It’s the time of year when C-suites and Boards meet to discuss growth plans for the coming year.
In light of price movements in the financial markets, these discussions are going to be very different from what they would have been a month ago. Borrowing costs are skyrocketing and uncertainty surrounding the economy is quickly turning into certainty that there will be a recession.
Who can justify growth plans in this environment?
There are certainly companies that are doing well and will grow, but at the margin the outlook for business spending is deteriorating significantly and we are rapidly approaching (beyond?) the point where cost cuts and layoffs are coming. .
This is the problem with the blunt instrument of monetary policy. Additional capacity would ease supply chains and bottlenecks while adding competition. Instead, we will get a reduction in that kind of spending.
Many people were scratching their heads two weeks ago when the White House announced the filling of the SPR to $80 a barrel. The reason they published this is because they need the oil companies to drill. Otherwise, there will be a rough shortage later. Right now, it looks like it will strike in 2024. So the Democrats may have saved the midterm elections, but they will be rewarded in the 2024 general election.
Any oil company that was considering growth investments in 2023 has undoubtedly scaled back that now. For the Fed however, it could also boomerang. Lack of investment in all commodities will leave the market short of supply and possibly another price spike down the road.
For every degree of excessive central bank tightening, they will pay the price later.