want advice about real estate, ask a realtor or real estate attorney. If you want advice about precious metals, ask the precious metals experts at the U.S. Gold Bureau.

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