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/

 

 

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.

 Greetings. It has been quite awhile since the last post but I felt there are some that might find an analysis of the current economic situation as it relates to a very fast paced changing world situation interesting and helpful. It has been some time since we had a shooting war, the Gulf War was the last one involving the United States. The current conflict with Russia and Ukraine will likely stay warm for a bit longer. Putin has not yet reached his objectives. He won't stop until he does. Putin will call the West's bluff on an open attack and push to reach his objectives. Biden and the NATO powers will not risk an all out shooting war at this point (or ever perhaps). Putin has shown he has no such fears. Tom Clancy in his book Red Storm Rising shows what the US military's World War III scenario looked like in the later 1980s. A good book and a good read. Some of the same conditions still apply. I have collected a few financial articles from leading news groups and put together some brief comments. The bottom line at this point is the US and world economy is in for a fairly rough ride over the next several months and may stretch out to a couple of years. Like the COVID pandemic the economic problems will likely drag on. 

I wrote the articles on the days shown and the news articles are from those days. Enjoy the read. Leave any comments and thoughts. Have a good day.

Written 3/2/2022

Global Bonds Extend Rally as War Curbs Pace of Rate-Hike Bets - BNN Bloomberg

Greetings,

                A new day, an increase in conflicts and more whipsawing of financial markets. Such is the life of a market watcher. If you have been closely following financial news (and regular news for that matter) you should have a very sore neck at this point. I hope you are feeling somewhat jaded with all the news, views and opinions swirling around at the moment. We have now had the State of the Union message with attendant power statements, major and minor threats and much noise including the continuing threat of spending trillions of dollars. The  attached Bloomberg article highlights the whipsaw nature of world turmoil. According to this article the Fed will now not raise Fed funds rates in March and likely any thoughts and plans should be scraped according to the article. I am afraid this is the nature of market watching. The pundits / reporters / news agencies tend to lurch from pillar to post with great speed. Remember, everything is short term in financial reporting regardless of what is said about forecasting and future planning. Any future plan will survive as long as short term situations don’t change (of course they always and constantly change). That is why you tend to see solutions being proposed and discarded with great rapidity.

                The underlying problem still exists. There is too much money in the system. I am afraid that war is one way of wringing out some excess funds but not very efficient and of course very painful. One can hope that the threat subsides soon. If so, look to see inflation become the #1 topic again and then the handwringing over Fed Funds rate hikes will quickly become the next short term, long solution.

                Just remember, long term proposals will be subject to short term criteria which will cause new long term proposals based on the current short term situation. No forecast survives today’s financial news. In the financial news business one uses the simplest of forecasting tools which is the straight line regression analysis or even easier (and quicker), pick a current point, pick a past point and draw a line to the future. Remember any past point is acceptable as long as it supports the current “group thinking”.

                The best plan is to stay back from the front line of financial news reporting. Let the pundits slug it out at the front. You and I can remain somewhat calmer and more reserved and enjoy much less stress if we don’t try to react to every “new” piece of information. In these situations slow and steady wins the race both in the fairy tale and real life.

Good luck.

Written 2/14/22

Inflation to exceed Fed’s 2% goal well into 2023, survey shows - BNN Bloomberg

https://www.reuters.com/business/finance/what-global-banks-forecast-fed-rate-hikes-2022-2022-02-11/

Greetings;

                Another 2 articles on the inflation front, markets and reactions. Things are getting very interesting (you remember what that key word means from last letter). The “very” modifier is a further definition of the key word, interesting. It means that the governmental agencies are now reacting. That is both good and bad. The politicians will attempt to minimize the importance of the various datum that is being generated by the numbers guys. You can see what form the politicians are initially likely to use in the statement from Pres. Biden in the Reuters article, 3^rd paragraph, when Biden says “we will make it through this challenge”. Expect to see more politicians weigh in on the themes of “we can do this and let’s all pull together and it isn’t as bad as it looks”. Watch for it, the noises, platitudes and pithy sayings should increase fairly soon. The various federal agencies, especially the Fed, will be trying to assure the politicians and the markets they can handle things. As it progresses and gets more involved (this will not likely be a short duration situation) the politicians will start to blame the Fed and call for more relief, help, etc. As I said it should be interesting. We haven’t seen this sort of financial mix/mash since 2008-9 in the beginning of the great recession. I don’t expect it to be as bad as that but it could be fairly rough.

                I am hoping things are more like the recession of 1997 or 2002 which were much more mild, relatively speaking, and were of fairly short duration. There are 2 basic types of recessions characterized by the letters “V” and “U”, the letters refer to the shape of the recession. The “V” is a fast falling in markets and things then a quick rebound, more of a blip that leaves markets gasping for breath and wondering just why they did a faceplant into the payment but getting up quickly and dusting themselves off (the markets tend to look around in this type of recession to see if anyone saw them fall, they look a bit guilty but carry on.) There will be commentary on what caused the fall. The “U” shaped recession is a bit more serious/difficult. The fall comes but the market faceplant is a bit more jarring and the markets may stay down on the pavement for a time. (Represented by the bottom of the “U” which may draw out over months as opposed to the “V” which may be quite short.) When the market gets up it is a bit more groggy and it will look around and wonder just what tripped them. As you would expect it can be quite a bit more jarring and damaging. (The recession of the early 80s was more “U” shaped as was the great recession of 2009 which was very “U” shaped. You remember how long it took to get out of the 2009 recession, that’s the long bottom of the “U”, more like |____| .)

                So, keep the faith, if not in the system in life in general. The Fed will be increasing rates, the politicians will become more involved and their voices more strident and shrill. Look for the blame game to start fairly soon. We must have a scapegoat and the politicians will indeed look for and find one, whether it is deserved or not. The Republicans will have one and the Democrats a different one. Oh yes, and I forgot, the talking heads will have much to say, most of it irrelevant but possibly entertaining in a sad sort of way. I will be interested to see how it impacts the Democrats massive spending plans. The diehard Democrats will want to push on with the spending which will make things worse by pumping more money into the already loose money policy and not allow the easy money to dry up. If they get the spending package through in most of its aspects look for inflation to remain for years not quarters or look for several quick, sharp recessions in a row for the next several years.

                Life is good when we remember that God, family and friends are the real value in this life and inflation can’t diminish the value of them. 

 

 

Don’t Ignore the Economy or Politics

             I just loaded one of my playlists to my computer’s music player. I have the following songs among many I am listening to as I write tonight including Roll with the Changes by REO Speedwagon, Jukebox Hero by Foreigner, Bang a Drum by Bon Jovi, Heartbeat City by The Cars, Bad is Bad by Huey Lewis & the News, What it Takes to Win by Journey, Speed Turtle by Brian Wilson, Baby Come Back to Me by Manhattan Transfer, Brand New Day by Sting, and Africana by Kurt Bestor. The selections are a bit eclectic but a good mix for me. I realize it is loaded with what many would consider some older period works (1970’s – 80’s). I have very vivid memories of listening to groups like Three Dog Night  and Journey in the Utah State University Spectrum (basketball stadium) with more than 7,000 screaming fans (all considered close friends by the end of the evening). The stage was raised about 6 feet off the floor with four 20 foot high sound columns on the sides of the stage, a wall of speakers behind the band that stood 8 feet high and ran the entire width of the stage. I am convinced that when they powered up the sound and light systems in the Spectrum the lights dimmed in the rest of Logan. The band would start with something like Line of Fire (by Journey) and it would just get better and better. This is not the same experience you get by plugging in your ear buds and cranking up the volume on your IPod. Ear buds may be able to deliver a similar decibel level as music measured in a concert hall but that is where the similarities end. I remember the feel of the sound waves slamming into me. It was very much a physical thing. One could feel the bass notes through the floor, your shoes and into your bones. There is something very real about the feel of that kind of music in that setting.

             The best writers, like the best musicians help us experience stories through our senses. Somehow the reader has to be able to feel, to see, to hear, to touch,  to smell the story. All designed to create emotion and a sense of connection. We need an investment in the story. I read one of David Weber’s Honor Harrington series of books about a naval officer and her exploits. Weber is particularly good at describing naval battles. The stories are very much science fiction but  the terms, the tactics and the weapons are all well detailed and dovetail together. I remember reading an engagement in which the good guys did what is called a rearguard holding action. The action is designed to allow a group to escape but depending on the strengths of the opposing force, it may bode ill for the defending group. Here it allowed a group of under armed transports to escape a devastating ambush. I felt heartache for the dying rearguard force as the transports watched the destruction of this cover fleet but which destruction allowed the transports to escape. In real life those purchasing the time usually do not survive and know they are not likely to. One doesn’t have to have actual experience in death and destruction to feel the loss however, as Weber evokes emotions through descriptions and feelings by the characters who survive and those who know they are going to die. A good writer creates a mental image that one can immerse themselves in to generate and drive complex emotions, some very intense ones.

             L.E. Modesitt Jr. in his writing has the ability to lay out very complex economic, political and ecological concepts in such a manner as to make good story telling. Granted, one does not usually experience death from economic conflicts but it can be the catalyst that leads to death and destruction. However, with the proper use of such conflicts a much richer story is delivered. These principles and concepts add spice, flavors, colors, sounds, sights, if you will. It is important not to neglect the use of the soft sciences in story telling. These can be part of the back story or of the world building. They can also add dimensions and layers to main and secondary characters and create well rounded  plots and story arcs. Consider just a few of Modesitt’s books for particular situations. Parafaith Wars and The Ethos Effect show religious expansionism  vs. eco-technology and what can happen. The books are stand alone volumes but written in the same universe, centuries apart yet linked. A portion of the Recluse series involves the main character named Lerris who is an order mage but has to earn his living as a woodworker (a craftsman). He has to practice his trade to get enough money to travel. Yet because of his trade there are many great story arcs. The first 3 books of the Imager series involves the main character as a portraiturist and then as a magic user. The painting stays in the character’s background and colors the story. The entire economic and political setting is consistent with this aspect. In the Ghost series (a three book series) the main characters are university professors. The setting is such that it reminds me of class and all the situations one gets in that setting. Again Modesitt weaves the occupations into the story which adds story arcs and gives interesting flavors to the setting and characters. One of my favorite science fiction books by Modesitt is The One-Eyed Man. Here a society and social order is build around a planet that is influenced by a unique lifeform hidden yet in plain sight. The hero is commissioned to do an ecological survey to see if the settlements are interfering with the planetary systems. No one wants to upset the balance but things look poised to do just that.

             So, don’t neglect the full body effect of economic and political settings, ecologic and environmental aspects and certainly give characters jobs and lives. All will help generate deeper and more intense situations and many more story arcs, plots and subplot opportunities. Remember, politics can kill us. Just look at the French revolution.