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/ 

Hang On For A Rough Ride

                  As the old saying goes, hang on, things are likely to get a bit rough. I have pulled financial news articles from the past week or so. Financial thinking has been fairly consistent for the past weeks and the most recent 10 days have been fairly typical. By consistent I mean, lots of uncertainty, markets and thinking are moving up, down and sideways most all of the time. Nobody really knows much of anything but there is lots of noise.

First, a good article from Think Advisor (10/24/22) concerning the annual meeting of the Securities Industry and Financial Markets Association (SIFMA), an organization I subscribe to and is very much an industry standard. The meeting is attended by many big wigs from finance and government. Janet Yellen, secretary of the Treasury, spoke at the meeting (more on that later). One of the panel discussions included several business economists discussing inflation and recession among other things. Several are now predicting that there will be a recession in 2023. The participants listed several factors supporting their conclusion. The factors are the same as have been discussed before, inflation being the 800 lbs. gorilla in the room. The article gives some good comments and supports for their conclusions. Much of the current discussion involves estimating and second guessing the Fed and its inflation response. Since the 1970s and Alan Greenspan’s solution to inflation the Fed has been terrified of any type of uncontrolled inflation. The solution in the 1970s just about destroyed the US economy before it corrected itself. Corrected itself is also correct, Alan Greenspan and the Fed did not fix the 1970s economy but they made it possible for it (the economy) to rebalance itself – governments and individuals don’t control economies in spite of what they say, economies control governments and people. The Greenspan solution was one that worked or at least that was what governmental and financial think tank gurus came up with that worked, and it did work. Governmental officials and politicians ever since then will do just about anything to avoid that situation again. The problem is that much of the fiscal and governmental policies of the past 20 years have been such that it supports inflationary growth. Then the loose money supply accompanied with artificially low interest rates (yes, dear reader, rates have been artificially low for 20 years, held down by direct intervention from the Fed which allowed government to pursue its various expansionary agendas) got away from the governmental people as it had to do. The low interest rates and expanding money supply couldn’t go on forever but for 20 years governmental types have been kicking that can down the road until now. That is why the current administration is howling that the current inflation isn’t their fault but they are willing to add to the problem by increasing governmental spending by unprecedented amounts which is very inflationary. Hence, trying to kick the can down the road again but the financial system has reached its limit. Goods and services are not able to absorb the excess funds without adjusting and that means prices have to go up, in this case way up, way fast (the basic definition of inflation) as we have seen in the last 8 months. That is why the big concern. This looks a lot like the inflation rates of the 1970s. The cure is of course, recession, the rapid deceleration of spending and the removal of the excess money from the system. It would really help shorten the recession and cause it to be less severe if government curtailed spending, reduced governmental needs and did not fund new programs without also including revenue sources (net funding). All of which the current administration refuses to consider but instead is increasing spending and unfunded programs. We have to wait for price increases to begin to slow or stop (in spite of the governmental spending headwinds) as supply and demand are brought into closer alignment, i.e. demand does not outstrip supply and so prices are normalized and we don’t have too many dollars chasing too few goods. We have to weather inflation as price and supply try to find some sort of new equilibrium. I am afraid inflation hits very unevenly in these situations. It is inherently unfair, unjust and unkind. 

                Again, the mechanism to get inflation under control or rather, under more control is to dry out the excess money from the economy and that is done by making money more difficult or expensive to acquire and use. It has to cost more. The interest rates we pay is the control mechanism. Hence, the Fed Funds Rate helps increase or decrease what it costs to borrow and use money. In the second article by Reuters (10-24-22), Yellen is trying to make the point that the Treasury is aware of the problems of drying out the economy and at least in the area she has some control over is attempting to assure the financial system that the government is willing and able to keep one of the major secondary problems caused by inflation at bay. The problem is that as the cheap money (low borrowing costs, relatively speaking, caused by very low interest rates) dries up, investors become unwilling to speculate and began to draw their funds out of banks and financial institutions and put it in safer places such as Treasury instruments or cash (again safer is relative). Banks and financial institutions use leverage to earn additional profits by using borrowed money to invest. You take your money, they have to go find money somewhere on a short basis to cover your withdrawals. In the great recession of 2008 there wasn’t enough liquid funds available to meet the withdrawal needs and the government bailed out many financial institutions by printing more money among other things and almost wasn’t fast enough in responding (TARP if anyone remembers). Several big financial firms didn’t survive or were absorbed. Yellen is trying to tell the markets she is aware of the situation and it is under control which may or may not be accurate but we can hope.

                The Bloomberg article of 10-21-22 is a discussion of what Fed Funds Rates may be and why or why not. There is some speculation that Fed Funds rates may need to be as high as 4.75% - 5.0%. The Fed is trying to give the impression of controlling inflation and the financial institutions are trying to act like the Fed has some control. Both are incorrect. The Fed can’t “control” inflation and financial institutions are not really supporting the Fed but trying to find any place to hide away from the train wreck that is coming. As an aside, the financial economists are having a heyday because they can predict just about anything and there is a pretty good chance they will be correct at some point, for a change. Watch to see who claims they got the forecast right and what part of the forecast in the next 18 months or so. I need to flog a dead horse again. The Fed can not control inflation with any kind of fine tuning. Watch and see, at the very most they can nudge the inflation rate around. The Fed will get this whole process wrong (as measured by various financial institutions, markets and money gurus). But they may be able to influence inflation to some extent. According to the people in the know (don’t trust the people in the know), the Fed started raising the Fed Funds Rate to late or too early, they will not raise it fast enough or they will raise it too fast, and they will overshoot how high and for how long rates need to stay up and they will either not decrease rates fast enough or too fast on the back side of things. They will not be able to stop the inflation rate from gyrating all over the place, both up and down and they will likely completely miss their target inflation rate of 2.0% by a wide margin. The final solution to the last point will be that the Fed will change the target inflation rate to something other than 2.0%. In two years the Fed will declare that they beat inflation and it is now tame again at whatever rate they decide on. Again, not accurate (notice I didn’t say not true) as the Fed never has really been able to control inflation but rather sets a rate (for the last several years, 2.0%) that somewhat matches the ongoing economic activities. There will be more articles about the Fed and its “fine tuning” the Fed Funds Rate in the coming months. Don’t be fooled by the noise.

                The final article is a bit of fluff about the resignation of Prime Minster Liz Truss (Britain) after just 44 days in office. She has the distinction of being the shortest serving prime minster in history. Many of her problems were caused by very aggressive economic policies that were considered too radical for the times. Just a reminder why governments tend to be slow and ponderous in their decisions and a good example of why we have had 20+ years of expansion in this country. It is too politically difficult to change things and who wants to rock the boat, even if it needs it until there is some kind of popular uprising that is consistent with the political leaders thinking. A good example is the case of Ronald Regan and the then new thinking of supply side economics which was a good thing.

 

Articles referenced;

https://www.thinkadvisor.com/2022/10/24/bofa-economist-i-dont-see-how-we-avoid-a-recession/

https://www.reuters.com/markets/us/yellen-says-taking-steps-enhance-treasury-market-funds-resilience-2022-10-24/

https://www.bloomberg.com/news/articles/2022-10-21/fed-officials-expect-debate-on-rate-peak-and-when-to-slow-hikes

https://www.bnnbloomberg.ca/markets-are-calling-the-shots-uk-traders-react-to-truss-exit-1.1835289

The Art of the Economic / Financial Forecast

 

 

        Have you watched a child finger paint recently. Some start slowly then add more colors or big swirls. Then at some point mix the colors all together and want to start over. That is a good analogy for today’s markets and the forecasts that are being generated by various parties. What can you make from the mess? There are some nuggets in the mess but they may be more related to the process than the actual information provided. Economic / financial forecasting has a sequence to it. As a new problem is perceived the individual members of the reporting community try to grab the initiative on the other community members by reporting something fastest and loudest. There usually isn’t much substance and very little analysis to the first reports / analysis, mainly noise to generate interest. Quick charts and graphs will be added to give substance but may not be of much value. As the issue develops more concrete information is included as it becomes known, statements from officials, past trends that are thought to be similar to the current unfolding situation. Remember, the new problem has not really developed yet so any comparisons to past data are wild and loose. But there will be charts and graphs and comparisons. As the situation develops, conjectures, suppositions, ideas, comparisons and theories will be put forth and discarded at a rapid rate. There should be lots of conflicting opinions and conflicting charts and graphs. As the situation further develops the initial flurry should settle down a bit with more concrete information based on actual current data. Opinions on the meaning of the data will still swing wildly and there will be many interpretations and many conflicting points, still. At some point the data will tend to support a particular analysis. All the other conflicting statements will be forgotten or just dropped and there will be some general pronouncement from some official, governmental or business leader that many if not most will agree with. There will be a short period of quiet or something like a breather then some news group will perceive a new problem and away they all go again with the reporting community trying to grab the initiative. Several new problems may be simultaneously running depending on the particular economic climate. Our current climate is very conducive to the multiple current problem scenarios. The news groups love this type of environment. There are so many possible new problems that many groups have the opportunity to be first on something. This is the time for them to be looking and jumping on and at any and every new piece of information and rumor.

                So, what are you to do. Take it slow and easy on the new news. Wait for a theory or idea to stand some test of time. As an example, I quote from a CNN Politics article of June 1^st ,Treasury secretary concedes she was wrong on ‘path that inflation would take’ and which were also referred to in a Reuters article of June 7^th, Yellen says inflation to stay high, Biden likely to up forecast,

“US Treasury Secretary Janet Yellen admitted Tuesday that she had failed to anticipate how long high inflation would continue to plague American consumers as the Biden administration works to contain a mounting political liability.

"I think I was wrong then about the path that inflation would take," Yellen told CNN's Wolf Blitzer on "The Situation Room" when asked about her comments from 2021 that inflation posed only a "small risk."

The admission was the latest indication that the administration's expectations of a normalizing economy were thrown into disarray by the continuing pandemic and the war in Europe.

"As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn't -- at the time -- didn't fully understand, but we recognize that now," she said.

Yellen and other White House officials once framed inflation as a temporary side effect of the economy returning to normal following the pandemic, pointing to snags in supply chains and demand outstripping supply.”

Yellen has taken more responsibility than is usually done for her comments. The market did call her out on it however. Notice the time frame is 6-8 months,  much too long to wait in the news hungry environment that requires snap statements and quick facts and figures.

                What then are some of the new, new problems that the news folks are jumping on. Stagflation is now starting to show up in articles, recession is much more common and is expected to occur in 2023. The discussion is now when in 2023 for recession, some are saying 2^nd quarter, others late in the year. The shouting has gone from no recession or few saying it was possible, including the governmental officials, to many saying recession is possible even likely. Notice there hasn’t been as much said (or at least not said by the mainstream newsies) about supply chain bottlenecks or the Ukrainian war. Employment figures have become sparce in the last little while. The stock and bond market movements are getting some attention on a periodic basis, mainly when a new high or low is hit. Notice I didn’t specify just how high or low or how relevant it might be. Movement is what seems to be interesting the newsies. Again it comes back to volatility and uncertainty. With uncertainty newsies can make wild statements and maybe they get it right. If they don’t there is very little consequence to being wrong. Remember that, no or very minor consequences for being wrong. Look at Yellen and Powell. No job loss, little or no censure but it is important to have an excuse, the greatest one is “unforeseen circumstances”. In that context everything can be considered unforeseen.

                Good luck and hang in there. Take everything with a grain of salt until some time has passed. Remember the definition of recession requires a look back meaning that we have to have historical data meeting certain criteria before a recession can be declared. It is past tense. We won’t know when a recession has started until after the fact. Many financial situations are like that. It’s not worth getting worked up and panicky about. Enjoy life, family, friends and the beauties around us.  

CNN Article

https://edition.cnn.com/2022/05/31/politics/treasury-secretary-janet-yellen-inflation-cnntv/index.html

Reuters Article

https://www.reuters.com/markets/us/us-faces-unacceptable-levels-inflation-yellen-tells-senators-2022-06-07/

 

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 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.