The question is, if it’s said loud enough will it be believed? Because this time it really is true (it is being said very loudly). Or is it?
The discussion about recession has
been on-going for some time now. I started writing about recession
possibilities over a year ago. The discussion has moved back and forth between
how do we avoid one to how do we get a soft landing to what can we do to help
those that will likely suffer if the landing isn’t so soft. We may see in the
next several months various pronouncements by various talking heads. You notice
I didn’t say anything about what phase this is. I don’t know and it doesn’t
matter as much as most news personnel would like you to believe from their strident and every increasing noise. Remember,
it is important to keep the fans whipped up. We will be able to look back in
several months when the National Bureau of Economic Research (NBER) will state
that a recession started at such and such a point, or didn’t. Remember, only
the Bureau is recognized as the official group that can declare such and they
always include factors that are backward looking, meaning we don’t officially
know until after the fact. This also means that we don’t officially know if we
have had a soft landing, missed recession or face plant until after the fact either.
There are other signs that may give us indications of various outcomes,
however. We have been moving toward this point for months and months. It is
dragging on longer than a normal news cycle so it gets recycled regularly.
Expect to see it to continue. Again, the fans need to be whipped up to keep enthusiasm
high. We are getting more comments like JPMorgan Chase CEO, Jamie Dimon (CNBC,
Apr 14, 2023 Manie Dimon issues warning on rates: ‘It will undress problems in
the economy’) that investors and business should plan on interest rates
remaining higher for longer. The Fed still needs to “dry out” the economy, get
the excess funds (easy money) out of the system. That hasn’t changed. We still
have a recession we are trying to work around or work through depending on what
you think may happen. Work around implies a soft landing or just a slowdown; The
economy slows down, unemployment rises a bit. Banks tighten their lending
policies. A few business and individuals suffer or go under. The Fed is able to
get their balance sheet down without the stock and bond market tanking (it
slows down, drops and recovers fairly quickly). We stumble a bit and slow down.
No or mild recession and we carry on at a more measured pace. Work through
implies a recession; we trip or worse, face plant and have to pick ourselves
back up. We see bank failures, businesses and individuals declare bankruptcy.
The Fed isn’t able to maintain a smooth decrease in its balance sheet or worse
doesn’t reduce it. The stock and bond market react to all the uncertainty and
failures by tanking. It takes a longer to climb out of the hole.
One of the consequences of the
higher rates is the financial sector including banks will feel the pinch. They
have to change from an easy money mentality to a more measured lending stance.
Easy money implies less diligence in protecting deposits and in shoring up a
banks balance sheet. There is little or no profit in protecting deposits
(lending them out is where money is made) or doing more than the minimum
required or skirting regulations. Most banks try to balance the profits with
the safety, we have seen the banks that didn’t. The price for skirting the
safety regs in good times is minimal and it is hard to see which banks may be
skirting until too late when times turn bad. The best we can do is go with
financial institutions with a long record of being conservative. Credit Unions
tend to be more conservative by their nature and charter requirements. Still,
it’s hard to tell. There is something to be said for spreading money around
between institutions. We also have deposit insurance which is helpful but in
the Silicon Valley Bank and First Republic Bank failures the Fed stepped in and
guaranteed all deposits which stressed the insurance provider FDIC (it almost
broke it such that another big hit would cause serious problems). So, things
are complicated, of course. By guaranteeing all deposit they essentially gave a
green light to the poor practices of the bank. They also prevented a bank run
on several similar shaky banks across the country. Whether that was the right
thing to do or not should be debated for a long time. The current mentality is
that the government can fix everything which makes them responsible. Hence more
regulation and laws and more places for shady people to find loopholes. Notice
that the defense for many of these funny practices is that the entity did
nothing wrong, they were following the rules. It was the rules fault. So, of
course, more rules are needed. That is a very bad spiral and you can follow it
down to the final conclusion. Watch the financial sector for more stress in
general and how they seem to take care of it. Look for more rules and
regulations. I am glad I am finishing up my career in finance and not starting
it. It is a very different and much more difficult place to work then 30-35
years ago when I was first involved.
Now the
debt ceiling question. I am not going to quote any articles. There have been so
many. It is the current hot, hot, hot topic button and the news media are
mashing it with their biggest and most massive sledge hammers (gleefully I
might add). Do you feel like you have been beat up no, pummeled for weeks on
end. Everywhere you turn someone or some organization is talking dire straits,
doom, gloom, death, destruction, mayhem, the very end of the world as we know
it, the end of civilization, the death of all we hold near and dear, (pause for
dramatic breath!!!!!!) AURRRGHHHHHHHH. Why can’t you people see how important
this is!!!!!!!!!!!
Sorry…., I got just a little bit carried away.
It won’t happen again (at least until tomorrow anyway.)
This is
the news and financial media at its finest. This it the current news media
model and the debt ceiling is the ultimate opportunity to exercise its model to
the fullest. The underlying question is the government has set some limits on
its spending capability, a good thing. It has come around again that the
government can’t manage its input and output. The easy solution is raise the debt
ceiling or remove the debt ceiling requirement or better yet get spending under
control. Now, granted, the answer is never that easy and that is also part of
the problem. The solution is pretty complex but workable. However, we have
powerful political forces that are using this debt ceiling to push their
various points and agendas.
As background information. The following is from Wikepedia,
United States debt Ceiling;
The U.S. has never reached the
point of default where the Treasury was incapable of paying U.S. debt obligations,
though it has been close on several occasions. The only exception was during
the War of 1812 when parts of Washington D.C. including the Treasury
were burned.
In 2011, the U.S. reached a
crisis point of near default on public debt. The delay in raising the debt
ceiling resulted in the first downgrade in the United States credit rating,
a sharp drop in the stock market, and an increase in borrowing costs. Congress
raised the debt limit with the Budget Control Act of 2011, which added to
the fiscal cliff when the new ceiling was reached on December 31,
2012.
The last time things got too close, government set new rules
and they immediately went about figuring out where the loopholes are. And it is
continuing. Is it a problem. Yes. Is it the end of things as we know them (as
the news is telling us). No. Are there solutions. Yes. Should you be upset.
Yes. Should we be acting like Chicken Little. No. It will play out. It will get
close. There will be much rejoicing in the media when the “solution” is
reached. Then the media will begin the analysis phase which will allow for
continued coverage for many months. So it continues. Should you follow all the
stories. DEFINATELY NOT. When this crisis passes the media will need something
else to keep us tied to them. Look for the recession to come back in vogue. Don’t
be lead around. The various financial crisis will continue in the news. You can
always find them if you want. I suggest you don’t want to. Keep your finances
simple. Keep debt low. Save as you can. Debt is good for some things, housing,
education, transportation. Live simply.
Remember
what is important. It isn’t news. It is family, friends, the things you
love. It is the beauties around you. It is relationships, the good earth, the
joy of interacting. It is game nights, movies together, playing with kids (big
and little ones). It is in quite walks, talking in person to friends and
family. Meeting new people, a meal together, building something, watching a
sunrise and sunset. Tell someone you love them. Share precious things, a hug a
kind word, hope.
