Why So Much Uncertainty? Recession, Slowdown, Retrenchment
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.
