It Persists, Now What? Thoughts on Inflation, Growth, the Economy and Life in General

 

I have been waiting for the past 3 plus months to see what, if anything, would happen to the economy, inflation, Fed policy and life in general. So as to not keep you in undo suspense, life in general is pretty good and you should think so too. In regard to the other items listed, well... let’s just say life is unsettled and somewhat predictable at the same time. Looking at the drawing at the left, I think we are in a similar type of stalemate with little movement but lots of energy being expended.

                There has been some discussion about basic economic indicators being outdated (Reuters article, March 12, 2024, see below).  One of the classic leading economic indicators, has always been an inverted yield curve which is predictive of a coming recession, is thought by some to have become unreliable. They are suggesting that since the yield curve has been continuously inverted for 2 years now a recession should have happened. However, there have been external forces that have played havoc with the basic economic conditions including a Fed policy that some say is distorting the entire economic landscape. Since the 2007-2008 great recession Fed policy has been almost continuous stimulation of the economy through aggressive use of the Federal balance sheet (expanding money supply). Many argue that this tremendous infusion of money has distorted many economic indicators and caused many traditional relationships to be broken or grossly strained. The Fed has been reducing its balance sheet holdings for many months but the government has been spending and requiring additional funding for various programs and regulations. The overall balance sheet is sort of being reduced but only sort of. This may account for some of the limbo that rates seem to be in and the uncertainty we see and feel in the economy. It’s like stomping on the gas and mashing the brakes at the same time. The engine of the economy is racing and roaring  but are we slowing down or going faster? It’s hard to tell. In our current case it seems we still have some little forward movement. We are playing a different economic game and we don’t really know the modified rules or the scoring. Does that convey enough uncertainty because that is really what the Fed officials, governmental leaders, talking heads and economic news forecasters are suffering, gross uncertainly. And this uncertainty is lasting a long, long time from an economic standpoint. Back to the original question. Has the inverted yield curve failed as a predictive economic tool? Maybe, and maybe not. The underlying assumptions have been modified by Fed actions and governmental spending activities and we don’t know enough to understand the full consequences or implications.

                The second article (Reuters, April 29, 2024) suggests that “inflation and the labor market remain resilient. …Inflation remains stubborn despite slowing late last year after 15 months of aggressive rate hikes that the Fed halted in July. Data on Thursday [April 25^th] showed that core U.S. personal consumption expenditures inflation rose 3.7% in the first quarter, after growing 2% in the fourth.”

Central banks are suggesting in their comments that they hope to cut rates, relatively soon. However, the data doesn’t support this type of action, not if central banks want to reduce inflation. They are faced with a dual problem of strong economic growth and persistent inflation. The fix for this is higher interest rates, not lower rates as suggested by various central bankers. Talk of lower rates may stimulate market participants to be more bullish with the aim to increase growth in the stock market. I suspect the idea is to make current governments “look good” before elections. Pres. Biden has been saying the common man is doing so very well with the strong economic growth and high employment. The problem is that we have had very high inflation which has destroyed the real purchasing power of money. Yes, we are producing more but the cost to purchase is so very much higher. People are employed but they aren’t earning enough to afford the higher prices of things. So, yes, we are in a strong economic situation and we can’t afford it. But then you already knew that.

                The 3^rd Reuters article of May 8^th is interesting in a negative sort of way. Quoting from the article,

  “A slowdown in activity will be needed to ensure that demand is better aligned with supply for inflation to return durably” to the official target, Collins said in remarks to be delivered at a Massachusetts Institute of Technology event.

What she said was the Fed doesn’t believe it has reached a point that inflation will return to the benchmark 2% target on its own. The economy is too hot. Quoting from the article again,

 In her remarks, Collins said “overall, policy remains well positioned to respond to incoming information, as we assess the evolving outlook and risks.” She also said she’s “optimistic” the Fed can get inflation to 2% “in a reasonable amount of time, with a labor market that remains healthy.” That said, getting inflation to 2% “will take more time than previously thought,” with Collins noting “there is no pre-set path for policy – it requires decisions based on a methodical, holistic assessment of wide-ranging information.”

                Welcome to Fed speak. Let me see if I can dissect this a bit. Collins is trying to avoid the comment that she doesn’t think the current Fed Funds rates will be sufficient to bring down inflation any time soon, which is what people want, a quicker solution. We have had almost 2 years of trying to get down to 2% inflation and she isn’t confident they can do it soon. She says not to worry, that the Fed is watching but that “getting inflation to 2% “will take more time than previously thought,” with Collins noting “there is no pre-set path for policy – it requires decisions based on a methodical, holistic assessment of wide-ranging information.” That means they (the Fed) believe they can do it but that current activities may not be enough based on information that they currently don’t have but are willing to consider when they do have the information they currently don’t have. But what that information may be that they currently don’t have is uncertain at best. Makes perfect sense in a non-sensical sort of way, … don’t you think. So Collins is saying don’t worry, we know inflation is high and we are trying to get it down to 2% but we aren’t certain that current policies will accomplish that goal. We certainly aren’t certain how long it will take once we are more certain. If we were more certain we certainly would have a certain answer for you, but we certainly don’t at this time. I’m pretty certain that is certainly what she is trying to convey, certainly.

We can worry about the certainty or uncertainty of governmental leaders, Fed officials, financial commentators and the general economy but that isn’t what is important. I keep coming back to this theme again and again because it is important and if you will allow the use of an over used word, certain. We are certain about our relationships with family and friends and that we need to strengthen and improve such things. We are certain we live in a good land and can enjoy the beauties around us. We are certain that there is a God and he is aware. And we are certain that there are people who care and are interested in us and how we are doing. That is what is really important. We will survive this economic situation and why would we want to spend our time worrying about something when we can be improving ourselves and those around us and enjoy the beauties of a new spring and summer before us. About that I am absolutely and completely certain.

 Articles Consulted:

REUTERS, March 12, 2024, Inverted yield curve no longer reliable recession flag, strategists say,

https://www.reuters.com/markets/us/inverted-yield-curve-no-longer-reliable-recession-flag-strategists-say-2024-03-12/

REUTERS, April 29, 2024, Inflation-wary US rate options market cautiously prices for 2024 Fed hike,

 https://www.reuters.com/markets/us/inflation-wary-us-rate-options-market-cautiously-prices-2024-fed-hike-2024-04-29/

REUTERS, May 8,2024, Fed's Collins says economy may need to weaken to get 2% inflation, https://www.reuters.com/markets/us/feds-collins-says-economy-may-need-weaken-get-2-inflation-2024-05-08/

REUTERS, February 21, 2024, Fed worried about cutting rates too soon, minutes of January meeting show, https://www.reuters.com/markets/us/fed-concerned-about-cutting-rates-too-soon-minutes-january-meeting-show-2024-02-21/

Bank Failure, Recession – What Is Happening

 

        I am composing this blog while listening to 5 songs, playing loudly, Living the Dream by Foreigner, Demolition Man by Sting, Bang a Drum by Jon Bon Jovie, Wheel in the Sky by Journey, and Dr. Heckyll & Mr. Jive by Men at Work. Mainly because they sound good loud, better louder, especially with more bass. The lyrics are a good mix of some of my feelings regarding the economy, economic policy and the people playing the various roles in this current economic play (especially Bang a Drum).

                I haven’t said anything for a few weeks as I was waiting for the news noise to settle down and we can pick through the points in a more reasoned manner.  The Associated Press article titled Fed raises key rate by quarter-point despite bank turmoil by Christopher Rugaber (3/22/23) is a good summary of the past several weeks and may hold some insight into future activities. I have put a link to the article at the end of this post.

                First, bank failures. The problem is 3-fold. One, with the Fed raising the Fed Funds rates and attempting to dry out the economy by removing money from the economy, all borrowing costs have increased as well as interest rates on all new debt instruments. Treasury rates have changed wildly and are higher across the board. Don’t worry about short term vs. long term differences, just know all rates are up, up a lot. The purpose is to remove money from the overall economy so that too much money is not chasing too few goods (one of the basic definitions of inflation). The higher rates affect you in many ways but especially if you have old bonds (bonds at old, lower rates) and you need to get the principal before the bonds naturally mature. Remember, interest rates and principal value are inversely related. If rates go up principal value goes down. However, this only happens if the bonds are sold before their maturity date. If the bonds don’t need to be sold early then no foul, no harm. When they talk about bonds losing or gaining value it only relates to having to sell them before maturity. It’s only a paper change based on current conditions. It is a way of looking at current opportunities vs. what was spent / invested previously. If you have an existing, older mortgage you are saying, boy what I deal I got. If you are looking at invested funds you are saying I wish I had my money free right now because I could earn a lot more if I invested now. You don’t owe any more interest on your mortgage or have fewer dollars coming in from your invested bonds. Now, if you need to borrow new money or invest some current excess funds then the current rates will apply. That is where you will see the impact of higher rates, on any new debt you want to acquire or new investments which will give you more earnings. If, however, you need to get the money out of your current investments you will have a problem which is what all the current news is talking about as lost money. Remember, there is an inverse relationship between rates and principal, as rates increase, principal decreases and vise-versa. In order for you to get your money back early (i.e., sell your current debt/bond) someone else will have to buy it and they are not going to want your old interest rate bond because it has a lower interest earnings rate than what that person can get if they were to take their money into the market today and buy a new debt instrument. In order to make it attractive to the new investor you need to make your old debt equal to the current debt they can get. Debt is equal to the value of the stream of remaining interest payments plus the principal payment. So if the interest payments are lower than current interest payments you have to take less principal to make up the difference (not quite that simple because compounding is also included). So, if current interest rates are higher and you have to sell your old debt then you will get less than the stated principal to make up the difference. If you were counting on that total principal amount you now have less.

                That leads to the second part of the bank failure problem. Banks make money by lending out their deposits and funds to borrowers (no problem). Banks learned a long time ago that they can’t lend all their deposit as they need some funds to cover regular transactions. If people can’t get their money in a timely fashion they won’t invest in the bank. The Fed has set various rules for how much banks must maintain in cash and cash equivalents to meet short term demand. (A discussion for another time is why does the Fed have to set the rules thus removing the need for banks to be their own monitors. That is why we have too big to fail banks and other problems, banks aren’t responsible for their poor decisions because the Fed picks up the responsibility, and cost.) One of the cash equivalents allowed by the Fed is the bank can hold Treasury bonds and high quality municipal debt (bonds). The bank should always be monitoring the impact of changing rates and if rates are moving then what is the value of the principal if the debt has to be sold immediately (can’t wait for maturity). Usually the bank will “hedge” the debt meaning they have various financial products that will allow them to cover the loss in having to sell before maturity. These instruments are not perfect and can have problems themselves.

                The third part of the bank failure. Silicon Valley  and Signature Bank had depositors that included venture capitalists and other very sophisticated investors. The investors realized that the bank was either not hedging their funds properly or had lent out too much in relation to what they needed to cover their short term needs. The investors fairly quietly started taking their deposits back. Problem is many watch venture capitalists very closely. It took only a few days for a run to start on the bank meaning not just a few but lots of people want their money back, now. The bank had to sell their cash equivalent funds (because they didn’t have enough cash) which were in treasury bonds, considered very safe (and they are because the federal government will always pay what they owe) but they had to sell in a rising interest rate market. Investors won’t pay the full principal amount because interest rates are higher than the rates on the bonds. Hence, less principal coming back. The bank sold something like $21 billion in securities and lost $1.8 billion. They needed to make up the difference and tried to sell new stock to raise it. That sent more shockwaves through bank customers which led to a run on the bank. No one wanted to buy the stock. The bank was overwhelmed by withdrawals and couldn’t meet the demand. The Fed stepped in and closed the bank.

                Many are suggesting that the Fed’s interest rate policy led to the bank failures. High interest rates certainly caused the problem of the lost principal when the bank was forced to sell before maturity. The bank was supposed to be monitoring such things. According to reports, the bank’s mix of securities and cash was substantially different (worse) from industry averages.

The Fed this week increased the Fed Funds Rate by only 25 basis points, recently it was expected to be 50 basis points. There is news noise that the Fed should stop, increase, change. There are calls for Congress to do something (more regulation), again news noise. There may well be new regulations but let it sit a bit before you start looking / commenting. Previous Federal policies and regulations made much of this mess, they may or may not be able to do some good. I am not particularly hopeful but one never knows. There is much noise around the Treasury and Federal Reserve’s move that guaranteed all deposits not just those of $250,000 or less (FDIC insured) at the failed banks. That move was to keep the bank runs from spreading to other banks. It seems to have worked at this point but things are still dicey in the banking sector. Questions are being asked about what other banks may have similar situations to SVB and Signature bank. There have been rumblings in other parts of the country. We have had many public officials making official public announcements. Remember news noise, we don’t know yet in spite of all the words. Back to the guaranteeing of all deposits. That releases all responsibility of the banks and the big depositors. The system wasn’t designed to cover those types of costs. Biden and Yellen have promised that taxpayers won’t cover this cost. There isn’t enough money in the FDIC funds to cover the cost of insuring those uninsured deposits. The insurance premiums are collected from bank fees to all banks. You and I pay those fees. I don’t see how we aren’t going to pay the costs. Unless public officials come up with some other plan, we can hope they will. Now we have another precedence set for banks to rely on the Federal government to bail them out, tying them closer still to the government.

                A recession is still very much on the table. The Fed needs to balance the problems caused by tighter policy (higher rates) with the expected problems generated by those policies, yes expected (the problems aren’t new). They also include stalled growth (which is needed but how long might it last), increasing unemployment, higher borrowing costs. Markets really, really hate, loth, fear, you name it, all this uncertainty. They don’t like it and tend to rebel (do things that the Fed isn’t expecting or prepared for – like bank failures). Expect to see this continue. It’s all part of the process. Remember, we have survived this sort of thing before (recession). It is NOT the end of the world as we know it. It is NOT going to go on forever. The sky is NOT falling. (Things you will hear in the news noise.) It is part of the process of getting the economy back on track and working better. It is going to work, it has worked before and it will work again. Hang in there. Remember what is important and that important things are NOT found in news noise. They are found in friends, family, loved ones and enjoying life. It is doing things together and learning new things. It is in seeing all the beauty around us and enjoying that. It is found in loving and caring more.

            I am now stepping off my soapbox and turning down the music volume.

AP news article -

https://apnews.com/article/federal-reserve-inflation-banks-interest-rates-jobs-91a9185ebce972bbf5ab1f46654f1a53

The Sword of Damocles - Recession Discussion & Related Thoughts

Sword of Damocles
by Richard Westall

            We start the new year with the sword of Damocles poised over the national and world financial markets. The articles are a smattering of comments, commentary and conjecture from market gurus (both national and world) and federal officials tasked with knowing what is going on. Much of the thinking is still relating to recession but a new term is being introduced into the discussion. Additionally, many are discussing just what and when a recession may or may not occur and Powell (Fed Chairman) is trying to keep the Fed focused on is core responsibility. A typical month in the life of the financial world with many pronouncements, much hand wringing and many loud protestations. So, let’s dive into the murky waters and see just what we can see (or not see).

                A new term is being floated to describe the current financial situation, “slowcession”. Apparently the phrase was coined by Cristian deRitis and used by Moody’s Analytics chief economist Mark Zandi. It means economic growth “comes to a near standstill but never slips into reverse [recession].” Every economic downturn and upturn for that matter, is a bit different and past historical data can only give limited help in describing any current situation. We won’t know how this recession or as noted above, slowcession, will look until after the fact. It will probably have several differing characteristics from previous recessions but will meet the basic definition of recession. Do we know how this recession will play out, no. Are there some ideas, yes, many. Will any of the ideas be correct. Maybe. Then again they may all be wrong or at least mostly wrong. Then again, with all the possible ideas and conjectures floated over the past 12 months there is likely to be a couple of the ideas that will hit close to what actually happens. Remember, we have had so many possible scenarios described from the death of the markets to no recession that all possible options have at least been considered. Something has to hit, given enough shots taken. So, we don’t really know but we have some ideas on a recession and its impacts.

                The Guardian (London) collected comments from a variety of international economists and financial gurus and gives us a cross-section of thinking. They suggest from their sources that we should “brace for another turbulent year in the financial markets”. (Nothing new there.) Their comments suggest possible improvement and likely fall of markets, particularly the US. The head of the International Monetary Fund suggests that a third of the world’s economies are in recession which is likely “because the three big economies – US, EU and China – are all slowing down simultaneously”. Some are suggesting a global recession this year. Much of the speculation is based on what economists and other believe will be the response by central banks to the high inflation rate, which will be raising governmental monies interest rates. An interesting side comment, the article suggests that Russia’s economy is already in recession caused in large part by Putin’s failure to find an easy way out of the war.

                I have selected 3 articles on recession comments. The Bond Buyer (1/24/23) brings several analysts’ comments together suggesting recession is necessary. Some economists are suggesting a modest recession (Wells Fargo Securities and others) during 2023, others think more than modest. There is now discussion about the impact of the recession on inflation. Remember, recessions are supposed to kill inflation. Some are suggesting inflation will remain above the Fed target of 2.0% and be in the range of 2.5% to 3.5% for at least a decade. The solution to higher than target rates, the Fed can always move its target upward and declare victory in the war on inflation. That wouldn’t surprise me. Finally, there is some discussion that we will have a split year. Good for half and bad for half. Don’t know which half first. BNN Bloomberg (1/5/23) is a discussion by St. Louis Fed Reserve Bank President James Bullard that Fed Funds Rates are getting closer to high enough to bring down inflation. The thought by many from his comment is that the Fed still has some increases to come. The question is will they be .25% or .50% increases. The market views a slowing increase as positive at this point. Several Fed officials are still concerned that inflation is to high or way to high. That points to bigger increases. The 3^rd article from Reuters (1/25/23) is about the impact of all this to investors. The article warns that many “heavyweights [are] warn[ing] of pain ahead despite market’s recent reprieve”. Even though recent market movements have been positive or optimistic, most are warning that recession is still likely. The article states, “correctly gauging the economy is crucial for investors”. The statement is absolutely correct and impossible to do. Remember that. Don’t try. No one can. Ever. Don’t do it. In spite of what many say especially talk radio financial hosts and slick financial advisors. And of course many believe they know more. Some very few will get very lucky and be correct and you will hear about them and their phenomenal good skills (luck is not a skill). The majority (most) will get it wrong and there will never be any report on them or their numbers.

                Stay your course. Don’t panic or as the British war message stated “Keep Calm and Carry On”. Keep your debts manageable / low. Don’t borrow without careful thought. Save and above all….. enjoy life, friends, family and the beauties around us. Be grateful. I am.

Articles used:

https://www.theguardian.com/business/2023/jan/02/global-economic-forecast-for-2023-a-stormy-start-followed-by-a-ray-of-hope

https://www.cnn.com/2023/01/03/economy/moodys-us-economy-slowcession/index.html

https://www.bnnbloomberg.ca/fed-s-bullard-says-rates-are-getting-closer-to-sufficiently-high-1.1866262

https://www.reuters.com/markets/us/wall-street-heavyweights-warn-against-goldilocks-hopes-2023-01-25/ 

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

 

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.

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.