The Year of More of the Same

  

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

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

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

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

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

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

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

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

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

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

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

Articles cited.

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

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

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

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

Recession, Banks, Debt Ceiling – You Must Believe Me Now

The question is, if it’s said loud enough will it be believed? Because this time it really is true (it is being said very loudly). Or is it?

The discussion about recession has been on-going for some time now. I started writing about recession possibilities over a year ago. The discussion has moved back and forth between how do we avoid one to how do we get a soft landing to what can we do to help those that will likely suffer if the landing isn’t so soft. We may see in the next several months various pronouncements by various talking heads. You notice I didn’t say anything about what phase this is. I don’t know and it doesn’t matter as much as most news personnel would like you to believe from their  strident and every increasing noise. Remember, it is important to keep the fans whipped up. We will be able to look back in several months when the National Bureau of Economic Research (NBER) will state that a recession started at such and such a point, or didn’t. Remember, only the Bureau is recognized as the official group that can declare such and they always include factors that are backward looking, meaning we don’t officially know until after the fact. This also means that we don’t officially know if we have had a soft landing, missed recession or face plant until after the fact either. There are other signs that may give us indications of various outcomes, however. We have been moving toward this point for months and months. It is dragging on longer than a normal news cycle so it gets recycled regularly. Expect to see it to continue. Again, the fans need to be whipped up to keep enthusiasm high. We are getting more comments like JPMorgan Chase CEO, Jamie Dimon (CNBC, Apr 14, 2023 Manie Dimon issues warning on rates: ‘It will undress problems in the economy’) that investors and business should plan on interest rates remaining higher for longer. The Fed still needs to “dry out” the economy, get the excess funds (easy money) out of the system. That hasn’t changed. We still have a recession we are trying to work around or work through depending on what you think may happen. Work around implies a soft landing or just a slowdown; The economy slows down, unemployment rises a bit. Banks tighten their lending policies. A few business and individuals suffer or go under. The Fed is able to get their balance sheet down without the stock and bond market tanking (it slows down, drops and recovers fairly quickly). We stumble a bit and slow down. No or mild recession and we carry on at a more measured pace. Work through implies a recession; we trip or worse, face plant and have to pick ourselves back up. We see bank failures, businesses and individuals declare bankruptcy. The Fed isn’t able to maintain a smooth decrease in its balance sheet or worse doesn’t reduce it. The stock and bond market react to all the uncertainty and failures by tanking. It takes a longer to climb out of the hole.

One of the consequences of the higher rates is the financial sector including banks will feel the pinch. They have to change from an easy money mentality to a more measured lending stance. Easy money implies less diligence in protecting deposits and in shoring up a banks balance sheet. There is little or no profit in protecting deposits (lending them out is where money is made) or doing more than the minimum required or skirting regulations. Most banks try to balance the profits with the safety, we have seen the banks that didn’t. The price for skirting the safety regs in good times is minimal and it is hard to see which banks may be skirting until too late when times turn bad. The best we can do is go with financial institutions with a long record of being conservative. Credit Unions tend to be more conservative by their nature and charter requirements. Still, it’s hard to tell. There is something to be said for spreading money around between institutions. We also have deposit insurance which is helpful but in the Silicon Valley Bank and First Republic Bank failures the Fed stepped in and guaranteed all deposits which stressed the insurance provider FDIC (it almost broke it such that another big hit would cause serious problems). So, things are complicated, of course. By guaranteeing all deposit they essentially gave a green light to the poor practices of the bank. They also prevented a bank run on several similar shaky banks across the country. Whether that was the right thing to do or not should be debated for a long time. The current mentality is that the government can fix everything which makes them responsible. Hence more regulation and laws and more places for shady people to find loopholes. Notice that the defense for many of these funny practices is that the entity did nothing wrong, they were following the rules. It was the rules fault. So, of course, more rules are needed. That is a very bad spiral and you can follow it down to the final conclusion. Watch the financial sector for more stress in general and how they seem to take care of it. Look for more rules and regulations. I am glad I am finishing up my career in finance and not starting it. It is a very different and much more difficult place to work then 30-35 years ago when I was first involved.

                Now the debt ceiling question. I am not going to quote any articles. There have been so many. It is the current hot, hot, hot topic button and the news media are mashing it with their biggest and most massive sledge hammers (gleefully I might add). Do you feel like you have been beat up no, pummeled for weeks on end. Everywhere you turn someone or some organization is talking dire straits, doom, gloom, death, destruction, mayhem, the very end of the world as we know it, the end of civilization, the death of all we hold near and dear, (pause for dramatic breath!!!!!!) AURRRGHHHHHHHH. Why can’t you people see how important this is!!!!!!!!!!!

Sorry…., I got just a little bit carried away.

It won’t happen again (at least until tomorrow anyway.)

                This is the news and financial media at its finest. This it the current news media model and the debt ceiling is the ultimate opportunity to exercise its model to the fullest. The underlying question is the government has set some limits on its spending capability, a good thing. It has come around again that the government can’t manage its input and output. The easy solution is raise the debt ceiling or remove the debt ceiling requirement or better yet get spending under control. Now, granted, the answer is never that easy and that is also part of the problem. The solution is pretty complex but workable. However, we have powerful political forces that are using this debt ceiling to push their various points and agendas.  

As background information. The following is from Wikepedia, United States debt Ceiling;

The U.S. has never reached the point of default where the Treasury was incapable of paying U.S. debt obligations, though it has been close on several occasions. The only exception was during the War of 1812 when parts of Washington D.C. including the Treasury were burned.

In 2011, the U.S. reached a crisis point of near default on public debt. The delay in raising the debt ceiling resulted in the first downgrade in the United States credit rating, a sharp drop in the stock market, and an increase in borrowing costs. Congress raised the debt limit with the Budget Control Act of 2011, which added to the fiscal cliff when the new ceiling was reached on December 31, 2012.

The last time things got too close, government set new rules and they immediately went about figuring out where the loopholes are. And it is continuing. Is it a problem. Yes. Is it the end of things as we know them (as the news is telling us). No. Are there solutions. Yes. Should you be upset. Yes. Should we be acting like Chicken Little. No. It will play out. It will get close. There will be much rejoicing in the media when the “solution” is reached. Then the media will begin the analysis phase which will allow for continued coverage for many months. So it continues. Should you follow all the stories. DEFINATELY NOT. When this crisis passes the media will need something else to keep us tied to them. Look for the recession to come back in vogue. Don’t be lead around. The various financial crisis will continue in the news. You can always find them if you want. I suggest you don’t want to. Keep your finances simple. Keep debt low. Save as you can. Debt is good for some things, housing, education, transportation. Live simply.

                Remember what is important. It isn’t news. It is family, friends, the things you love. It is the beauties around you. It is relationships, the good earth, the joy of interacting. It is game nights, movies together, playing with kids (big and little ones). It is in quite walks, talking in person to friends and family. Meeting new people, a meal together, building something, watching a sunrise and sunset. Tell someone you love them. Share precious things, a hug a kind word, hope.

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

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.

 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. 

 

 

The bad dreams spawned by thinking about taxes and tax filing

I realized I haven’t done my taxes yet. Usually I have them done by now; the refund deposited and much of it spent. The reason for my procrastination is that I may owe something this year. I don’t know that but the thought makes me ill.I hate it with a passion reserved for few other things. I don’t think I would feel so strongly if I thought the Federal government would or even could use the funds wisely but having watched the latest shenanigans in Congress (even at our own state level) I just don’t have much confidence. We seem to lurch from one crisis to the next like a drunken sailor. Congress seems to careen from one short-term “solution” to the next, apologizing with a drunken smile at each injustice and injury but never thinking that the real solution might be to get sober. There is a good horror story here but I like horror stories to be fiction not true.

A new favorite author I have been enjoying is Nassim Nicholas Taleb. He writes The Black Swan, Fooled by Randomness and his new book, Antifragile. I have referred to some of his thoughts in previous blogs and will continue to do so in future blogs and comments. He has many comments on politicians and their actions. My own thinking tends to lean towards the thought that about the only way a politician seems to be able to justify his existence is by either spending money, creating a new program, increasing the welfare rolls, or creating a new regulation. One of my favorite examples is the TSA and airport security. A multi-billion dollar agency has been created to make a visible statement that something is being done. It doesn’t matter if the activity is helpful or hurtful, just that there is activity. What constitutes success here? The number of people embarrassed, the length of lines, the amount of money spent, the number of new Federal employees, the number of laptops stolen from the screening areas? The real hero here is the person who came up with the reinforced steel door for cockpits and the rule that pilots stay in the cockpit in any emergency situation. That person deserves a medal but will probably never be recognized and may not even be known. Dad tells a story that happened fairly soon after we had moved to Logan. Several of the neighbors thought it would be good to have street lights on our block. The families along to block got together, did the research to find what needed to be done and raised the money for the streetlights. The city people offered to install the lights because they had all the right equipment needed to do it correctly. When the job was done the local newspaper found out that a citizens group had improved their neighbor. As I remember the story a little ceremony was scheduled and who should show up but the local politician to be photographed and included in the story. He wasn’t involved in any other activity than the picture and story.

So in your writing, make your politicians believable. Whether that means a good guy or a bad guy depends on what you need. However, in my current frame of mind you are really going to have to work at making me believe a story with a good politician. Now, if you wanted to include one that didn’t do any work and only shows up for the ribbon cutting I have just the reference materials to help you.