The Recession word is being tossed around

 

 https://www.bnnbloomberg.ca/fed-officials-take-aim-at-inflation-say-ready-to-act-with-vigor-1.1742076

https://www.bnnbloomberg.ca/a-recession-warning-sign-part-of-u-s-yield-curve-inverts-for-first-time-since-2006-1.1743815

https://edition.cnn.com/2022/03/26/economy/inverted-yield-curve-march-warning/index.html

              Another day another crisis of some sort. I trust you have put on your financial blinders so you can function in this rapidly changing and not changing environment (is that ambiguous enough to sound like a talking head). Take a look at the 3 articles above. The first, BNN Bloomberg-Fed ready to act, is a discussion of the Fed’s response to inflation as it raising the Fed Fund Rate. The dot plot shown in the article is a relatively new invention of the Fed to signal its thinking. The dots supposedly show the thinking of the voting members of the Fed on interest rate changes. This chart was created because the market made so much noise several years ago about the Fed never saying what they were thinking that the Fed created this and said, in essence, here is what we are thinking now stop asking. If you are confused you are in good company. Remember, the chart has no binding power, it is the equivalent of thinking out loud but it has proven an indication of possible intent in several instances. So the Fed is thinking of acting aggressively. That is a good sign. Now we will see what they actually do. However, the market will react to the perception of movement because the market really doesn’t have anything else to go on. That is why you need to be wearing your financial blinders to help protect from an overload of change that is based on perceived information not necessarily actual information. It’s hard to separate the two.

                The second two articles are hot off the press, so to speak. The articles titled, A Recession warning sign? and This recession indicator, are from today’s news feed discussing an inverted yield curve. The CNN article makes the statement that a “yield curve inversion has preceded every single recession since 1955” which is true.  But not every yield curve inversion has been followed by a recession. A subtle but important difference. An inverted yield curve by its very nature is very unstable and traditionally corrects itself as investors and the economy calm down. Having said that, there have been a couple of times in the last 40 years that the curve stayed inverted for some time (many months is very unusual but does happen).

                What does it all mean. Well……, as the last sentence in the CNN articles says, “The harder the Fed steps on the brakes [raises Fed Funds Rates], the higher the probability the car seizes up and the economy goes into recession”. But something has to be done to get the excess money out of the system and we have kicked the can down the road for so long we are losing the ability to kick. Remember from a previous post I said one of the quickest ways to reign in inflation is recession, it isn’t a painless method but it usually works. I am afraid there are only a limited number of options and a slow reversal of the excess money policy and slowly removing the excess funds from the economy is definitely a much gentler method of slowing down a raging economy but is infinitely more difficult and the tools the Fed has are not very good at fine tuning. Regardless of the impression they try to give, Fed Funds Rate changes and buying or selling securities from the government controlled pool are more a blunt force hammer than a fine tuning knob.

           Stay tuned as the ride continues.

Fed Interest Rate Hike and the Possible Impacts

https://www.reuters.com/world/us/all-systems-go-feds-liftoff-us-interest-rates-2022-03-16/

 

March 17, 2022

                The Federal Reserve raised the Fed Funds interest rate as discussed in the article from Reuters (listed above). Now begins the very delicate balancing act of raising rates, which is supposed to reduce inflation. The problem is the interest rate lever is not particularly precise nor the effects very controllable. Don’t be fooled by the Fed language. It sounds like they have the ability to precisely control the effects and impacts of the changes. They don’t. The changes caused by the Fed’s interest rate adjustments will tend to be in a general direction (tightening or loosening policy) but the magnitude of impacts is not really knowable or controllable. What does a .25% increase do vs. a .50% increase? The problem is, too much increase too fast and the economy goes into immediate recession, too little increase or too slow and inflation just keeps on going. The Fed doesn’t really know the impact nor does anyone else. It’s like a go-cart careening downhill out of control and the brake is the stick against the wheel. Maybe it works, maybe it doesn’t. Remember, there is no fine control regardless the words or language used or implied. Soft landing, controlled slide, easy fix are just words with no meaning in this type of situation. There will be under and over correction, wild swerves and hairy curves on two wheels. There will be missed turns and some likely drop offs. A crash is also likely (recession) and in the current situation we may have a couple of crashes before it settles out completely. You will notice lots of corrections and changes in forecasts and the news media will begin to pay less attention to changes and such as they become more frequent. You will have to dig that out yourself. There will be pronouncements by various Federal officials and large bank economists about this and that affecting the inflation rate. They will be all over the place. Energy, food and commodities prices will bounce around generally going up (inflation) until they don’t which may be caused by recession or if we are really, really lucky by successful Fed policy. It sounds fairly bleak but we have done this before and it can be fairly mild, think the recession of 1997 and 2002. They were really quite mild. Remember, the definition of recession "is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.” (www.investopedia.com) If we have less than the 2 quarters of downturn this is not considered a recession but it is an economic slowdown. That is really what the Fed is trying to achieve, a series of down sloping waves that reduce inflation but don’t quite drive the economy into the red zone definition (recession). They will do everything they can to avoid the recession definition, it looks very bad for them. Perception is everything.

                So, hope for the ideal series of corrections. A series of down sloping waves that never quite reach the definition of recession but that bring economic activity down by drying up the easy money currently circulating in the economy. We should see higher borrowing costs (interest rates), higher prices on commodities, energy and food and less spending. That is going to be challenging for people as we have become used to spending. I am hoping home prices come down without a crash but we will have to see. Again, this isn’t the end of civilization as we know it. We have had inflation and recession before, some mild some not so mild. The US economy will make it through this even though it may take a while but it will be okay. Reduce you debt as able or avoid it by postponing things, save more and above all… enjoy life, stay close to family and friends, take some time for yourself and don’t spend too much time listening to the talking heads in either government or the media.

 Greetings. It has been quite awhile since the last post but I felt there are some that might find an analysis of the current economic situation as it relates to a very fast paced changing world situation interesting and helpful. It has been some time since we had a shooting war, the Gulf War was the last one involving the United States. The current conflict with Russia and Ukraine will likely stay warm for a bit longer. Putin has not yet reached his objectives. He won't stop until he does. Putin will call the West's bluff on an open attack and push to reach his objectives. Biden and the NATO powers will not risk an all out shooting war at this point (or ever perhaps). Putin has shown he has no such fears. Tom Clancy in his book Red Storm Rising shows what the US military's World War III scenario looked like in the later 1980s. A good book and a good read. Some of the same conditions still apply. I have collected a few financial articles from leading news groups and put together some brief comments. The bottom line at this point is the US and world economy is in for a fairly rough ride over the next several months and may stretch out to a couple of years. Like the COVID pandemic the economic problems will likely drag on. 

I wrote the articles on the days shown and the news articles are from those days. Enjoy the read. Leave any comments and thoughts. Have a good day.

Written 3/2/2022

Global Bonds Extend Rally as War Curbs Pace of Rate-Hike Bets - BNN Bloomberg

Greetings,

                A new day, an increase in conflicts and more whipsawing of financial markets. Such is the life of a market watcher. If you have been closely following financial news (and regular news for that matter) you should have a very sore neck at this point. I hope you are feeling somewhat jaded with all the news, views and opinions swirling around at the moment. We have now had the State of the Union message with attendant power statements, major and minor threats and much noise including the continuing threat of spending trillions of dollars. The  attached Bloomberg article highlights the whipsaw nature of world turmoil. According to this article the Fed will now not raise Fed funds rates in March and likely any thoughts and plans should be scraped according to the article. I am afraid this is the nature of market watching. The pundits / reporters / news agencies tend to lurch from pillar to post with great speed. Remember, everything is short term in financial reporting regardless of what is said about forecasting and future planning. Any future plan will survive as long as short term situations don’t change (of course they always and constantly change). That is why you tend to see solutions being proposed and discarded with great rapidity.

                The underlying problem still exists. There is too much money in the system. I am afraid that war is one way of wringing out some excess funds but not very efficient and of course very painful. One can hope that the threat subsides soon. If so, look to see inflation become the #1 topic again and then the handwringing over Fed Funds rate hikes will quickly become the next short term, long solution.

                Just remember, long term proposals will be subject to short term criteria which will cause new long term proposals based on the current short term situation. No forecast survives today’s financial news. In the financial news business one uses the simplest of forecasting tools which is the straight line regression analysis or even easier (and quicker), pick a current point, pick a past point and draw a line to the future. Remember any past point is acceptable as long as it supports the current “group thinking”.

                The best plan is to stay back from the front line of financial news reporting. Let the pundits slug it out at the front. You and I can remain somewhat calmer and more reserved and enjoy much less stress if we don’t try to react to every “new” piece of information. In these situations slow and steady wins the race both in the fairy tale and real life.

Good luck.

Written 2/14/22

Inflation to exceed Fed’s 2% goal well into 2023, survey shows - BNN Bloomberg

https://www.reuters.com/business/finance/what-global-banks-forecast-fed-rate-hikes-2022-2022-02-11/

Greetings;

                Another 2 articles on the inflation front, markets and reactions. Things are getting very interesting (you remember what that key word means from last letter). The “very” modifier is a further definition of the key word, interesting. It means that the governmental agencies are now reacting. That is both good and bad. The politicians will attempt to minimize the importance of the various datum that is being generated by the numbers guys. You can see what form the politicians are initially likely to use in the statement from Pres. Biden in the Reuters article, 3^rd paragraph, when Biden says “we will make it through this challenge”. Expect to see more politicians weigh in on the themes of “we can do this and let’s all pull together and it isn’t as bad as it looks”. Watch for it, the noises, platitudes and pithy sayings should increase fairly soon. The various federal agencies, especially the Fed, will be trying to assure the politicians and the markets they can handle things. As it progresses and gets more involved (this will not likely be a short duration situation) the politicians will start to blame the Fed and call for more relief, help, etc. As I said it should be interesting. We haven’t seen this sort of financial mix/mash since 2008-9 in the beginning of the great recession. I don’t expect it to be as bad as that but it could be fairly rough.

                I am hoping things are more like the recession of 1997 or 2002 which were much more mild, relatively speaking, and were of fairly short duration. There are 2 basic types of recessions characterized by the letters “V” and “U”, the letters refer to the shape of the recession. The “V” is a fast falling in markets and things then a quick rebound, more of a blip that leaves markets gasping for breath and wondering just why they did a faceplant into the payment but getting up quickly and dusting themselves off (the markets tend to look around in this type of recession to see if anyone saw them fall, they look a bit guilty but carry on.) There will be commentary on what caused the fall. The “U” shaped recession is a bit more serious/difficult. The fall comes but the market faceplant is a bit more jarring and the markets may stay down on the pavement for a time. (Represented by the bottom of the “U” which may draw out over months as opposed to the “V” which may be quite short.) When the market gets up it is a bit more groggy and it will look around and wonder just what tripped them. As you would expect it can be quite a bit more jarring and damaging. (The recession of the early 80s was more “U” shaped as was the great recession of 2009 which was very “U” shaped. You remember how long it took to get out of the 2009 recession, that’s the long bottom of the “U”, more like |____| .)

                So, keep the faith, if not in the system in life in general. The Fed will be increasing rates, the politicians will become more involved and their voices more strident and shrill. Look for the blame game to start fairly soon. We must have a scapegoat and the politicians will indeed look for and find one, whether it is deserved or not. The Republicans will have one and the Democrats a different one. Oh yes, and I forgot, the talking heads will have much to say, most of it irrelevant but possibly entertaining in a sad sort of way. I will be interested to see how it impacts the Democrats massive spending plans. The diehard Democrats will want to push on with the spending which will make things worse by pumping more money into the already loose money policy and not allow the easy money to dry up. If they get the spending package through in most of its aspects look for inflation to remain for years not quarters or look for several quick, sharp recessions in a row for the next several years.

                Life is good when we remember that God, family and friends are the real value in this life and inflation can’t diminish the value of them.