Thursday, November 16, 2023

The Year of More of the Same

  

        I have two pieces of information before me on my desk. One is from Winters & Co. Advisors, LLC, an investment agent who I have worked with over the years. The Winters document contains a chart showing the swap yield curve for the last 4 years based on today’s date (swap rates tend to closely follow same maturity treasuries). The most recent 2 years shows an inverted yield curve in the 4% to 6% range. The curves for 2020 and 2021 show normal sloping curves in the range of 0% to 1.95%. The second document is a short story from the Wall Street Journal of today with the headline, “As inflation cools, economists see soft landing for US”. What a ride we have had for the last two plus years. We have been riding the Fed induced rollercoaster since mid-2021 when inflation started its climb from the benchmark of 2% (4.2% - Apr 2021) to its high of 9.1% in June of 2022. It slowly trended downward through the balance of 2022 and finally was back down to 3% in June of this year. The rate trended up to 3.7% through September and is 3.2% for October according to US inflation Calculator (usinflationcalculatior.com/inflation/current-inflation-rates/). Remember, the Fed moved the goal posts last year when it said that they would be happy if long term inflation would stay in the 3.0% range as opposed to its 30 year target range of 2.0%. The Wall Street article states “Economists continue to see the US economy approaching a soft landing as inflation data comes in better than expected, with little signs of impending recession. This would mark the first time in 80 years the Federal Reserve has brought down inflation without triggering a recession.” Not bad if it does happen, i.e. no recession triggered. However, the Fed doesn’t have a very good track record and they did move the goal posts to make it easier to claim success. So, change the rules, take 2 ½ years to do something that many times (one can’t say normally in economic situations) takes 6 to 8 months and declare victory at the new levels, maybe. I see that the Wall Street group is the first on the soft landing band wagon in this current time period. Do you remember the movie Those Magnificent Men in Their Flying Machines (1965 comedy). It goes on to say something like, they go uppity up up, they go downdity down down. I am afraid we have been doing the up down routine along the bottom of the economic landscape for the last 2 ½ years.

      No, we haven’t had an official recession yet but we haven’t had much growth in the economy either. We have a very high Federal Fund rate that looks to stay high for some time to come according to Chairman Powell. In the Associated Press article of November 1, 2023, “Federal Reserve leaves its key rate unchanged but keeps open possibility of a future hike” I quote;

The central bank’s latest statement noted that the economy “expanded at a strong pace” in the July-September quarter and that job gains “remain strong.” And it reiterated that future rate hikes, if the Fed finds them necessary, remain under consideration.

But it also acknowledged that recent tumult in the financial markets has sent interest rates on 10-year Treasury notes to near 16-year highs and contributed to higher loan rates across the economy — a trend that helps serve the Fed’s goal of cooling the economy and inflation pressures.

Powell himself suggested that Fed officials remain unsure about whether further rate increases might still be needed to defeat inflation. That stance marks a shift from earlier this year, when the policymakers had made clear that they leaned toward pushing rates higher.

I am curious to see if the Fed will consider inflation beaten at a 2% rate or the newer Fed suggested 3% rate. It sounds like the Fed is watching and ready to hike the Fed Funds rate more if necessary. Not a strong sign of reduced volatility as the higher rate tends to make other aspects of the economy volatile and unpredictable. The good news is the Fed hasn’t forgotten about the huge balance sheet problem which is and was one of the primary driving forces for the inflation explosion in the first place. Remember the huge balance sheet was fueled by artificially low borrowing rates for so very, very long. In a Reuters article of October 31, 2023 I again quote;

The eventual end of the Federal Reserve’s efforts to reduce its vast bond holdings increasingly appears tied to what happens with the central bank's "reverse repo" operations.

The program, launched nearly a decade ago, grew rapidly starting in the spring of 2021 and by June 2022 was consistently taking in more than $2 trillion a day in what was seen as clear evidence of the amount of excess cash sloshing around the financial system. Inflows have dropped sharply in recent months to around $1 trillion in the face of the Fed's aggressive policy tightening underway since last year.

Lou Crandall, chief economist with Wrightson ICAP, a research firm …  reckons the Fed still has time in this process, and speaking earlier this month, Cleveland Fed President Loretta Mester agreed.

"We still have a very large balance sheet" so the balance sheet cuts can likely continue over the next year and half to two years, she said, adding when it comes to getting to the finish line, "it's going to take a while."

    So, what might we see regarding inflation, economic growth, and a return to normal (whatever normal may be 😊)? Well, that’s just it. I suspect more of the same which is a fair amount of uncertainty and ambiguity plus a large dose of prevarication by the various economic gurus, and financial and governmental leaders. I am afraid we aren’t going to know until we know. Or at the very earliest after the fact (yup, after the fact). Not much comfort. However what you can do is stay conservative in your investments. Don’t concentrate your holdings but spread things out. Don’t go for financial or investing fads. Save as you can, spend less, and find ways to enjoy things more like family, friends, the beauties around us. Don’t worry to much about the economy. It has survived several other difficult times regardless of what people, institutions and governments do to it. Things will of course certainly, almost without fail, very likely, probably, in most cases solve themselves, we think. (But don’t quote us on that.)

Articles cited.

Federal Reserve leaves its key rate unchanged but keeps open possibility of a future hike

https://apnews.com/article/inflation-interest-rates-prices-economy-federal-reserve-63f5a7ed041d6b55c7aa773d071a05fb

Fed’s reverse repo facility drawdown looms large in balance sheet debate

https://www.reuters.com/markets/us/feds-reverse-repo-facility-drawdown-looms-large-balance-sheet-debate-2023-10-31/