Cat on a Hot Tin Roof – Some Explanations and Information

A cat on a hot tin roof is the appropriate image for how the financial markets and economies feel and are reacting at the moment. An avalanche of commentaries and volumes of data are pouring into and being poured over by a myrid of individuals, specialists, talking heads, and governmental bodies. There is no shortage of information, opinion, comment, commentary, noise and confusion. I have found a couple of articles over the past 2 weeks I think may be interesting and helpful. I am including them in their entirety.

Some observations. Quoting from the first line of the Bloomberg article, “The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks.” That sums up exactly what is happening. That is the 900 lbs. gorilla in the room. If or when it breaks, that is recession. The 2^nd article from the Spokane Review (originally from Bankrate.com) is a pretty good discussion on how rising interest rates may impact various financial instruments. Remember, don’t focus on the hype language. Look for the solid information. Good luck. Hang in there and don’t panic.

https://www.bloomberg.com/graphics/2022-world-economy-wall-street-market-worries/

Bloomberg

Everything That Could Go Wrong in Markets as Free-Money Era Ends

By Jack Pitcher, Alexandra Harris, and Alex McIntyre

May 9, 2022, 6:00 AM MDT

The world’s most powerful central bank is about to find out how far it can squeeze financial markets before something breaks. Struggling to tamp down the most pervasive inflation in decades, the Federal Reserve delivered its biggest interest-rate increase since 2000 last week while outlining a plan to begin unwinding trillions of dollars in asset purchases that have kept world markets brimming with cash since the 2020 crash. Its peers will soon follow suit. Bloomberg Economics has estimated that policy makers in the Group of Seven countries from the European Central Bank to the Bank of Canada will shrink balance sheets by about $410 billion combined in the remainder of 2022.

Yet it all comes at one of the most precarious times in recent memory for the global economy. Russia’s war in Ukraine, and the bevy of sanctions that followed, have upended business. Supply chains that were disrupted by the pandemic have grown even tighter, causing chaos for companies lashed by soaring prices for everything from labor to commodities. The worry now is whether central banks can accomplish the high-wire act of weaning Wall Street off unprecedented stimulus, without disrupting the flow of capital and tipping economies into recession.

Bloomberg News canvassed traders, money managers and analysts on their top market indicators to track corporate distress, liquidity shocks and cracks in the financial plumbing. We then analyzed decades of price history to identify the systemic turning points — when central bankers on a hawkish mission risk crashing the real economy.

While there’s little sign of widespread stress yet, some barometers of cross-asset health are moving closer to the danger zone. All that suggests investors are in for a bumpy ride as the Fed drains its unprecedented liquidity measures.

Here are four indicators keeping Wall Street worrywarts on edge.

1. An Upside-Down Bond Market

Like it or not, the U.S. Treasury yield curve remains the top dog economic forecaster on Wall Street — even if the Fed’s bond-buying spree in the pandemic has distorted its message. In normal times, when the business cycle is in good health, the interest rate on debt maturing in, say, 10 years, will be higher than that on shorter-term securities as investors demand more compensation for the risk that inflation down the road will erode returns. If the opposite happens, meaning short-term rates are higher than the longer term, the foreboding dynamic is known as an inversion — signaling a bet that the central bank will eventually have to cut rates in order to salvage growth.

While not every inversion in the yield curve has led to a downturn, prolonged distortions have become eerily accurate, especially when two of the most widely followed curves become inverted at the same time, data compiled by Bloomberg show. Since the beginning of the 1990s, whenever yields on both 3-month Treasury bills and two-year notes have risen above the rate on 10-year bonds, a recession has followed almost without fail within the next six to 18 months. It's a simplified measure — the most recent double inversion preceded a pandemic that no one saw coming — but big moves in yield curves have kept Wall Street on edge recently.

In late March and the start of April, the gap between two- and 10-year yields briefly inverted before normalizing, reflecting market angst that the Fed’s mission to aggressively tighten policy risks sparking a recession by ramping up the cost of money and thereby constraining consumer spending as well as business activity. At the same time, the spread between the three-month Treasury bill and the 10-year yield has been heading in the opposite direction, suggesting a still-healthy outlook for U.S. investment and consumption that gives the central bank room to make good on its policy-tightening plan.

For now, yield-curve worriers are easy to find as the end of the easy-money era rocks global markets. Already this year, the Nasdaq 100 index of technology shares has had the worst start in decades, speculative stock strategies have lost billions and cross-asset volatility has spiked all over the world.

PGIM Chief Executive Officer David Hunt warned last week that signals in the bond market suggest a significant risk of a recession in 2024, while Citadel’s Ken Griffin said the outlook is the most uncertain since the global financial crisis.

2. Disruption to the Flow of Credit

U.S. companies have lost their ability to borrow money at ultra-cheap rates, a direct function of the Fed’s mission to cool the red-hot business cycle that’s stoked inflation for everything, everywhere all at once.

But when borrowing costs surge too far, too fast, the flow of corporate credit can become disrupted or even blocked entirely. In extreme instances, healthy companies can lose access to funding, wreaking economic havoc. This happened most recently during the onset of the pandemic, which forced the Fed to take unprecedented action to keep corporate America afloat.

The most widely followed credit gauge is the additional yield over Treasury bonds that investors demand to hold debt from the largest and strongest U.S. corporations. Currently, the spread on a Bloomberg index of U.S. investment-grade bonds has risen to 1.35 percentage points, from as low as 0.8 percentage point in June 2021, signaling higher borrowing costs that still sit below a key threshold for stress.

When the spread rises above 1.5 percentage points, it’s a warning sign that credit markets could seize up, making borrowing a lot harder, according to analysts and investors informally polled by Bloomberg. The metric has proved a reliable red flag in the past after crossing 2 percentage points in the volatile years after the global financial crisis and during the pandemic fallout.

To illustrate how the flow of credit across the entire U.S. economy can constrict, Bloomberg examined commercial and industrial loan data from all commercial banks, published monthly by the Federal Reserve.

The analysis, dating back to 1989, shows that when investment-grade credit spreads approach and exceed 2 percentage points, a threshold that’s been crossed just six times over that period, a contraction in loan growth almost always follows.

In January 2008, for example, borrowing costs for investment-grade companies soared to more than 2 percentage points for the first time in more than five years. Risk premiums remained above that level for nearly two years, and a prolonged slowdown in commercial and industrial loan volumes came next. Loan volumes fell for two years beginning in November 2008, causing historic damage to the world economy.

More recently, credit spreads spiked to over 3.5 percentage points in the March 2020 selloff. Yet some of the easiest borrowing conditions on record took hold in the following year as the Fed pumped liquidity into the financial system and even offered to buy corporate bonds directly.

Now premiums are back on the rise and company debt is becoming volatile. Investors and companies alike will be watching whether borrowing costs spike into risky territory that would disrupt the flow of credit once more.

3. The Junk Penalty

Borrowers with weak balance sheets were given a reprieve after the Fed and other central banks rode to the rescue in the dark days of the pandemic. For the better part of two years, credit was dirt cheap and defaults became virtually non-existent. But the liquidity party is coming to a rapid end as interest rates rise — with new speculative-rated debt offerings this year falling to the lowest volume since 2009.

A recent bond sale from Carvana Co., for example, initially struggled to attract investors, and the used-car company ended up paying a whopping 10.25% yield while buyers demanded a clause intended to help shield them from losses if the company were to head to bankruptcy court. Similar cases abound.

A measure investors are watching closely is the extra risk premium that bond buyers demand to own debt from the lowest-rated companies compared to investment-grade peers. Call it the junk-bond penalty. When this premium goes up, it makes borrowing more costly and less accessible to issuers who need the funding the most, especially those who have poor credit ratings due to weak cash flows or high debt loads compared to their earnings.

If firms that have limited money on reserve and debt coming due in the near future lose access to primary markets, that makes defaults and bankruptcies more likely — bad news for growth-minded policy makers at the White House.

For most of the post-pandemic era, junk-rated companies across the globe paid little more to borrow than some of the biggest corporations — an average of just 2.4 percentage points more during 2021, a year that saw some of the easiest credit conditions ever, according to data compiled by Bloomberg. That made corporate failures exceptionally rare. But the tide is starting to turn. The junk penalty climbed above 3 percentage points last week. While that’s below the historical average of about 4 percentage points, the fast pace of liquidity tightening could soon cause trouble for the most vulnerable of companies. Since 2000, when the junk penalty has climbed above 5 percentage points and held above that level for an extended period, defaults have almost always risen above the historic norm, data compiled by Bloomberg show.

4. Short–term money markets crack

The Fed’s massive pandemic stimulus program caused excess liquidity in the financial system to balloon, with banks flush with record cash in the form of reserves. Now, as the monetary authority begins to pare a $9 trillion balance sheet, a process known as quantitative tightening, Wall Street is on high alert for any resulting logjams in the financial plumbing.

When the Fed starts to shrink asset holdings — by simply not replacing maturing securities — there will be an increase in the number of Treasuries and mortgage bonds in search of a home in the private sector. And the amount of reserves held in the banking system will fall by design.

No one knows how any of this will ultimately play out. But the last time the central bank embarked on quantitative tightening, bad things eventually happened in late 2019. Banks saw their reserves fall sharply — fueling a disruptive spike in interest rates on so-called repurchase agreements, a keystone of short-term funding markets. That caused liquidity headaches all around and forced the central bank to intervene in the funding markets.

The Fed has since implemented additional tools to help reduce these liquidity risks. But all bets are off. Some two and half years ago, total reserves held by depository institutions at the Fed slid to around $1.4 trillion. That was enough to cause liquidity issues in overnight lending, even though banks at the time considered $700 billion as the lowest threshold for comfort.

This time round, Barclays Plc estimates the tipping point at some $2 trillion versus $3.3 trillion currently. All this is guesswork with few historic precedents, so the reserve level will be a key focus for risk watchers well before it hits this point.

All in, traders around the world are bracing for a disruptive tightening in financial conditions on multiple fronts, from bonds and credit to money markets, as the Fed spoonfeeds markets with liquidity no longer.

“We have never been able to reduce inflation by more than 2 percentage points in the U.S. historically without inducing recession,” said Guggenheim Partners Chief Investment Officer Scott Minerd at the Milken Institute Global Conference in Los Angeles. “I think that it's going to be really hard for the Fed to maneuver into a soft landing.”

https://www.spokesman.com/stories/2022/may/09/biggest-winners-and-losers-from-the-feds-interest-/

The Spokesman Review - Spokane, Washington

Biggest winners and losers from the Fed's interest rate hike

Updated: Mon, May 9, 2022

Spokane, Washington

James Royal    Bankrate.com (TNS)

Last week, the Federal Reserve announced that it’s raising interest rates by half a percentage point, bumping the federal funds rate to a target range of 0.75 to 1.00 percent. The move follows an increase of 0.25 percent in March, as the Fed continues reducing liquidity to the financial markets to help tamp down soaring inflation.

The central bank also announced that it was further reducing stimulus to financial markets by letting its holdings of bonds decline over time. The Fed will work its way up to letting about $95 billion in bonds roll off its balance sheet every month, reducing liquidity by about $1 trillion per year.

The Fed’s move comes as inflation rages in the U.S. economy at the highest annual rate in some 40 years, hitting 8.5 percent in March. With the Fed hitting the brakes on an overheated economy, the main question for many market watchers is how fast Federal Reserve Chairman Jerome Powell & Co. will continue to raise rates.

“The Federal Reserve is behind the curve on inflation and has a lot of catching up to do,” says Greg McBride, CFA, Bankrate chief financial analyst. “This means rate hikes at successive meetings for the first time in 16 years, and for the first time in 22 years, a larger half-point hike.”

At about 3 percent, the 10-year Treasury bond is now at its highest level since late 2018, as markets price in the expectation of sustained inflation and rising rates. After some ups and downs in 2021, the benchmark bond has soared since December 2021 and especially since the start of March, when it sat at just 1.65 percent.

As the Fed embarks on what appears to be a longer period of raising rates, here are the winners and losers from its latest decision.

1. Mortgages

While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield zooming higher in recent months, as the market prices in expectations of the Fed raising rates, mortgage rates have risen alongside them.

“Mortgage rates have bounded higher by 2 full percentage points since the end of 2021, one of the largest and fastest run-ups in history,” says McBride. “Mortgage rates move well in advance of Fed action and the outlook for inflation and the economy will be the key determinants of what we see with mortgage rates in the months ahead. Until we see signs inflation has peaked, the risk is definitely to the upside.”

The run-up in rates – following the rapid rise in housing prices over the past couple years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.

So would-be homebuyers are worse off by the rise in rates.

2. Home equity

The cost of a home equity line of credit (HELOC) will be ratcheting higher, since HELOCs adjust relatively quickly to changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers.

Those with outstanding balances on their HELOC will see rates tick up, though interest expenses may continue to be low historically. A low rate is also beneficial for those looking to take out a HELOC, and it can be a good time to comparison-shop for the best rate.

But with rates moving higher, even a little bit, and the expectation that they’ll move higher still as the year progresses, those with outstanding HELOC balances should expect to see their payments continue to rise in the near term.

3. Credit cards

Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will move higher now.

“Credit card rates will march higher in step with the Federal Reserve, and often follow within one or two statement cycles,” says McBride. “Pay down credit card debt now because it will only get more expensive and you don’t want that debt hanging over your head, should the economy topple into recession.”

If you have an outstanding balance on your cards, then you’re going to get hit with higher costs. With rates projected to rise for a while, it could also be a welcome opportunity to shop for a new credit card with a more competitive rate.

Low rates on credit cards are largely a non-issue if you’re not running a balance.

4. Savings accounts and CDs

Rising interest rates mean that banks will offer rising returns on their savings and money market accounts, but will likely adjust their yields at a measured pace.

Account holders who recently locked in CD rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.

Those with savings accounts may look forward to rising rates, but it’s off a low base, as most banks quickly ratcheted rates to near zero following the Fed’s emergency cuts in March 2020.

“Yields on certificates of deposit have started to pick up and we’ll see the same in savings yields, although with a bit of a lag,” says McBride. “The outlook for the next year or so is much better than what savers have endured over the past three years, where rates fell and then inflation took off.”

“It will take a while, but as rate hikes continue, the returns savers get will rise and inflation will hopefully decline,” he says.

Savers looking to maximize their earnings from interest should turn to online banks, where rates are typically much better than those offered by traditional banks.

5. Stock and cryptocurrency investors

A huge boon for the stock market has been the Fed’s willingness to keep rates at near zero for an extended period of time. Low rates have been beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed income investments such as CDs. But that’s changing.

In the last few months, investors have been pricing in the potential for rate increases, with the S&P 500 starting 2022 in a deep slump.

“The market went up with little hesitation while the Federal Reserve was pumping stimulus into the economy, but now that they’re removing that stimulus, market volatility has returned,” says McBride. “Particularly susceptible have been the high-octane growth stocks that were the primary beneficiaries of low interest rates, with investors now questioning what value to put on those stocks in a higher interest-rate environment.”

Cryptocurrencies have also been feeling the brunt since November, when the Fed more clearly telegraphed its intentions to reduce liquidity in the financial system. Bitcoin, Ethereum and other major cryptos are well off their 52-week highs and have shown a solid downtrend over the last few months, as they priced in reduced stimulus and the potential for higher interest rates.

The Fed’s reduction in its own bond portfolio should further decrease support for stocks and crypto.

6. The U.S. federal government

With the national debt above $30 trillion, rising rates will raise the costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.

For now, the interest rates on debt remain at historically attractive levels, with 10-year and 30-year Treasurys running well below inflation. As long as inflation remains higher than interest rates, the government is slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt.

Bottom line

Inflation has been running hot over much of the last year, and the Fed is raising interest rates to combat it. But rates still do remain low by historical standards, at least for now, so it makes sense to think about how to take advantage, for example, by being more discriminating when it comes to shopping for rates on your savings accounts or CDs.

(Visit Bankrate online at bankrate.com.)

©2022 Bankrate.com. Distributed by Tribune Content Agency, LLC.

How to Maintain Your Financial Health in Unhealthy Times

https://www.bloomberg.com/news/articles/2022-04-26/deutsche-bank-sees-5-6-fed-target-rate-and-deep-u-s-recession

https://www.bloomberg.com/news/articles/2022-05-03/investors-are-so-bearish-on-stocks-that-the-market-looks-bullish

 https://www.bnnbloomberg.ca/yellen-sees-solid-growth-possible-soft-landing-for-u-s-economy-1.1761068#:~:text=(Bloomberg)%20%2D%2D%20Treasury%20Secretary%20Janet,moves%20to%20bring%20down%20inflation

https://www.bnnbloomberg.ca/u-s-stocks-roar-as-powell-quells-fear-of-jumbo-hikes-1.1760681

https://apnews.com/article/business-stock-markets-asia-sydney-hong-kong-c341786b3e475916247b2fcd5c07602f

                There is a concept in behavioral economics called loss aversion. It refers to the situation that a real or potential loss is perceived either psychologically or emotionally as being more severe than an equivalent or equal gain. We feel more deeply for a loss than a gain or the loss of $100 is far greater than the joy of gaining $100. For greater insight into this concept check out Nassim Talab’s book, Fooled by Randomness. I recommend it for this and many other things. This applied to today’s comments on several levels.

                I have included several articles on the recent happenings in the markets and with various statements by banking and governmental officials which need to be read in order listed to show the progression of thoughts and ideas in the last two weeks. I had a discussion earlier this week with someone who wanted to know what they should be investing in. They didn’t think I had given a very satisfactory answer when I suggested they shouldn’t be doing any investing. I would go so far as to suggest that looking at financial news with the intent of investing should not be done right now. Don’t look or follow or even think about financial news, at least not if you are looking for information to help you choose investments or trying out some strategy suggested by a financial advisor or even well meaning friend. Because the only thing that will happen is you will feel rotten or worse, hopeless. Any investment decision you make right now will result in some loss, possibly a lot of loss and remember, loses contain more negative punch than comparable gains. Granted, your current investments may be taking a hit but then you are not following my initial counsel to avoid looking at financial news with the intent to invest. Think back to the first paragraph about loss aversion. Right now the market is so all over the place any gains (feeling some little good) will be massively offset by losses (feeling much more bad). The articles I have included / listed show how in just a couple of weeks we have gone from despair to euphoria to despair (not quite that extreme but you get the point).

                The first article from Deutsche Bank (April 26, 2022) suggests we will definitely have a recession in 2023 and that the Fed monetary policy needs to be very aggressive, i.e. really jumping the Fed Funds rate up a lot and often. The second article from Bloomberg dated May 3, 2022 suggests investors are too Bearish. “Investors have become so negative about the stock market that Wall Street [read smart money] is starting [to] think a rally may be on the way.” They give several technical metrics to support their thinking. The Third article from BNN Bloomberg (May 4, 2022) states Yellen thinks the Fed can make a “soft landing” for the economy. Again, a couple of reasons are listed. We have a very negative article (recession next year) followed by 2 very positive articles (market likely going up and no recession next year).

                The last two articles show what actually happened. The BNN Bloomberg article is from May 4, 2022 the day of the Fed meeting and the AP article is from May 5, 2022 the day after the Fed meeting. The May 4^th article is after the meeting and gives the reaction of markets during the next few hours. Markets are up 3%, joy and jubilation. Several reasons are given including that Chairman Powell says that .75% Fed Funds Rate increases are off the table. All is roses and smells great (an emotional gain). The next day the markets falls 3% (an emotional loss). How could this happen, the fiscal doves had taken over, the world was roses, champagne had been flowing. The talking heads had spoken. We are told in the AP News article that “yesterday’s sharp rally was not rooted in reality and today’s dramatic selloff is a reversal of that misplaced exuberance”. Exactly what does that mean. So, yesterday pundits couldn’t read the signs but today they can? What about tomorrow’s swings, for there certainly will be swings. Will those signs be read correctly? What will be the greater insight and understanding that will allow for reasoned understanding and the ability to plot the market and world economies, especially on a day to day basis. Now do you see why you should not be reading the financial news thinking about investing. The financial noise is so loud individuals can’t hear, let alone think in any kind of reasonable manner. There is little real information in the noise that would allow for reasoned decisions. The financial pundits will never apologize for, attempt to correct nor take any responsibility for any misconception, error or misleading statements . You will find contradictions among the nuggets of truth and accurate information. It is the nature of financial noise because remember, in the markets, information is power and financial noise may contain useful information and….. may not. How do you tell (it is extremely difficult).  

                What should you be doing at this point or any point in which you need to make financial decisions. Think of the tortoise and the hare or slow and steady. Limit your debt to necessities like education, housing (don’t ever consider variable rate financing – too many potential problems) and transportation. Have a diversified portfolio of stocks, bonds, mutual funds. Remember, stocks are usually a longer term investment with the expectation that they will go up and down, mainly up over the longer term. Bonds tend to be a bit more stable and many times move opposite stocks (but not always) and mutual funds, to get more diversity from smaller investments. A mix is good. Look at rebalancing your investments on a regular basis, a good financial advisor can help.

                Hang in there. These are unhealthy times for those that immerse themselves in the dirty waters of too much financial noise (news). Watch from the sidelines. Keep to the regular and steady investing schedules you have established before and don’t think you can time or out smart the market.

 

Why So Much Uncertainty? Recession, Slowdown, Retrenchment

https://www.bloomberg.com/news/articles/2022-04-11/world-markets-are-falling-again-with-echoes-of-the-2018-rout

https://www.bnnbloomberg.ca/junkiest-junk-bonds-flash-a-warning-sign-for-the-economy-1.1754017

https://www.theguardian.com/business/2022/apr/19/imf-governments-covid-debt-world-economic-outlook

https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874

https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874

                Yesterday the dentist put a new crown on a tooth for me. It was the culmination of about 3 weeks of pain, discomfort and unpleasantness. I was enjoying the ability to chew on both sides of my mouth this morning when another tooth broke. What a mess. I have an appointment with the dentist at 4:00 pm today for another crown (that is another very personal economic hit). This is kind of like the economy at the moment. We are suffering through one problem and something else gets added. I have 5 articles (2 of them very short)  I think may be interesting relating to national and world thinking on interest rates, markets and recession thinking.

                The first article from Bloomberg dated 4/12/22 World Markets are Falling Again With Echoes of the 2018 Rout, discusses various watched indicators and what they are doing. Fed officials and comments on Fed Funds Rate increases, stocks and bond market changes, recession comments all add to a cacophony of noises and sounds some helpful most mainly noise. The article uses words like rout, economic retrenchment, hawkishness, stampede, fear, hunkering down, all designed to create tension, show action or just to jar the senses. You see such things in the daily news relating to most stories. I am afraid it is the current fad in news reporting in general and financial markets and reporting are no different. So, can we cut through some of the rhetoric, yes we can. For example, in the Bloomberg article referenced above there are two or three items you should look at. One, the Fed is staying the course with rate hikes. There is talk of 75 basis points (bp or .75%) increases from various sources. That is an indication that the Fed is more worried about inflation than recession which they have stated before and they are not as afraid of recession. They are hoping for no or a very mild recession which is possible. The economic and financial indicators are currently giving  very mixed messages and advisors and officials are having a hard time gaining helpful information from those messages. This is not unexpected or unusual. Officials and markets will be trying to discern a direction or an intensity or a trend from all the market and data signals. Don’t hang your hat on any one piece of information regardless of how loudly or strongly someone pushes it at this point.

                The second Bloomberg article dated 4/19/22, Junkiest Junk Bonds Flash a Warning Sign for the Economy, suggests the junk bond (very low credit worthiness) market, by its recent increase in costs of borrowing, is signaling that a recession is becoming more likely. Maybe yes and maybe…… yes. The article lists several indicators that are supporting what they think is more likely to be pointing to recession or at the very least, a significant economic slowdown (or retrenchment). A slowdown may or may not fall into a recession, there are some technical definitions that separate the two. Some consider a slowdown or retrenchment a very mild recession (negative growth in GDP and a few other indicators) but if you don’t have to use the recession word, especially as a Fed official, that is very good. The article lists several indicators that are pointing various directions including uncertainty caused by the war. Remember, markets don’t handle uncertainty well at all and tend to bounce and wiggle alarmingly when they are subjected to much of any uncertainty. They are currently being subjected to very large quantities of uncertainty. They will be very unsettled. Depending on when some news story is generated, the conclusions of the story may be way up or way down. It is more important to watch trends but the news will not generally do that. You will tend to get the Chicken Little report (the sky is falling, the sky is falling) rather than something measured. Try to look for the measured.

                The next article is from The Guardian. I don’t have a lot of experience with this particular rag. It bills itself as “the world’s leading liberal voice”. I am not certain exactly what that means but the article seems pretty good. They are discussing the International Monetary Fund (IMF) and some of its thinking and findings. The article is short but I think fairly informative. I would like to quote a couple of sections;

“The IMF also warns the war has exacerbated two tricky policy dilemmas, one facing central banks and one troubling finance ministers.

For central banks, such as the Bank of England and the Federal Reserve, the issue is how to tackle mounting cost of living crises without killing off still incomplete recoveries from the pandemic. That’s not going to be easy, as the IMF freely admits.

For finance ministers, such as Rishi Sunak, it is getting the balance right between protecting the most vulnerable while repairing the damage caused to the public finances by Covid-19 spending. The IMF understands the difficulties but warns against being too penny-pinching.”

The article also points out the global supply chain disruptions and suggests world markets are becoming more fragmented which they consider, not good. Germany is considered the big power in Europe and no one wants to remember the problem of a large powerful Germany with economic power (think WWII). One of the ideas of the European Union was and is to bind France and Germany (and the others) so closely together they can’t swing fists at each other. Supply chain problems makes it so economies and businesses stockpile resources and such which makes them less dependent on each other to some extent. The IMF is suggesting something similar about Russia and the war. The war is driving a wedge into positive relationships which were being created over the last 20 to 30 years between Russia and the European Union countries and creating economic disconnections which help drive nations apart. In positive times, the interlocking economies help reduce friction and give a reason to work together. Another reason several European countries are less vocal than others concerning the Ukraine / Russian conflict (like Great Britain who has its own oil supplies and other sources and is very vocal) is that Russian natural resources especially natural gas and oil supply a large percentage of European needs. That is part of what the IMF is referring to in its “supply chain” comments as have other world financial leaders done in the last several weeks. Moscow has the ability to be an unreliable supplier and many European nations are staring that big problem square in the face. A little economic blackmail can certainly be and likely will be part of Putin’s overall game plan for Eastern Europe.

                The last article is really 2 sources for the same information. I thought you might like to see the different reporting of the same information. BNN Bloomberg and The Hill reported on Fannie Mae’s  (the governmental housing arm) comments on recession. Fannie Mae is suggesting we will have a recession in 2023. You can see from the short articles. Quoting from the BNN Bloomberg article;

“Rising interest rates at the U.S. Federal Reserve will further slow an economy already weighed down by high inflation and the fallout from the Russian invasion of Ukraine, causing a “modest contraction” [recession] in the second half of 2023, according to Fannie Mae.”

Short and sweet. Expect to see more statements like this from various bank economists, quasi-governmental agencies, like Fannie Mae, and world economists. Whether its called a recession, economic slowdown, economic retrenchment or something else. Look for higher interest rates, slowing grow rate to negative growth rate (recession) or maybe, just hopefully, a cooling of the overheated economies and a return to more normal growth in housing and prices. One can and should hope for the best but prepare for something else.

 

The Inverted Yield Curve and Recession?

https://www.bloomberg.com/news/articles/2022-04-02/inverting-yield-curve-signals-high-stakes-for-fed-and-investors

https://www.reuters.com/world/us/ny-feds-williams-balance-sheet-run-off-could-start-soon-may-2022-04-02/

                I was checking the financial news feeds yesterday morning and found the attached 2 articles. The Bloomberg article continues the discussion on the inverted /inverting yield curve which is a pretty good advance warning sign for recession. The second, Reuters article, involves one of the Fed’s presidents, John Williams, and his views on Fed actions and reactions. Both are good for different reasons.

                The Bloomberg article is highlighting that many in the financial community are feeling the Fed needs to get the Fed Funds Rate up now to help bring inflation down. Talk of .50% and even .75% increases are now routinely discussed where a .75% increase wasn’t considered at all until recently. The purpose of the increases is to brake and break inflation. To brake the rate of increase and to break the rate down from the current 7.5% annual rate that is increasing, to the Fed’s long term target annual rate of around 2.0%. The article is showing that more and more groups are calling for higher and faster rate increases. The final paragraph in the Bloomberg article does a pretty good job of summarizing the possible outcomes of this -  “It’s not a done deal that we are going to have stagflation or a recession but we are getting close,” said Jake Remley, a senior portfolio manager at Income Research + Management, which oversees about $92 billion. “That inflection point is out there somewhere, and it’s possible that at some point we may hit it soon if they keep pushing the expectations for [Fed Funds Rate] hikes.”

                The second article from Reuters is a summary of comments by John Williams, one of the Federal Reserve Bank’s presidents. Williams is responding to questions about Fed intentions. It is not uncommon for various Fed bank presidents and some others to make limited statements about current Fed thinking or activities. They very seldom make a definitive statement and usually don’t say much more than generalities however, and this is very much on purpose. They sometimes use these types of settings to get a feel for what the thinking is in the markets. It is an interesting dance, the Fed tries to make calming statements with little or no content and then tries to “read” the comments from the market to see what the market may be thinking or may do. The market meanwhile tries to “read” what the Fed is saying (as the Fed tries not to say much) and get more information out of the limited statements. The reason for this dance is that the market can react very quickly to any information or direction it “thinks” is important. The Fed doesn’t want to diminish its ability to influence markets by telegraphing their plays. We had this problem in the 1970s-80s with Alan Greenspan and the raging inflation and interest rates of that period. Greenspan would share what he was thinking (kind of like thinking out loud, not necessarily  concrete, more exploring several ideas, we all do it)  with some of his people or other governmental people, congress etc. and within hours (sometimes if felt like minutes) the markets would have gotten hold of the information and reacted in some way or other. Greenspan finally had to stop saying anything just so he could think through things. That basically has carried over through all Fed officials since then, they don’t dare say anything before they want to act themselves. Remember, everything in the market is about information and perception or worse perceived information. Williams, as reported in this article, spent a little time relating past performance of Fed policies (in the 2019 Fed actions)  that were viewed by the Fed as being successful. Now if I was going to say that last statement as proper Fed-speak I would say something like; Many individuals in the market and government perceived our actions (Fed actions of 2019) as being somewhat successful and we believe given current conditions which may or may not be similar to conditions in 2019 that the Fed may be successful or not in doing something similar though not necessarily the same again, i.e. slow the economy without crashing it (recession). Do you get the idea. The article reports that Williams gave some general rate targets and hinted that the Fed might consider (the next section is my words not Williams but you get the idea)…., trying but may not try, still it might work, but there are no guarantees, but maybe….. something “like” the previous actions might, or possibly might not do something similar or not, in the current situation that may or may not be like the previous situation, maybe. Do you get the drift of the depth and breadth that the Fed people will go to to say something but not say something. The article goes on to say Williams suggests the high inflation rate is currently the “greatest challenge” for the Fed at the moment (which may or may not change) - nothing is ever a problem, just a challenge, and lists several factors likely influencing the current inflation trends. Notice in the list nothing is said about the Fed’s massive balance sheet which in my mind is the 900 lbs. gorilla in the room. Williams does acknowledge that the Fed is going to try to “ease inflation to around 4% this year and ‘close to our 2% longer-run goal in 2024’ while keeping the economy on track.” With inflation currently running at 7.5% and climbing that is a good goal. The trick to the whole thing is in Williams’ quoted remarks in the last paragraph, “These actions should enable us to manage the proverbial soft landing in a way that maintains a sustained strong economy and labor market”. That is really the goal, hope, prayer and fervent wish – a soft landing of the economy. The success rate of soft landings is, unfortunately, not particularly good.

                Stay tuned to the exciting continuation of the US Fed and the fight with the dragon of inflation. The year 2022 promises to be interesting (not problematic, of course). Think of the 1965 movie Those Magnificent Men in their Flying Machines. The first 3 lines of the theme song describe our likely market ride as the Fed attempts to bring the economy in for a “soft” landing. Think of the Fed as the pilot and the economy as the flying machine.

    Those magnificent men in their flying machines,

    they go up tiddly up up,

    they go down tiddly down down

from Those Magnificent Men in the Flying Machines theme song

… and up and down and up and down and up.

As the stewardess says, everyone please fasten your seatbelts we are entering turbulent weather.

The Recession word is being tossed around

 

 https://www.bnnbloomberg.ca/fed-officials-take-aim-at-inflation-say-ready-to-act-with-vigor-1.1742076

https://www.bnnbloomberg.ca/a-recession-warning-sign-part-of-u-s-yield-curve-inverts-for-first-time-since-2006-1.1743815

https://edition.cnn.com/2022/03/26/economy/inverted-yield-curve-march-warning/index.html

              Another day another crisis of some sort. I trust you have put on your financial blinders so you can function in this rapidly changing and not changing environment (is that ambiguous enough to sound like a talking head). Take a look at the 3 articles above. The first, BNN Bloomberg-Fed ready to act, is a discussion of the Fed’s response to inflation as it raising the Fed Fund Rate. The dot plot shown in the article is a relatively new invention of the Fed to signal its thinking. The dots supposedly show the thinking of the voting members of the Fed on interest rate changes. This chart was created because the market made so much noise several years ago about the Fed never saying what they were thinking that the Fed created this and said, in essence, here is what we are thinking now stop asking. If you are confused you are in good company. Remember, the chart has no binding power, it is the equivalent of thinking out loud but it has proven an indication of possible intent in several instances. So the Fed is thinking of acting aggressively. That is a good sign. Now we will see what they actually do. However, the market will react to the perception of movement because the market really doesn’t have anything else to go on. That is why you need to be wearing your financial blinders to help protect from an overload of change that is based on perceived information not necessarily actual information. It’s hard to separate the two.

                The second two articles are hot off the press, so to speak. The articles titled, A Recession warning sign? and This recession indicator, are from today’s news feed discussing an inverted yield curve. The CNN article makes the statement that a “yield curve inversion has preceded every single recession since 1955” which is true.  But not every yield curve inversion has been followed by a recession. A subtle but important difference. An inverted yield curve by its very nature is very unstable and traditionally corrects itself as investors and the economy calm down. Having said that, there have been a couple of times in the last 40 years that the curve stayed inverted for some time (many months is very unusual but does happen).

                What does it all mean. Well……, as the last sentence in the CNN articles says, “The harder the Fed steps on the brakes [raises Fed Funds Rates], the higher the probability the car seizes up and the economy goes into recession”. But something has to be done to get the excess money out of the system and we have kicked the can down the road for so long we are losing the ability to kick. Remember from a previous post I said one of the quickest ways to reign in inflation is recession, it isn’t a painless method but it usually works. I am afraid there are only a limited number of options and a slow reversal of the excess money policy and slowly removing the excess funds from the economy is definitely a much gentler method of slowing down a raging economy but is infinitely more difficult and the tools the Fed has are not very good at fine tuning. Regardless of the impression they try to give, Fed Funds Rate changes and buying or selling securities from the government controlled pool are more a blunt force hammer than a fine tuning knob.

           Stay tuned as the ride continues.

Fed Interest Rate Hike and the Possible Impacts

https://www.reuters.com/world/us/all-systems-go-feds-liftoff-us-interest-rates-2022-03-16/

 

March 17, 2022

                The Federal Reserve raised the Fed Funds interest rate as discussed in the article from Reuters (listed above). Now begins the very delicate balancing act of raising rates, which is supposed to reduce inflation. The problem is the interest rate lever is not particularly precise nor the effects very controllable. Don’t be fooled by the Fed language. It sounds like they have the ability to precisely control the effects and impacts of the changes. They don’t. The changes caused by the Fed’s interest rate adjustments will tend to be in a general direction (tightening or loosening policy) but the magnitude of impacts is not really knowable or controllable. What does a .25% increase do vs. a .50% increase? The problem is, too much increase too fast and the economy goes into immediate recession, too little increase or too slow and inflation just keeps on going. The Fed doesn’t really know the impact nor does anyone else. It’s like a go-cart careening downhill out of control and the brake is the stick against the wheel. Maybe it works, maybe it doesn’t. Remember, there is no fine control regardless the words or language used or implied. Soft landing, controlled slide, easy fix are just words with no meaning in this type of situation. There will be under and over correction, wild swerves and hairy curves on two wheels. There will be missed turns and some likely drop offs. A crash is also likely (recession) and in the current situation we may have a couple of crashes before it settles out completely. You will notice lots of corrections and changes in forecasts and the news media will begin to pay less attention to changes and such as they become more frequent. You will have to dig that out yourself. There will be pronouncements by various Federal officials and large bank economists about this and that affecting the inflation rate. They will be all over the place. Energy, food and commodities prices will bounce around generally going up (inflation) until they don’t which may be caused by recession or if we are really, really lucky by successful Fed policy. It sounds fairly bleak but we have done this before and it can be fairly mild, think the recession of 1997 and 2002. They were really quite mild. Remember, the definition of recession "is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.” (www.investopedia.com) If we have less than the 2 quarters of downturn this is not considered a recession but it is an economic slowdown. That is really what the Fed is trying to achieve, a series of down sloping waves that reduce inflation but don’t quite drive the economy into the red zone definition (recession). They will do everything they can to avoid the recession definition, it looks very bad for them. Perception is everything.

                So, hope for the ideal series of corrections. A series of down sloping waves that never quite reach the definition of recession but that bring economic activity down by drying up the easy money currently circulating in the economy. We should see higher borrowing costs (interest rates), higher prices on commodities, energy and food and less spending. That is going to be challenging for people as we have become used to spending. I am hoping home prices come down without a crash but we will have to see. Again, this isn’t the end of civilization as we know it. We have had inflation and recession before, some mild some not so mild. The US economy will make it through this even though it may take a while but it will be okay. Reduce you debt as able or avoid it by postponing things, save more and above all… enjoy life, stay close to family and friends, take some time for yourself and don’t spend too much time listening to the talking heads in either government or the media.

 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.