Hang On For A Rough Ride

                  As the old saying goes, hang on, things are likely to get a bit rough. I have pulled financial news articles from the past week or so. Financial thinking has been fairly consistent for the past weeks and the most recent 10 days have been fairly typical. By consistent I mean, lots of uncertainty, markets and thinking are moving up, down and sideways most all of the time. Nobody really knows much of anything but there is lots of noise.

First, a good article from Think Advisor (10/24/22) concerning the annual meeting of the Securities Industry and Financial Markets Association (SIFMA), an organization I subscribe to and is very much an industry standard. The meeting is attended by many big wigs from finance and government. Janet Yellen, secretary of the Treasury, spoke at the meeting (more on that later). One of the panel discussions included several business economists discussing inflation and recession among other things. Several are now predicting that there will be a recession in 2023. The participants listed several factors supporting their conclusion. The factors are the same as have been discussed before, inflation being the 800 lbs. gorilla in the room. The article gives some good comments and supports for their conclusions. Much of the current discussion involves estimating and second guessing the Fed and its inflation response. Since the 1970s and Alan Greenspan’s solution to inflation the Fed has been terrified of any type of uncontrolled inflation. The solution in the 1970s just about destroyed the US economy before it corrected itself. Corrected itself is also correct, Alan Greenspan and the Fed did not fix the 1970s economy but they made it possible for it (the economy) to rebalance itself – governments and individuals don’t control economies in spite of what they say, economies control governments and people. The Greenspan solution was one that worked or at least that was what governmental and financial think tank gurus came up with that worked, and it did work. Governmental officials and politicians ever since then will do just about anything to avoid that situation again. The problem is that much of the fiscal and governmental policies of the past 20 years have been such that it supports inflationary growth. Then the loose money supply accompanied with artificially low interest rates (yes, dear reader, rates have been artificially low for 20 years, held down by direct intervention from the Fed which allowed government to pursue its various expansionary agendas) got away from the governmental people as it had to do. The low interest rates and expanding money supply couldn’t go on forever but for 20 years governmental types have been kicking that can down the road until now. That is why the current administration is howling that the current inflation isn’t their fault but they are willing to add to the problem by increasing governmental spending by unprecedented amounts which is very inflationary. Hence, trying to kick the can down the road again but the financial system has reached its limit. Goods and services are not able to absorb the excess funds without adjusting and that means prices have to go up, in this case way up, way fast (the basic definition of inflation) as we have seen in the last 8 months. That is why the big concern. This looks a lot like the inflation rates of the 1970s. The cure is of course, recession, the rapid deceleration of spending and the removal of the excess money from the system. It would really help shorten the recession and cause it to be less severe if government curtailed spending, reduced governmental needs and did not fund new programs without also including revenue sources (net funding). All of which the current administration refuses to consider but instead is increasing spending and unfunded programs. We have to wait for price increases to begin to slow or stop (in spite of the governmental spending headwinds) as supply and demand are brought into closer alignment, i.e. demand does not outstrip supply and so prices are normalized and we don’t have too many dollars chasing too few goods. We have to weather inflation as price and supply try to find some sort of new equilibrium. I am afraid inflation hits very unevenly in these situations. It is inherently unfair, unjust and unkind. 

                Again, the mechanism to get inflation under control or rather, under more control is to dry out the excess money from the economy and that is done by making money more difficult or expensive to acquire and use. It has to cost more. The interest rates we pay is the control mechanism. Hence, the Fed Funds Rate helps increase or decrease what it costs to borrow and use money. In the second article by Reuters (10-24-22), Yellen is trying to make the point that the Treasury is aware of the problems of drying out the economy and at least in the area she has some control over is attempting to assure the financial system that the government is willing and able to keep one of the major secondary problems caused by inflation at bay. The problem is that as the cheap money (low borrowing costs, relatively speaking, caused by very low interest rates) dries up, investors become unwilling to speculate and began to draw their funds out of banks and financial institutions and put it in safer places such as Treasury instruments or cash (again safer is relative). Banks and financial institutions use leverage to earn additional profits by using borrowed money to invest. You take your money, they have to go find money somewhere on a short basis to cover your withdrawals. In the great recession of 2008 there wasn’t enough liquid funds available to meet the withdrawal needs and the government bailed out many financial institutions by printing more money among other things and almost wasn’t fast enough in responding (TARP if anyone remembers). Several big financial firms didn’t survive or were absorbed. Yellen is trying to tell the markets she is aware of the situation and it is under control which may or may not be accurate but we can hope.

                The Bloomberg article of 10-21-22 is a discussion of what Fed Funds Rates may be and why or why not. There is some speculation that Fed Funds rates may need to be as high as 4.75% - 5.0%. The Fed is trying to give the impression of controlling inflation and the financial institutions are trying to act like the Fed has some control. Both are incorrect. The Fed can’t “control” inflation and financial institutions are not really supporting the Fed but trying to find any place to hide away from the train wreck that is coming. As an aside, the financial economists are having a heyday because they can predict just about anything and there is a pretty good chance they will be correct at some point, for a change. Watch to see who claims they got the forecast right and what part of the forecast in the next 18 months or so. I need to flog a dead horse again. The Fed can not control inflation with any kind of fine tuning. Watch and see, at the very most they can nudge the inflation rate around. The Fed will get this whole process wrong (as measured by various financial institutions, markets and money gurus). But they may be able to influence inflation to some extent. According to the people in the know (don’t trust the people in the know), the Fed started raising the Fed Funds Rate to late or too early, they will not raise it fast enough or they will raise it too fast, and they will overshoot how high and for how long rates need to stay up and they will either not decrease rates fast enough or too fast on the back side of things. They will not be able to stop the inflation rate from gyrating all over the place, both up and down and they will likely completely miss their target inflation rate of 2.0% by a wide margin. The final solution to the last point will be that the Fed will change the target inflation rate to something other than 2.0%. In two years the Fed will declare that they beat inflation and it is now tame again at whatever rate they decide on. Again, not accurate (notice I didn’t say not true) as the Fed never has really been able to control inflation but rather sets a rate (for the last several years, 2.0%) that somewhat matches the ongoing economic activities. There will be more articles about the Fed and its “fine tuning” the Fed Funds Rate in the coming months. Don’t be fooled by the noise.

                The final article is a bit of fluff about the resignation of Prime Minster Liz Truss (Britain) after just 44 days in office. She has the distinction of being the shortest serving prime minster in history. Many of her problems were caused by very aggressive economic policies that were considered too radical for the times. Just a reminder why governments tend to be slow and ponderous in their decisions and a good example of why we have had 20+ years of expansion in this country. It is too politically difficult to change things and who wants to rock the boat, even if it needs it until there is some kind of popular uprising that is consistent with the political leaders thinking. A good example is the case of Ronald Regan and the then new thinking of supply side economics which was a good thing.

 

Articles referenced;

https://www.thinkadvisor.com/2022/10/24/bofa-economist-i-dont-see-how-we-avoid-a-recession/

https://www.reuters.com/markets/us/yellen-says-taking-steps-enhance-treasury-market-funds-resilience-2022-10-24/

https://www.bloomberg.com/news/articles/2022-10-21/fed-officials-expect-debate-on-rate-peak-and-when-to-slow-hikes

https://www.bnnbloomberg.ca/markets-are-calling-the-shots-uk-traders-react-to-truss-exit-1.1835289

The Whirlwind of Financial News

 

    “Round and Round she goes, where she stops nobody knows.” The phrase was used by the Major Bowes Original Amateur Hour, a radio show that ran from 1934-1948. However, I think it also describes our current economic and financial situation to a tee. I present to you 3 themes from this week’s news feeds that are “round and round” or in my mind, or more of the same. The news themes are; (a) vanishing liquidity and its impacts, (b) impacts of slowing economy, specifically in this article as it relates to investors, and (c) Dow Jones is down… again. However, since it isn’t zero that means there had to have been some ups somewhere.

            Bloomberg is reporting in its article of 9/12/22, titled Vanishing Bond Market Liquidity Bad for Fed Balance Sheet Unwind, that the Fed program to reduce its balance sheet may be headed for the rocks. The article discusses the tightening liquidity in the short term money market and how that may make it more difficult for the Fed to reduce its balance sheet. The article is fairly esoteric but the bottom line is the possible recession is making the drawdown of the Fed balance sheet more difficult and uncertain. The high balance sheet makes it more difficult for actions the Fed takes to have as much impact as it may, i.e. there is little or no room to flex monetary  policy to change the impact or likelihood of recession. With Pres. Biden’s  Inflation Reduction Act which really doesn’t reduce inflation pressures as much as it adds to the balance sheet you can see that the Fed is being painted into a corner. The current Fed policy of increasing Fed Funds Rate to try to tighten spending (reduce it) is being offset by the Inflation Reduction Act which is expanding monetary policy. The Fed’s only possible response is to raise its Funds Rate high enough to put a damper on inflation caused by excess money in the system, which the president just increased by a tremendous amount. This does not bode well for an economic “soft landing” as proposed and suggested by the Fed and pushed by Administration personnel, i.e. the Treasury Secretary, and of course the president, amount others.

            In the second article UBS Bank suggests its clients are becoming more cautious in their money management and involvement. The Reuters article titled, USB CFO sees increased client caution as global economy slows discusses the decreased activity by bank clients in the world financial systems. This would mainly be the large bank clients involved in the world markets. The article discusses how this is putting downward pressure on bank revenues as their revenue tends to be based on transactions, fewer transactions generates less revenue. The important part of the article is that the financial markets impact is worldwide. The bank is attempting to assure bank investors they (the bank) recognize the problem and as with all situations like this, they are not responsible for declining revenue as no one could have foreseen this. This seems like some attempted fancy footwork to distance management from what it sees as a likely downturn in revenue. The bank is betting on economic slowdown at best and, I suspect, recession at worst. They are declaring they are not responsible.

            Finally CNBC is reporting another stock market down record in its 9/13/22 headline, Dow tumbles 1,200 points for worst day since June 2020 after hot inflation report. This is a good article to show the up and down and down and up nature of markets in troubled (meaning uncertain) economic times and the reporting by news organizations on such things. Notice two things about the headline, one, the Dow is moving 1,200 points, in this instance down. That is about 3.9% as reported in the article. The second thing is this is the largest change in 2 years. The first statement implies that 1,200 is a big deal the second statement suggests that it isn’t that uncommon, only 2 years since the last time we had such a shift. Somewhat contradictory statements. The article states the drop erased “nearly all of the recent rally for stocks”. You will not easily find articles on stocks increasing 1,200 points recently but you will and do find many articles on stock decreases.  Part of the reason for not finding articles on increases is they tend to be a bit more gradual. I do believe there have been some recent trading days that were up a lot though they are a bit more difficult to find. It’s important to weigh any major swing reported in the news in light of just how significant it is. One of the definitions of economic upheaval is wild and vicious swings. You should look at this as a general reporting news story. Try to separate the facts and figures from the color commentary.

            In conclusion, stuff happens. Markets, interest rates and prices go up and down, many times violently in an economic upheaval (think pre-recession – recession). If all the negative news of the last little while were added up the Dow Jones Industrial Average would be at zero or below. It is down, admittedly, but not zero and actually closer to its high or sitting at about 31,000. It may fall 10-15% total from the recent high to whatever its low point will be before it recovers. We won’t know until after the fact what the total fall may have been, or when the recession started or when we have officially recovered. We had our annual meeting with our financial advisor a couple of weeks ago. Parts of our portfolio are definitely down from last year but they had been up a great deal previously. Other parts are holding fairly steady and some parts are actually benefiting from the increasing interest rates. So, balance in life and investments is helpful. Hang in there we will make it through this. Live, love, and enjoy life. There is much to be grateful for and thankful for.

Bloomberg article:

https://www.bloomberg.com/news/articles/2022-09-12/vanishing-bond-market-liquidity-bad-for-fed-balance-sheet-unwind

REUTERS article:

https://www.reuters.com/business/finance/ubs-cfo-sees-potential-higher-dividend-next-year-2022-09-13/

CNBC article:

https://www.cnbc.com/2022/09/12/stock-futures-are-higher-as-wall-street-awaits-key-inflation-report-.html

The Fed and Beating Up Inflation

 “The beatings will continue until morale improves.” The author is uncertain but  it is the correct statement for the current economic situation. The beatings are, of course, increases in Fed Funds rate and morale is an improving inflation rate. We, the general public, are the implied beaten person. I have 3 main articles I am drawing from for this post regarding economic conditions, the Fed and other central banks responses and expected outcomes, i.e. what the officials want/hope with all their hearts.

The first and oldest article is from Reuters of July 22^nd titled “Analysis: R.I.P. forward guidance: Inflation forces central banks to ditch messaging tool”. The article is referring to central banks and their guidelines or projections of interest rate changes in the Fed Funds Rate or equivalent central bank rates for other countries. For many years central banks have given a longer term estimate of rates changes. Since June of this year, the Federal Reserve has stepped away from that policy when they raised rates by 75 basis points (bp). Previously they had said they expected 50 bp increases for some time. Instead they raised it 75 bp. Other central banks have raised their equivalent funds rates by wildly differing amounts from their stated goals. This goes back to the old saying, don’t telegraph your plays if you don’t want the opponent to sack your quarterback. The our team in this is the Federal Reserve, the opponent is the stock market/investors and the sack is the ability of the Fed to influence inflation rates. We talked about the market anticipating changes and therefore the change not having the same punch. The Fed and other Central banks have given notice they are no longer going to telegraph their plays. The outcome will be greater volatility in all interest rates and the markets (much wider and wilder ups and downs). The Fed’s hope is that they will have a greater impact on inflation. Again, remember that the Federal Funds Rate which the Fed controls is not a finely crafted and precise economic instrument that the Fed can wield with dexterity, grace and fine precision (regardless of what some in the media, talking heads, and governmental officials may suggest). It is a massive, unwieldy, gross (meaning large and ungainly), ugly (meaning exactly that) blunt force trauma inducing massive piece of economic plate iron. It is about as finely controllable as trying to hit a large, ugly rat (inflation) on a sidewalk by dropping it from a 10 story building onto that same busy sidewalk. The goal is to get the rat and miss the people, streetlights, cars, prams, butterflies and in fact the sidewalk. You will likely get the rat after a number of drops but,…. you will not be able to avoid the non-combatants (i.e., all the non-rat things) regardless of the precision of the drop. Now the governmental response to all this. From July 24^th Reuters article titled,

“U.S. economy slowing but recession not inevitable, Yellen says”.  “I’m not saying that we will definitely avoid a recession,” Yellen said. “But I think there is a path that keeps the labor market strong and brings inflation down.”

Some of the current debate is if we have entered a recession now or not. That kind of thinking is dangerous for the current administration who claims to have things under control or moving in the right direction or improving or something. You may have heard something about redefining what is a recession. The only ones who can declare recession or end of recession is the independent private research group tasked with that job. Governmental administrations try to influence public opinion and other groups but that is all it is, attempted influence.

The last article is from CNBC of August 3^rd. “Fed’s Bullard sees more interest rate hikes ahead and no U.S. recession.” That is the great goal, increase the interest rate (Fed Funds Rate) which will slow inflation, which is running at 9.1%, and do that with ­no recession. And if we really are in trouble we can try to adjust the definition of recession.  Quoting from the article.

“St. Louis Federal Reserve President James Bullard said Wednesday that the central bank will continue raising rates until it sees compelling evidence that inflation is falling.” …“We’re not in a recession right now. We do have these two quarters of negative GDP growth. To some extent, a recession is in the eyes of the beholder,” he said. “With all the job growth in the first half of the year, it’s hard to say there’s a recession. With a flat unemployment rate at 3.6%, it’s hard to say there’s a recession.”

 Again, pick and choose your variables (a very econometric way to do things) and highlight what appears important to make your case which is not unreasonable but you as the reader need to be aware of what is being said and not said by such statements. Bullard is laying out some hard “facts” while not saying just when they will do things (no play telegraphing). The Fed sees the large, ugly rat on the sidewalk (inflation). They tell us they are now focused on the rat. They have their tool to deal with it which many imply is an elegant piece of economic equipment and they are willing to employ it with all the finesse of the large piece of plate iron it is. Elegant no, effective, likely. We are also told they will use it several times, as necessary, to get this rat. You (the public) may be assured and comforted. That is especially true if you like large plate iron induced headaches.

So gentle reader, do I think we are in a recession? The National Bureau of Economic Research (NBER) will look at the data, after the fact, and declare if there has been one. No one else can do that. The more important questions are how will inflation, shortages, supply chain bottlenecks, wages, job stability and the host of every day, individual and personal impacts affect our ability to grow, love, learn, help, serve and enjoy life and loved ones. I don’t know about a recession by the definition but I do know I need to take time for the more important and personal challenges and opportunities around me. We have had recessions before, we will have them again. Let’s get on with living and doing the best we can under the circumstances.  

Articles quoted / cited:

https://www.reuters.com/markets/europe/rip-forward-guidance-inflation-forces-central-banks-ditch-messaging-tool-2022-07-21/

https://www.reuters.com/markets/us/us-economy-is-slowing-recession-not-inevitable-yellen-says-2022-07-24/

https://www.cnbc.com/2022/08/03/feds-bullard-sees-more-interest-rate-hikes-ahead-and-no-us-recession.html

Kitten on a Mission - How Things Change

 Notice how a kitten will jump on anything and everything and is easily distracted. This applies to governmental officials, financial professionals and financial news organizations.

The National Bureau of Economic Research is a private organization responsible for calling the official timing of a recession. It states a recession “is a marked declined across the economy in a range of indicators, including the labor market, investment and spending.” Usually people tend to look for 2 quarters of downturn in several indicators including GDP growth (negative), employment (negative), consumption and spending and other financial measures such as an inverted yield curve. Many of these measures can be analyzed by month, which is 5 months shorter than the classical 2 quarter+ measurement of the official bureau. That is why we get the range of dates or even no date on recession estimations. The only one officially recognized to call a recession tends to use at least 2 quarters of historical data before they make a pronouncement.

                With that in mind let’s turn to some news stories. From June 6^th, BNN Bloomberg (Canada), the headline reads “Powell says soft landing ‘very challenging,’ recession possible.” The article suggests that “Powell has given his most explicit acknowledgment to date that steep rates could tip the US economy into recession, saying one is possible and calling a soft landing ‘very challenging” ‘. Notice that the language is still couched and nuanced and leaves much room to wiggle. He still leaves a way for the Fed to claim that they are not forecasting a recession, yet. In spite of the hikes in the Fed Funds Rate and the reduction of the Fed balance sheet. The article discusses Powell’s reactions and actions to inflation reports. Republican have recently been blasting Powell for not jumping on inflation sooner by raising rates faster. Again we have the current bandwagon of thought. Watch as comments shifts back and forth. Powell didn’t do enough, Powell did too much. Remember, the Fed has a sledge hammer to deliver adjustments and the talking heads including Congress are reacting as if there is a precise tool. There isn’t and they (Fed) can’t use it that way (with precision). The Fed has fostered this thinking which is bringing the problem back to roost (as the saying goes) by their own past statements and actions. They act as if they can precisely control inflation and growth. They can’t. So when they get called out for not being able to steer the economy they have in large measure brought it on themselves by implying they can control. Again, they can’t. Expect to see more and harsher statements especially from Congress and talking heads.

                Moving to the 2^nd article, from Politico of 7/04/2022. Tag line is “President Joe Biden says ‘there’s nothing inevitable’ about a recession in the U.S. Right…., and where is the rest of the statement the country asks? Many are saying the president is a lone voice in the noise of recession and he probably is at this point. This is pure politics. Since the president can’t (or shouldn’t) try to influence the Fed which is supposed to be independent by definition, the president can make calming public statements and call Powell privately in desperation. Several Democrats are on record as suggesting this recession thing is not a big problem, we just need to spend more.

                The 3^rd article is from BNN Bloomberg of 7/07/2022. The tag line reads, “US recession is already here, according to Wells Fargo Investment Group”. Think back to our previous blog on economic / financial forecasts and notice that here we have the first news grabbers with a new story or new twist and trying to get out front of the news competition. We can see the progression of news stories as we went from no recession to possible recession to more likely recession to predicting recession in the future (from middle to end of 2023) to now we are in a recession. Pure news grabbing. Watch to see of others will jump on this bandwagon or if they suggest something else. Regardless they (the newsies) have a new and exciting twist to write about which generates copy (not necessarily good copy but copy).

                What to do. Slow and steady wins the race or in this situation slow and thoughtful keeps their sanity. You know the news articles and newsies are going to jump on everything just like our kitten does. Their attention is divided so many different direction (very much on purpose) because it generates pages to read. Again, there are few if any consequences in reporting so you have to be selective in what you read. Watch for things to settle out a bit and see. A good example is the recession. Since the first of the year the talking heads started as recession was not likely but a possibility to now a recession is likely and may be as early as next year. I don’t give much weight to the Wells Fargo comments about the recession has started because it is the first mention (a kitten pounced on something let’s all look). That makes it a new idea and someone was trying to get the jump on everyone else. If they are wrong it doesn’t matter to them. It’s news. Remember, slow and thoughtful helps you keep your financial sanity. You don’t have to react to every new thing. Paraphrasing what President Brigham Young was supposed to have said to the woman who came in for counseling, “Well sister, if your husband tells you to go to hell, well just don’t go.” If the newsies, financial pundits and governmental officials tell you we have to jump, well, just don’t jump (wait and see). Regardless of their screaming we will figure it out. Earplugs help. Enjoy family, friends and your favorite sport or book, take a walk, do something fun and relaxing. The screaming, finger pointing and loud noises will still be there when we get back and maybe, just maybe, there might be some calmer voices with some real, helpful information. We can always hope.

 

https://www.bnnbloomberg.ca/powell-says-soft-landing-very-challenging-recession-possible-1.1782346

https://www.politico.com/news/2022/07/04/recession-talk-surges-in-washington-00043818

https://www.bnnbloomberg.ca/us-recession-is-already-here-according-to-wells-fargo-investment-group-1.1789170

 

The Art of the Economic / Financial Forecast

 

 

        Have you watched a child finger paint recently. Some start slowly then add more colors or big swirls. Then at some point mix the colors all together and want to start over. That is a good analogy for today’s markets and the forecasts that are being generated by various parties. What can you make from the mess? There are some nuggets in the mess but they may be more related to the process than the actual information provided. Economic / financial forecasting has a sequence to it. As a new problem is perceived the individual members of the reporting community try to grab the initiative on the other community members by reporting something fastest and loudest. There usually isn’t much substance and very little analysis to the first reports / analysis, mainly noise to generate interest. Quick charts and graphs will be added to give substance but may not be of much value. As the issue develops more concrete information is included as it becomes known, statements from officials, past trends that are thought to be similar to the current unfolding situation. Remember, the new problem has not really developed yet so any comparisons to past data are wild and loose. But there will be charts and graphs and comparisons. As the situation develops, conjectures, suppositions, ideas, comparisons and theories will be put forth and discarded at a rapid rate. There should be lots of conflicting opinions and conflicting charts and graphs. As the situation further develops the initial flurry should settle down a bit with more concrete information based on actual current data. Opinions on the meaning of the data will still swing wildly and there will be many interpretations and many conflicting points, still. At some point the data will tend to support a particular analysis. All the other conflicting statements will be forgotten or just dropped and there will be some general pronouncement from some official, governmental or business leader that many if not most will agree with. There will be a short period of quiet or something like a breather then some news group will perceive a new problem and away they all go again with the reporting community trying to grab the initiative. Several new problems may be simultaneously running depending on the particular economic climate. Our current climate is very conducive to the multiple current problem scenarios. The news groups love this type of environment. There are so many possible new problems that many groups have the opportunity to be first on something. This is the time for them to be looking and jumping on and at any and every new piece of information and rumor.

                So, what are you to do. Take it slow and easy on the new news. Wait for a theory or idea to stand some test of time. As an example, I quote from a CNN Politics article of June 1^st ,Treasury secretary concedes she was wrong on ‘path that inflation would take’ and which were also referred to in a Reuters article of June 7^th, Yellen says inflation to stay high, Biden likely to up forecast,

“US Treasury Secretary Janet Yellen admitted Tuesday that she had failed to anticipate how long high inflation would continue to plague American consumers as the Biden administration works to contain a mounting political liability.

"I think I was wrong then about the path that inflation would take," Yellen told CNN's Wolf Blitzer on "The Situation Room" when asked about her comments from 2021 that inflation posed only a "small risk."

The admission was the latest indication that the administration's expectations of a normalizing economy were thrown into disarray by the continuing pandemic and the war in Europe.

"As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn't -- at the time -- didn't fully understand, but we recognize that now," she said.

Yellen and other White House officials once framed inflation as a temporary side effect of the economy returning to normal following the pandemic, pointing to snags in supply chains and demand outstripping supply.”

Yellen has taken more responsibility than is usually done for her comments. The market did call her out on it however. Notice the time frame is 6-8 months,  much too long to wait in the news hungry environment that requires snap statements and quick facts and figures.

                What then are some of the new, new problems that the news folks are jumping on. Stagflation is now starting to show up in articles, recession is much more common and is expected to occur in 2023. The discussion is now when in 2023 for recession, some are saying 2^nd quarter, others late in the year. The shouting has gone from no recession or few saying it was possible, including the governmental officials, to many saying recession is possible even likely. Notice there hasn’t been as much said (or at least not said by the mainstream newsies) about supply chain bottlenecks or the Ukrainian war. Employment figures have become sparce in the last little while. The stock and bond market movements are getting some attention on a periodic basis, mainly when a new high or low is hit. Notice I didn’t specify just how high or low or how relevant it might be. Movement is what seems to be interesting the newsies. Again it comes back to volatility and uncertainty. With uncertainty newsies can make wild statements and maybe they get it right. If they don’t there is very little consequence to being wrong. Remember that, no or very minor consequences for being wrong. Look at Yellen and Powell. No job loss, little or no censure but it is important to have an excuse, the greatest one is “unforeseen circumstances”. In that context everything can be considered unforeseen.

                Good luck and hang in there. Take everything with a grain of salt until some time has passed. Remember the definition of recession requires a look back meaning that we have to have historical data meeting certain criteria before a recession can be declared. It is past tense. We won’t know when a recession has started until after the fact. Many financial situations are like that. It’s not worth getting worked up and panicky about. Enjoy life, family, friends and the beauties around us.  

CNN Article

https://edition.cnn.com/2022/05/31/politics/treasury-secretary-janet-yellen-inflation-cnntv/index.html

Reuters Article

https://www.reuters.com/markets/us/us-faces-unacceptable-levels-inflation-yellen-tells-senators-2022-06-07/

 

 

Cat on a Hot Tin Roof – Some Explanations and Information

A cat on a hot tin roof is the appropriate image for how the financial markets and economies feel and are reacting at the moment. An avalanche of commentaries and volumes of data are pouring into and being poured over by a myrid of individuals, specialists, talking heads, and governmental bodies. There is no shortage of information, opinion, comment, commentary, noise and confusion. I have found a couple of articles over the past 2 weeks I think may be interesting and helpful. I am including them in their entirety.

Some observations. Quoting from the first line of the Bloomberg article, “The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks.” That sums up exactly what is happening. That is the 900 lbs. gorilla in the room. If or when it breaks, that is recession. The 2^nd article from the Spokane Review (originally from Bankrate.com) is a pretty good discussion on how rising interest rates may impact various financial instruments. Remember, don’t focus on the hype language. Look for the solid information. Good luck. Hang in there and don’t panic.

https://www.bloomberg.com/graphics/2022-world-economy-wall-street-market-worries/

Bloomberg

Everything That Could Go Wrong in Markets as Free-Money Era Ends

By Jack Pitcher, Alexandra Harris, and Alex McIntyre

May 9, 2022, 6:00 AM MDT

The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks. Struggling to tamp down the most pervasive inflation in decades, the Federal Reserve delivered its biggest interest-rate increase since 2000 last week while outlining a plan to begin unwinding trillions of dollars in asset purchases that have kept world markets brimming with cash since the 2020 crash. Its peers will soon follow suit. Bloomberg Economics has estimated that policy makers in the Group of Seven countries from the European Central Bank to the Bank of Canada will shrink balance sheets by about $410 billion combined in the remainder of 2022.

Yet it all comes at one of the most precarious times in recent memory for the global economy. Russia’s war in Ukraine, and the bevy of sanctions that followed, have upended business. Supply chains that were disrupted by the pandemic have grown even tighter, causing chaos for companies lashed by soaring prices for everything from labor to commodities. The worry now is whether central banks can accomplish the high-wire act of weaning Wall Street off unprecedented stimulus, without disrupting the flow of capital and tipping economies into recession.

Bloomberg News canvassed traders, money managers and analysts on their top market indicators to track corporate distress, liquidity shocks and cracks in the financial plumbing. We then analyzed decades of price history to identify the systemic turning points — when central bankers on a hawkish mission risk crashing the real economy.

While there’s little sign of widespread stress yet, some barometers of cross-asset health are moving closer to the danger zone. All that suggests investors are in for a bumpy ride as the Fed drains its unprecedented liquidity measures.

Here are four indicators keeping Wall Street worrywarts on edge.

1. An Upside-Down Bond Market

Like it or not, the U.S. Treasury yield curve remains the top dog economic forecaster on Wall Street — even if the Fed’s bond-buying spree in the pandemic has distorted its message. In normal times, when the business cycle is in good health, the interest rate on debt maturing in, say, 10 years, will be higher than that on shorter-term securities as investors demand more compensation for the risk that inflation down the road will erode returns. If the opposite happens, meaning short-term rates are higher than the longer term, the foreboding dynamic is known as an inversion — signaling a bet that the central bank will eventually have to cut rates in order to salvage growth.

While not every inversion in the yield curve has led to a downturn, prolonged distortions have become eerily accurate, especially when two of the most widely followed curves become inverted at the same time, data compiled by Bloomberg show. Since the beginning of the 1990s, whenever yields on both 3-month Treasury bills and two-year notes have risen above the rate on 10-year bonds, a recession has followed almost without fail within the next six to 18 months. It's a simplified measure — the most recent double inversion preceded a pandemic that no one saw coming — but big moves in yield curves have kept Wall Street on edge recently.

In late March and the start of April, the gap between two- and 10-year yields briefly inverted before normalizing, reflecting market angst that the Fed’s mission to aggressively tighten policy risks sparking a recession by ramping up the cost of money and thereby constraining consumer spending as well as business activity. At the same time, the spread between the three-month Treasury bill and the 10-year yield has been heading in the opposite direction, suggesting a still-healthy outlook for U.S. investment and consumption that gives the central bank room to make good on its policy-tightening plan.

For now, yield-curve worriers are easy to find as the end of the easy-money era rocks global markets. Already this year, the Nasdaq 100 index of technology shares has had the worst start in decades, speculative stock strategies have lost billions and cross-asset volatility has spiked all over the world.

PGIM Chief Executive Officer David Hunt warned last week that signals in the bond market suggest a significant risk of a recession in 2024, while Citadel’s Ken Griffin said the outlook is the most uncertain since the global financial crisis.

2. Disruption to the Flow of Credit

U.S. companies have lost their ability to borrow money at ultra-cheap rates, a direct function of the Fed’s mission to cool the red-hot business cycle that’s stoked inflation for everything, everywhere all at once.

But when borrowing costs surge too far, too fast, the flow of corporate credit can become disrupted or even blocked entirely. In extreme instances, healthy companies can lose access to funding, wreaking economic havoc. This happened most recently during the onset of the pandemic, which forced the Fed to take unprecedented action to keep corporate America afloat.

The most widely followed credit gauge is the additional yield over Treasury bonds that investors demand to hold debt from the largest and strongest U.S. corporations. Currently, the spread on a Bloomberg index of U.S. investment-grade bonds has risen to 1.35 percentage points, from as low as 0.8 percentage point in June 2021, signaling higher borrowing costs that still sit below a key threshold for stress.

When the spread rises above 1.5 percentage points, it’s a warning sign that credit markets could seize up, making borrowing a lot harder, according to analysts and investors informally polled by Bloomberg. The metric has proved a reliable red flag in the past after crossing 2 percentage points in the volatile years after the global financial crisis and during the pandemic fallout.

To illustrate how the flow of credit across the entire U.S. economy can constrict, Bloomberg examined commercial and industrial loan data from all commercial banks, published monthly by the Federal Reserve.

The analysis, dating back to 1989, shows that when investment-grade credit spreads approach and exceed 2 percentage points, a threshold that’s been crossed just six times over that period, a contraction in loan growth almost always follows.

In January 2008, for example, borrowing costs for investment-grade companies soared to more than 2 percentage points for the first time in more than five years. Risk premiums remained above that level for nearly two years, and a prolonged slowdown in commercial and industrial loan volumes came next. Loan volumes fell for two years beginning in November 2008, causing historic damage to the world economy.

More recently, credit spreads spiked to over 3.5 percentage points in the March 2020 selloff. Yet some of the easiest borrowing conditions on record took hold in the following year as the Fed pumped liquidity into the financial system and even offered to buy corporate bonds directly.

Now premiums are back on the rise and company debt is becoming volatile. Investors and companies alike will be watching whether borrowing costs spike into risky territory that would disrupt the flow of credit once more.

3. The Junk Penalty

Borrowers with weak balance sheets were given a reprieve after the Fed and other central banks rode to the rescue in the dark days of the pandemic. For the better part of two years, credit was dirt cheap and defaults became virtually non-existent. But the liquidity party is coming to a rapid end as interest rates rise — with new speculative-rated debt offerings this year falling to the lowest volume since 2009.

A recent bond sale from Carvana Co., for example, initially struggled to attract investors, and the used-car company ended up paying a whopping 10.25% yield while buyers demanded a clause intended to help shield them from losses if the company were to head to bankruptcy court. Similar cases abound.

A measure investors are watching closely is the extra risk premium that bond buyers demand to own debt from the lowest-rated companies compared to investment-grade peers. Call it the junk-bond penalty. When this premium goes up, it makes borrowing more costly and less accessible to issuers who need the funding the most, especially those who have poor credit ratings due to weak cash flows or high debt loads compared to their earnings.

If firms that have limited money on reserve and debt coming due in the near future lose access to primary markets, that makes defaults and bankruptcies more likely — bad news for growth-minded policy makers at the White House.

For most of the post-pandemic era, junk-rated companies across the globe paid little more to borrow than some of the biggest corporations — an average of just 2.4 percentage points more during 2021, a year that saw some of the easiest credit conditions ever, according to data compiled by Bloomberg. That made corporate failures exceptionally rare. But the tide is starting to turn. The junk penalty climbed above 3 percentage points last week. While that’s below the historical average of about 4 percentage points, the fast pace of liquidity tightening could soon cause trouble for the most vulnerable of companies. Since 2000, when the junk penalty has climbed above 5 percentage points and held above that level for an extended period, defaults have almost always risen above the historic norm, data compiled by Bloomberg show.

4. Short–term money markets crack

The Fed’s massive pandemic stimulus program caused excess liquidity in the financial system to balloon, with banks flush with record cash in the form of reserves. Now, as the monetary authority begins to pare a $9 trillion balance sheet, a process known as quantitative tightening, Wall Street is on high alert for any resulting logjams in the financial plumbing.

When the Fed starts to shrink asset holdings — by simply not replacing maturing securities — there will be an increase in the number of Treasuries and mortgage bonds in search of a home in the private sector. And the amount of reserves held in the banking system will fall by design.

No one knows how any of this will ultimately play out. But the last time the central bank embarked on quantitative tightening, bad things eventually happened in late 2019. Banks saw their reserves fall sharply — fueling a disruptive spike in interest rates on so-called repurchase agreements, a keystone of short-term funding markets. That caused liquidity headaches all around and forced the central bank to intervene in the funding markets.

The Fed has since implemented additional tools to help reduce these liquidity risks. But all bets are off. Some two and half years ago, total reserves held by depository institutions at the Fed slid to around $1.4 trillion. That was enough to cause liquidity issues in overnight lending, even though banks at the time considered $700 billion as the lowest threshold for comfort.

This time round, Barclays Plc estimates the tipping point at some $2 trillion versus $3.3 trillion currently. All this is guesswork with few historic precedents, so the reserve level will be a key focus for risk watchers well before it hits this point.

All in, traders around the world are bracing for a disruptive tightening in financial conditions on multiple fronts, from bonds and credit to money markets, as the Fed spoonfeeds markets with liquidity no longer.

“We have never been able to reduce inflation by more than 2 percentage points in the U.S. historically without inducing recession,” said Guggenheim Partners Chief Investment Officer Scott Minerd at the Milken Institute Global Conference in Los Angeles. “I think that it's going to be really hard for the Fed to maneuver into a soft landing.”

https://www.spokesman.com/stories/2022/may/09/biggest-winners-and-losers-from-the-feds-interest-/

The Spokesman Review - Spokane, Washington

Biggest winners and losers from the Fed's interest rate hike

Updated: Mon, May 9, 2022

Spokane, Washington

James Royal    Bankrate.com (TNS)

Last week, the Federal Reserve announced that it’s raising interest rates by half a percentage point, bumping the federal funds rate to a target range of 0.75 to 1.00 percent. The move follows an increase of 0.25 percent in March, as the Fed continues reducing liquidity to the financial markets to help tamp down soaring inflation.

The central bank also announced that it was further reducing stimulus to financial markets by letting its holdings of bonds decline over time. The Fed will work its way up to letting about $95 billion in bonds roll off its balance sheet every month, reducing liquidity by about $1 trillion per year.

The Fed’s move comes as inflation rages in the U.S. economy at the highest annual rate in some 40 years, hitting 8.5 percent in March. With the Fed hitting the brakes on an overheated economy, the main question for many market watchers is how fast Federal Reserve Chairman Jerome Powell & Co. will continue to raise rates.

“The Federal Reserve is behind the curve on inflation and has a lot of catching up to do,” says Greg McBride, CFA, Bankrate chief financial analyst. “This means rate hikes at successive meetings for the first time in 16 years, and for the first time in 22 years, a larger half-point hike.”

At about 3 percent, the 10-year Treasury bond is now at its highest level since late 2018, as markets price in the expectation of sustained inflation and rising rates. After some ups and downs in 2021, the benchmark bond has soared since December 2021 and especially since the start of March, when it sat at just 1.65 percent.

As the Fed embarks on what appears to be a longer period of raising rates, here are the winners and losers from its latest decision.

1. Mortgages

While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield zooming higher in recent months, as the market prices in expectations of the Fed raising rates, mortgage rates have risen alongside them.

“Mortgage rates have bounded higher by 2 full percentage points since the end of 2021, one of the largest and fastest run-ups in history,” says McBride. “Mortgage rates move well in advance of Fed action and the outlook for inflation and the economy will be the key determinants of what we see with mortgage rates in the months ahead. Until we see signs inflation has peaked, the risk is definitely to the upside.”

The run-up in rates – following the rapid rise in housing prices over the past couple years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.

So would-be homebuyers are worse off by the rise in rates.

2. Home equity

The cost of a home equity line of credit (HELOC) will be ratcheting higher, since HELOCs adjust relatively quickly to changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers.

Those with outstanding balances on their HELOC will see rates tick up, though interest expenses may continue to be low historically. A low rate is also beneficial for those looking to take out a HELOC, and it can be a good time to comparison-shop for the best rate.

But with rates moving higher, even a little bit, and the expectation that they’ll move higher still as the year progresses, those with outstanding HELOC balances should expect to see their payments continue to rise in the near term.

3. Credit cards

Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will move higher now.

“Credit card rates will march higher in step with the Federal Reserve, and often follow within one or two statement cycles,” says McBride. “Pay down credit card debt now because it will only get more expensive and you don’t want that debt hanging over your head, should the economy topple into recession.”

If you have an outstanding balance on your cards, then you’re going to get hit with higher costs. With rates projected to rise for a while, it could also be a welcome opportunity to shop for a new credit card with a more competitive rate.

Low rates on credit cards are largely a non-issue if you’re not running a balance.

4. Savings accounts and CDs

Rising interest rates mean that banks will offer rising returns on their savings and money market accounts, but will likely adjust their yields at a measured pace.

Account holders who recently locked in CD rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.

Those with savings accounts may look forward to rising rates, but it’s off a low base, as most banks quickly ratcheted rates to near zero following the Fed’s emergency cuts in March 2020.

“Yields on certificates of deposit have started to pick up and we’ll see the same in savings yields, although with a bit of a lag,” says McBride. “The outlook for the next year or so is much better than what savers have endured over the past three years, where rates fell and then inflation took off.”

“It will take a while, but as rate hikes continue, the returns savers get will rise and inflation will hopefully decline,” he says.

Savers looking to maximize their earnings from interest should turn to online banks, where rates are typically much better than those offered by traditional banks.

5. Stock and cryptocurrency investors

A huge boon for the stock market has been the Fed’s willingness to keep rates at near zero for an extended period of time. Low rates have been beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed income investments such as CDs. But that’s changing.

In the last few months, investors have been pricing in the potential for rate increases, with the S&P 500 starting 2022 in a deep slump.

“The market went up with little hesitation while the Federal Reserve was pumping stimulus into the economy, but now that they’re removing that stimulus, market volatility has returned,” says McBride. “Particularly susceptible have been the high-octane growth stocks that were the primary beneficiaries of low interest rates, with investors now questioning what value to put on those stocks in a higher interest-rate environment.”

Cryptocurrencies have also been feeling the brunt since November, when the Fed more clearly telegraphed its intentions to reduce liquidity in the financial system. Bitcoin, Ethereum and other major cryptos are well off their 52-week highs and have shown a solid downtrend over the last few months, as they priced in reduced stimulus and the potential for higher interest rates.

The Fed’s reduction in its own bond portfolio should further decrease support for stocks and crypto.

6. The U.S. federal government

With the national debt above $30 trillion, rising rates will raise the costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.

For now, the interest rates on debt remain at historically attractive levels, with 10-year and 30-year Treasurys running well below inflation. As long as inflation remains higher than interest rates, the government is slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt.

Bottom line

Inflation has been running hot over much of the last year, and the Fed is raising interest rates to combat it. But rates still do remain low by historical standards, at least for now, so it makes sense to think about how to take advantage, for example, by being more discriminating when it comes to shopping for rates on your savings accounts or CDs.

(Visit Bankrate online at bankrate.com.)

©2022 Bankrate.com. Distributed by Tribune Content Agency, LLC.

How to Maintain Your Financial Health in Unhealthy Times

https://www.bloomberg.com/news/articles/2022-04-26/deutsche-bank-sees-5-6-fed-target-rate-and-deep-u-s-recession

https://www.bloomberg.com/news/articles/2022-05-03/investors-are-so-bearish-on-stocks-that-the-market-looks-bullish

 https://www.bnnbloomberg.ca/yellen-sees-solid-growth-possible-soft-landing-for-u-s-economy-1.1761068#:~:text=(Bloomberg)%20%2D%2D%20Treasury%20Secretary%20Janet,moves%20to%20bring%20down%20inflation

https://www.bnnbloomberg.ca/u-s-stocks-roar-as-powell-quells-fear-of-jumbo-hikes-1.1760681

https://apnews.com/article/business-stock-markets-asia-sydney-hong-kong-c341786b3e475916247b2fcd5c07602f

                There is a concept in behavioral economics called loss aversion. It refers to the situation that a real or potential loss is perceived either psychologically or emotionally as being more severe than an equivalent or equal gain. We feel more deeply for a loss than a gain or the loss of $100 is far greater than the joy of gaining $100. For greater insight into this concept check out Nassim Talab’s book, Fooled by Randomness. I recommend it for this and many other things. This applied to today’s comments on several levels.

                I have included several articles on the recent happenings in the markets and with various statements by banking and governmental officials which need to be read in order listed to show the progression of thoughts and ideas in the last two weeks. I had a discussion earlier this week with someone who wanted to know what they should be investing in. They didn’t think I had given a very satisfactory answer when I suggested they shouldn’t be doing any investing. I would go so far as to suggest that looking at financial news with the intent of investing should not be done right now. Don’t look or follow or even think about financial news, at least not if you are looking for information to help you choose investments or trying out some strategy suggested by a financial advisor or even well meaning friend. Because the only thing that will happen is you will feel rotten or worse, hopeless. Any investment decision you make right now will result in some loss, possibly a lot of loss and remember, loses contain more negative punch than comparable gains. Granted, your current investments may be taking a hit but then you are not following my initial counsel to avoid looking at financial news with the intent to invest. Think back to the first paragraph about loss aversion. Right now the market is so all over the place any gains (feeling some little good) will be massively offset by losses (feeling much more bad). The articles I have included / listed show how in just a couple of weeks we have gone from despair to euphoria to despair (not quite that extreme but you get the point).

                The first article from Deutsche Bank (April 26, 2022) suggests we will definitely have a recession in 2023 and that the Fed monetary policy needs to be very aggressive, i.e. really jumping the Fed Funds rate up a lot and often. The second article from Bloomberg dated May 3, 2022 suggests investors are too Bearish. “Investors have become so negative about the stock market that Wall Street [read smart money] is starting [to] think a rally may be on the way.” They give several technical metrics to support their thinking. The Third article from BNN Bloomberg (May 4, 2022) states Yellen thinks the Fed can make a “soft landing” for the economy. Again, a couple of reasons are listed. We have a very negative article (recession next year) followed by 2 very positive articles (market likely going up and no recession next year).

                The last two articles show what actually happened. The BNN Bloomberg article is from May 4, 2022 the day of the Fed meeting and the AP article is from May 5, 2022 the day after the Fed meeting. The May 4^th article is after the meeting and gives the reaction of markets during the next few hours. Markets are up 3%, joy and jubilation. Several reasons are given including that Chairman Powell says that .75% Fed Funds Rate increases are off the table. All is roses and smells great (an emotional gain). The next day the markets falls 3% (an emotional loss). How could this happen, the fiscal doves had taken over, the world was roses, champagne had been flowing. The talking heads had spoken. We are told in the AP News article that “yesterday’s sharp rally was not rooted in reality and today’s dramatic selloff is a reversal of that misplaced exuberance”. Exactly what does that mean. So, yesterday pundits couldn’t read the signs but today they can? What about tomorrow’s swings, for there certainly will be swings. Will those signs be read correctly? What will be the greater insight and understanding that will allow for reasoned understanding and the ability to plot the market and world economies, especially on a day to day basis. Now do you see why you should not be reading the financial news thinking about investing. The financial noise is so loud individuals can’t hear, let alone think in any kind of reasonable manner. There is little real information in the noise that would allow for reasoned decisions. The financial pundits will never apologize for, attempt to correct nor take any responsibility for any misconception, error or misleading statements . You will find contradictions among the nuggets of truth and accurate information. It is the nature of financial noise because remember, in the markets, information is power and financial noise may contain useful information and….. may not. How do you tell (it is extremely difficult).  

                What should you be doing at this point or any point in which you need to make financial decisions. Think of the tortoise and the hare or slow and steady. Limit your debt to necessities like education, housing (don’t ever consider variable rate financing – too many potential problems) and transportation. Have a diversified portfolio of stocks, bonds, mutual funds. Remember, stocks are usually a longer term investment with the expectation that they will go up and down, mainly up over the longer term. Bonds tend to be a bit more stable and many times move opposite stocks (but not always) and mutual funds, to get more diversity from smaller investments. A mix is good. Look at rebalancing your investments on a regular basis, a good financial advisor can help.

                Hang in there. These are unhealthy times for those that immerse themselves in the dirty waters of too much financial noise (news). Watch from the sidelines. Keep to the regular and steady investing schedules you have established before and don’t think you can time or out smart the market.

 

Why So Much Uncertainty? Recession, Slowdown, Retrenchment

https://www.bloomberg.com/news/articles/2022-04-11/world-markets-are-falling-again-with-echoes-of-the-2018-rout

https://www.bnnbloomberg.ca/junkiest-junk-bonds-flash-a-warning-sign-for-the-economy-1.1754017

https://www.theguardian.com/business/2022/apr/19/imf-governments-covid-debt-world-economic-outlook

https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874

https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874

                Yesterday the dentist put a new crown on a tooth for me. It was the culmination of about 3 weeks of pain, discomfort and unpleasantness. I was enjoying the ability to chew on both sides of my mouth this morning when another tooth broke. What a mess. I have an appointment with the dentist at 4:00 pm today for another crown (that is another very personal economic hit). This is kind of like the economy at the moment. We are suffering through one problem and something else gets added. I have 5 articles (2 of them very short)  I think may be interesting relating to national and world thinking on interest rates, markets and recession thinking.

                The first article from Bloomberg dated 4/12/22 World Markets are Falling Again With Echoes of the 2018 Rout, discusses various watched indicators and what they are doing. Fed officials and comments on Fed Funds Rate increases, stocks and bond market changes, recession comments all add to a cacophony of noises and sounds some helpful most mainly noise. The article uses words like rout, economic retrenchment, hawkishness, stampede, fear, hunkering down, all designed to create tension, show action or just to jar the senses. You see such things in the daily news relating to most stories. I am afraid it is the current fad in news reporting in general and financial markets and reporting are no different. So, can we cut through some of the rhetoric, yes we can. For example, in the Bloomberg article referenced above there are two or three items you should look at. One, the Fed is staying the course with rate hikes. There is talk of 75 basis points (bp or .75%) increases from various sources. That is an indication that the Fed is more worried about inflation than recession which they have stated before and they are not as afraid of recession. They are hoping for no or a very mild recession which is possible. The economic and financial indicators are currently giving  very mixed messages and advisors and officials are having a hard time gaining helpful information from those messages. This is not unexpected or unusual. Officials and markets will be trying to discern a direction or an intensity or a trend from all the market and data signals. Don’t hang your hat on any one piece of information regardless of how loudly or strongly someone pushes it at this point.

                The second Bloomberg article dated 4/19/22, Junkiest Junk Bonds Flash a Warning Sign for the Economy, suggests the junk bond (very low credit worthiness) market, by its recent increase in costs of borrowing, is signaling that a recession is becoming more likely. Maybe yes and maybe…… yes. The article lists several indicators that are supporting what they think is more likely to be pointing to recession or at the very least, a significant economic slowdown (or retrenchment). A slowdown may or may not fall into a recession, there are some technical definitions that separate the two. Some consider a slowdown or retrenchment a very mild recession (negative growth in GDP and a few other indicators) but if you don’t have to use the recession word, especially as a Fed official, that is very good. The article lists several indicators that are pointing various directions including uncertainty caused by the war. Remember, markets don’t handle uncertainty well at all and tend to bounce and wiggle alarmingly when they are subjected to much of any uncertainty. They are currently being subjected to very large quantities of uncertainty. They will be very unsettled. Depending on when some news story is generated, the conclusions of the story may be way up or way down. It is more important to watch trends but the news will not generally do that. You will tend to get the Chicken Little report (the sky is falling, the sky is falling) rather than something measured. Try to look for the measured.

                The next article is from The Guardian. I don’t have a lot of experience with this particular rag. It bills itself as “the world’s leading liberal voice”. I am not certain exactly what that means but the article seems pretty good. They are discussing the International Monetary Fund (IMF) and some of its thinking and findings. The article is short but I think fairly informative. I would like to quote a couple of sections;

“The IMF also warns the war has exacerbated two tricky policy dilemmas, one facing central banks and one troubling finance ministers.

For central banks, such as the Bank of England and the Federal Reserve, the issue is how to tackle mounting cost of living crises without killing off still incomplete recoveries from the pandemic. That’s not going to be easy, as the IMF freely admits.

For finance ministers, such as Rishi Sunak, it is getting the balance right between protecting the most vulnerable while repairing the damage caused to the public finances by Covid-19 spending. The IMF understands the difficulties but warns against being too penny-pinching.”

The article also points out the global supply chain disruptions and suggests world markets are becoming more fragmented which they consider, not good. Germany is considered the big power in Europe and no one wants to remember the problem of a large powerful Germany with economic power (think WWII). One of the ideas of the European Union was and is to bind France and Germany (and the others) so closely together they can’t swing fists at each other. Supply chain problems makes it so economies and businesses stockpile resources and such which makes them less dependent on each other to some extent. The IMF is suggesting something similar about Russia and the war. The war is driving a wedge into positive relationships which were being created over the last 20 to 30 years between Russia and the European Union countries and creating economic disconnections which help drive nations apart. In positive times, the interlocking economies help reduce friction and give a reason to work together. Another reason several European countries are less vocal than others concerning the Ukraine / Russian conflict (like Great Britain who has its own oil supplies and other sources and is very vocal) is that Russian natural resources especially natural gas and oil supply a large percentage of European needs. That is part of what the IMF is referring to in its “supply chain” comments as have other world financial leaders done in the last several weeks. Moscow has the ability to be an unreliable supplier and many European nations are staring that big problem square in the face. A little economic blackmail can certainly be and likely will be part of Putin’s overall game plan for Eastern Europe.

                The last article is really 2 sources for the same information. I thought you might like to see the different reporting of the same information. BNN Bloomberg and The Hill reported on Fannie Mae’s  (the governmental housing arm) comments on recession. Fannie Mae is suggesting we will have a recession in 2023. You can see from the short articles. Quoting from the BNN Bloomberg article;

“Rising interest rates at the U.S. Federal Reserve will further slow an economy already weighed down by high inflation and the fallout from the Russian invasion of Ukraine, causing a “modest contraction” [recession] in the second half of 2023, according to Fannie Mae.”

Short and sweet. Expect to see more statements like this from various bank economists, quasi-governmental agencies, like Fannie Mae, and world economists. Whether its called a recession, economic slowdown, economic retrenchment or something else. Look for higher interest rates, slowing grow rate to negative growth rate (recession) or maybe, just hopefully, a cooling of the overheated economies and a return to more normal growth in housing and prices. One can and should hope for the best but prepare for something else.

 

The Inverted Yield Curve and Recession?

https://www.bloomberg.com/news/articles/2022-04-02/inverting-yield-curve-signals-high-stakes-for-fed-and-investors

https://www.reuters.com/world/us/ny-feds-williams-balance-sheet-run-off-could-start-soon-may-2022-04-02/

                I was checking the financial news feeds yesterday morning and found the attached 2 articles. The Bloomberg article continues the discussion on the inverted /inverting yield curve which is a pretty good advance warning sign for recession. The second, Reuters article, involves one of the Fed’s presidents, John Williams, and his views on Fed actions and reactions. Both are good for different reasons.

                The Bloomberg article is highlighting that many in the financial community are feeling the Fed needs to get the Fed Funds Rate up now to help bring inflation down. Talk of .50% and even .75% increases are now routinely discussed where a .75% increase wasn’t considered at all until recently. The purpose of the increases is to brake and break inflation. To brake the rate of increase and to break the rate down from the current 7.5% annual rate that is increasing, to the Fed’s long term target annual rate of around 2.0%. The article is showing that more and more groups are calling for higher and faster rate increases. The final paragraph in the Bloomberg article does a pretty good job of summarizing the possible outcomes of this -  “It’s not a done deal that we are going to have stagflation or a recession but we are getting close,” said Jake Remley, a senior portfolio manager at Income Research + Management, which oversees about $92 billion. “That inflection point is out there somewhere, and it’s possible that at some point we may hit it soon if they keep pushing the expectations for [Fed Funds Rate] hikes.”

                The second article from Reuters is a summary of comments by John Williams, one of the Federal Reserve Bank’s presidents. Williams is responding to questions about Fed intentions. It is not uncommon for various Fed bank presidents and some others to make limited statements about current Fed thinking or activities. They very seldom make a definitive statement and usually don’t say much more than generalities however, and this is very much on purpose. They sometimes use these types of settings to get a feel for what the thinking is in the markets. It is an interesting dance, the Fed tries to make calming statements with little or no content and then tries to “read” the comments from the market to see what the market may be thinking or may do. The market meanwhile tries to “read” what the Fed is saying (as the Fed tries not to say much) and get more information out of the limited statements. The reason for this dance is that the market can react very quickly to any information or direction it “thinks” is important. The Fed doesn’t want to diminish its ability to influence markets by telegraphing their plays. We had this problem in the 1970s-80s with Alan Greenspan and the raging inflation and interest rates of that period. Greenspan would share what he was thinking (kind of like thinking out loud, not necessarily  concrete, more exploring several ideas, we all do it)  with some of his people or other governmental people, congress etc. and within hours (sometimes if felt like minutes) the markets would have gotten hold of the information and reacted in some way or other. Greenspan finally had to stop saying anything just so he could think through things. That basically has carried over through all Fed officials since then, they don’t dare say anything before they want to act themselves. Remember, everything in the market is about information and perception or worse perceived information. Williams, as reported in this article, spent a little time relating past performance of Fed policies (in the 2019 Fed actions)  that were viewed by the Fed as being successful. Now if I was going to say that last statement as proper Fed-speak I would say something like; Many individuals in the market and government perceived our actions (Fed actions of 2019) as being somewhat successful and we believe given current conditions which may or may not be similar to conditions in 2019 that the Fed may be successful or not in doing something similar though not necessarily the same again, i.e. slow the economy without crashing it (recession). Do you get the idea. The article reports that Williams gave some general rate targets and hinted that the Fed might consider (the next section is my words not Williams but you get the idea)…., trying but may not try, still it might work, but there are no guarantees, but maybe….. something “like” the previous actions might, or possibly might not do something similar or not, in the current situation that may or may not be like the previous situation, maybe. Do you get the drift of the depth and breadth that the Fed people will go to to say something but not say something. The article goes on to say Williams suggests the high inflation rate is currently the “greatest challenge” for the Fed at the moment (which may or may not change) - nothing is ever a problem, just a challenge, and lists several factors likely influencing the current inflation trends. Notice in the list nothing is said about the Fed’s massive balance sheet which in my mind is the 900 lbs. gorilla in the room. Williams does acknowledge that the Fed is going to try to “ease inflation to around 4% this year and ‘close to our 2% longer-run goal in 2024’ while keeping the economy on track.” With inflation currently running at 7.5% and climbing that is a good goal. The trick to the whole thing is in Williams’ quoted remarks in the last paragraph, “These actions should enable us to manage the proverbial soft landing in a way that maintains a sustained strong economy and labor market”. That is really the goal, hope, prayer and fervent wish – a soft landing of the economy. The success rate of soft landings is, unfortunately, not particularly good.

                Stay tuned to the exciting continuation of the US Fed and the fight with the dragon of inflation. The year 2022 promises to be interesting (not problematic, of course). Think of the 1965 movie Those Magnificent Men in their Flying Machines. The first 3 lines of the theme song describe our likely market ride as the Fed attempts to bring the economy in for a “soft” landing. Think of the Fed as the pilot and the economy as the flying machine.

    Those magnificent men in their flying machines,

    they go up tiddly up up,

    they go down tiddly down down

from Those Magnificent Men in the Flying Machines theme song

… and up and down and up and down and up.

As the stewardess says, everyone please fasten your seatbelts we are entering turbulent weather.