Bank Failure, Recession – What Is Happening

 

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

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

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

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

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

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

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

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

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

AP news article -

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

The Sword of Damocles - Recession Discussion & Related Thoughts

Sword of Damocles
by Richard Westall

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

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

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

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

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

Articles used:

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

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

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

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

Hang On For A Rough Ride

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

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

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

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

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

 

Articles referenced;

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

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

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

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

The Whirlwind of Financial News

 

    “Round and Round she goes, where she stops nobody knows.” The phrase was used by the Major Bowes Original Amateur Hour, a radio show that ran from 1934-1948. However, I think it also describes our current economic and financial situation to a tee. I present to you 3 themes from this week’s news feeds that are “round and round” or in my mind, or more of the same. The news themes are; (a) vanishing liquidity and its impacts, (b) impacts of slowing economy, specifically in this article as it relates to investors, and (c) Dow Jones is down… again. However, since it isn’t zero that means there had to have been some ups somewhere.

            Bloomberg is reporting in its article of 9/12/22, titled Vanishing Bond Market Liquidity Bad for Fed Balance Sheet Unwind, that the Fed program to reduce its balance sheet may be headed for the rocks. The article discusses the tightening liquidity in the short term money market and how that may make it more difficult for the Fed to reduce its balance sheet. The article is fairly esoteric but the bottom line is the possible recession is making the drawdown of the Fed balance sheet more difficult and uncertain. The high balance sheet makes it more difficult for actions the Fed takes to have as much impact as it may, i.e. there is little or no room to flex monetary  policy to change the impact or likelihood of recession. With Pres. Biden’s  Inflation Reduction Act which really doesn’t reduce inflation pressures as much as it adds to the balance sheet you can see that the Fed is being painted into a corner. The current Fed policy of increasing Fed Funds Rate to try to tighten spending (reduce it) is being offset by the Inflation Reduction Act which is expanding monetary policy. The Fed’s only possible response is to raise its Funds Rate high enough to put a damper on inflation caused by excess money in the system, which the president just increased by a tremendous amount. This does not bode well for an economic “soft landing” as proposed and suggested by the Fed and pushed by Administration personnel, i.e. the Treasury Secretary, and of course the president, amount others.

            In the second article UBS Bank suggests its clients are becoming more cautious in their money management and involvement. The Reuters article titled, USB CFO sees increased client caution as global economy slows discusses the decreased activity by bank clients in the world financial systems. This would mainly be the large bank clients involved in the world markets. The article discusses how this is putting downward pressure on bank revenues as their revenue tends to be based on transactions, fewer transactions generates less revenue. The important part of the article is that the financial markets impact is worldwide. The bank is attempting to assure bank investors they (the bank) recognize the problem and as with all situations like this, they are not responsible for declining revenue as no one could have foreseen this. This seems like some attempted fancy footwork to distance management from what it sees as a likely downturn in revenue. The bank is betting on economic slowdown at best and, I suspect, recession at worst. They are declaring they are not responsible.

            Finally CNBC is reporting another stock market down record in its 9/13/22 headline, Dow tumbles 1,200 points for worst day since June 2020 after hot inflation report. This is a good article to show the up and down and down and up nature of markets in troubled (meaning uncertain) economic times and the reporting by news organizations on such things. Notice two things about the headline, one, the Dow is moving 1,200 points, in this instance down. That is about 3.9% as reported in the article. The second thing is this is the largest change in 2 years. The first statement implies that 1,200 is a big deal the second statement suggests that it isn’t that uncommon, only 2 years since the last time we had such a shift. Somewhat contradictory statements. The article states the drop erased “nearly all of the recent rally for stocks”. You will not easily find articles on stocks increasing 1,200 points recently but you will and do find many articles on stock decreases.  Part of the reason for not finding articles on increases is they tend to be a bit more gradual. I do believe there have been some recent trading days that were up a lot though they are a bit more difficult to find. It’s important to weigh any major swing reported in the news in light of just how significant it is. One of the definitions of economic upheaval is wild and vicious swings. You should look at this as a general reporting news story. Try to separate the facts and figures from the color commentary.

            In conclusion, stuff happens. Markets, interest rates and prices go up and down, many times violently in an economic upheaval (think pre-recession – recession). If all the negative news of the last little while were added up the Dow Jones Industrial Average would be at zero or below. It is down, admittedly, but not zero and actually closer to its high or sitting at about 31,000. It may fall 10-15% total from the recent high to whatever its low point will be before it recovers. We won’t know until after the fact what the total fall may have been, or when the recession started or when we have officially recovered. We had our annual meeting with our financial advisor a couple of weeks ago. Parts of our portfolio are definitely down from last year but they had been up a great deal previously. Other parts are holding fairly steady and some parts are actually benefiting from the increasing interest rates. So, balance in life and investments is helpful. Hang in there we will make it through this. Live, love, and enjoy life. There is much to be grateful for and thankful for.

Bloomberg article:

https://www.bloomberg.com/news/articles/2022-09-12/vanishing-bond-market-liquidity-bad-for-fed-balance-sheet-unwind

REUTERS article:

https://www.reuters.com/business/finance/ubs-cfo-sees-potential-higher-dividend-next-year-2022-09-13/

CNBC article:

https://www.cnbc.com/2022/09/12/stock-futures-are-higher-as-wall-street-awaits-key-inflation-report-.html

The Fed and Beating Up Inflation

 “The beatings will continue until morale improves.” The author is uncertain but  it is the correct statement for the current economic situation. The beatings are, of course, increases in Fed Funds rate and morale is an improving inflation rate. We, the general public, are the implied beaten person. I have 3 main articles I am drawing from for this post regarding economic conditions, the Fed and other central banks responses and expected outcomes, i.e. what the officials want/hope with all their hearts.

The first and oldest article is from Reuters of July 22^nd titled “Analysis: R.I.P. forward guidance: Inflation forces central banks to ditch messaging tool”. The article is referring to central banks and their guidelines or projections of interest rate changes in the Fed Funds Rate or equivalent central bank rates for other countries. For many years central banks have given a longer term estimate of rates changes. Since June of this year, the Federal Reserve has stepped away from that policy when they raised rates by 75 basis points (bp). Previously they had said they expected 50 bp increases for some time. Instead they raised it 75 bp. Other central banks have raised their equivalent funds rates by wildly differing amounts from their stated goals. This goes back to the old saying, don’t telegraph your plays if you don’t want the opponent to sack your quarterback. The our team in this is the Federal Reserve, the opponent is the stock market/investors and the sack is the ability of the Fed to influence inflation rates. We talked about the market anticipating changes and therefore the change not having the same punch. The Fed and other Central banks have given notice they are no longer going to telegraph their plays. The outcome will be greater volatility in all interest rates and the markets (much wider and wilder ups and downs). The Fed’s hope is that they will have a greater impact on inflation. Again, remember that the Federal Funds Rate which the Fed controls is not a finely crafted and precise economic instrument that the Fed can wield with dexterity, grace and fine precision (regardless of what some in the media, talking heads, and governmental officials may suggest). It is a massive, unwieldy, gross (meaning large and ungainly), ugly (meaning exactly that) blunt force trauma inducing massive piece of economic plate iron. It is about as finely controllable as trying to hit a large, ugly rat (inflation) on a sidewalk by dropping it from a 10 story building onto that same busy sidewalk. The goal is to get the rat and miss the people, streetlights, cars, prams, butterflies and in fact the sidewalk. You will likely get the rat after a number of drops but,…. you will not be able to avoid the non-combatants (i.e., all the non-rat things) regardless of the precision of the drop. Now the governmental response to all this. From July 24^th Reuters article titled,

“U.S. economy slowing but recession not inevitable, Yellen says”.  “I’m not saying that we will definitely avoid a recession,” Yellen said. “But I think there is a path that keeps the labor market strong and brings inflation down.”

Some of the current debate is if we have entered a recession now or not. That kind of thinking is dangerous for the current administration who claims to have things under control or moving in the right direction or improving or something. You may have heard something about redefining what is a recession. The only ones who can declare recession or end of recession is the independent private research group tasked with that job. Governmental administrations try to influence public opinion and other groups but that is all it is, attempted influence.

The last article is from CNBC of August 3^rd. “Fed’s Bullard sees more interest rate hikes ahead and no U.S. recession.” That is the great goal, increase the interest rate (Fed Funds Rate) which will slow inflation, which is running at 9.1%, and do that with ­no recession. And if we really are in trouble we can try to adjust the definition of recession.  Quoting from the article.

“St. Louis Federal Reserve President James Bullard said Wednesday that the central bank will continue raising rates until it sees compelling evidence that inflation is falling.” …“We’re not in a recession right now. We do have these two quarters of negative GDP growth. To some extent, a recession is in the eyes of the beholder,” he said. “With all the job growth in the first half of the year, it’s hard to say there’s a recession. With a flat unemployment rate at 3.6%, it’s hard to say there’s a recession.”

 Again, pick and choose your variables (a very econometric way to do things) and highlight what appears important to make your case which is not unreasonable but you as the reader need to be aware of what is being said and not said by such statements. Bullard is laying out some hard “facts” while not saying just when they will do things (no play telegraphing). The Fed sees the large, ugly rat on the sidewalk (inflation). They tell us they are now focused on the rat. They have their tool to deal with it which many imply is an elegant piece of economic equipment and they are willing to employ it with all the finesse of the large piece of plate iron it is. Elegant no, effective, likely. We are also told they will use it several times, as necessary, to get this rat. You (the public) may be assured and comforted. That is especially true if you like large plate iron induced headaches.

So gentle reader, do I think we are in a recession? The National Bureau of Economic Research (NBER) will look at the data, after the fact, and declare if there has been one. No one else can do that. The more important questions are how will inflation, shortages, supply chain bottlenecks, wages, job stability and the host of every day, individual and personal impacts affect our ability to grow, love, learn, help, serve and enjoy life and loved ones. I don’t know about a recession by the definition but I do know I need to take time for the more important and personal challenges and opportunities around me. We have had recessions before, we will have them again. Let’s get on with living and doing the best we can under the circumstances.  

Articles quoted / cited:

https://www.reuters.com/markets/europe/rip-forward-guidance-inflation-forces-central-banks-ditch-messaging-tool-2022-07-21/

https://www.reuters.com/markets/us/us-economy-is-slowing-recession-not-inevitable-yellen-says-2022-07-24/

https://www.cnbc.com/2022/08/03/feds-bullard-sees-more-interest-rate-hikes-ahead-and-no-us-recession.html

Kitten on a Mission - How Things Change

 Notice how a kitten will jump on anything and everything and is easily distracted. This applies to governmental officials, financial professionals and financial news organizations.

The National Bureau of Economic Research is a private organization responsible for calling the official timing of a recession. It states a recession “is a marked declined across the economy in a range of indicators, including the labor market, investment and spending.” Usually people tend to look for 2 quarters of downturn in several indicators including GDP growth (negative), employment (negative), consumption and spending and other financial measures such as an inverted yield curve. Many of these measures can be analyzed by month, which is 5 months shorter than the classical 2 quarter+ measurement of the official bureau. That is why we get the range of dates or even no date on recession estimations. The only one officially recognized to call a recession tends to use at least 2 quarters of historical data before they make a pronouncement.

                With that in mind let’s turn to some news stories. From June 6^th, BNN Bloomberg (Canada), the headline reads “Powell says soft landing ‘very challenging,’ recession possible.” The article suggests that “Powell has given his most explicit acknowledgment to date that steep rates could tip the US economy into recession, saying one is possible and calling a soft landing ‘very challenging” ‘. Notice that the language is still couched and nuanced and leaves much room to wiggle. He still leaves a way for the Fed to claim that they are not forecasting a recession, yet. In spite of the hikes in the Fed Funds Rate and the reduction of the Fed balance sheet. The article discusses Powell’s reactions and actions to inflation reports. Republican have recently been blasting Powell for not jumping on inflation sooner by raising rates faster. Again we have the current bandwagon of thought. Watch as comments shifts back and forth. Powell didn’t do enough, Powell did too much. Remember, the Fed has a sledge hammer to deliver adjustments and the talking heads including Congress are reacting as if there is a precise tool. There isn’t and they (Fed) can’t use it that way (with precision). The Fed has fostered this thinking which is bringing the problem back to roost (as the saying goes) by their own past statements and actions. They act as if they can precisely control inflation and growth. They can’t. So when they get called out for not being able to steer the economy they have in large measure brought it on themselves by implying they can control. Again, they can’t. Expect to see more and harsher statements especially from Congress and talking heads.

                Moving to the 2^nd article, from Politico of 7/04/2022. Tag line is “President Joe Biden says ‘there’s nothing inevitable’ about a recession in the U.S. Right…., and where is the rest of the statement the country asks? Many are saying the president is a lone voice in the noise of recession and he probably is at this point. This is pure politics. Since the president can’t (or shouldn’t) try to influence the Fed which is supposed to be independent by definition, the president can make calming public statements and call Powell privately in desperation. Several Democrats are on record as suggesting this recession thing is not a big problem, we just need to spend more.

                The 3^rd article is from BNN Bloomberg of 7/07/2022. The tag line reads, “US recession is already here, according to Wells Fargo Investment Group”. Think back to our previous blog on economic / financial forecasts and notice that here we have the first news grabbers with a new story or new twist and trying to get out front of the news competition. We can see the progression of news stories as we went from no recession to possible recession to more likely recession to predicting recession in the future (from middle to end of 2023) to now we are in a recession. Pure news grabbing. Watch to see of others will jump on this bandwagon or if they suggest something else. Regardless they (the newsies) have a new and exciting twist to write about which generates copy (not necessarily good copy but copy).

                What to do. Slow and steady wins the race or in this situation slow and thoughtful keeps their sanity. You know the news articles and newsies are going to jump on everything just like our kitten does. Their attention is divided so many different direction (very much on purpose) because it generates pages to read. Again, there are few if any consequences in reporting so you have to be selective in what you read. Watch for things to settle out a bit and see. A good example is the recession. Since the first of the year the talking heads started as recession was not likely but a possibility to now a recession is likely and may be as early as next year. I don’t give much weight to the Wells Fargo comments about the recession has started because it is the first mention (a kitten pounced on something let’s all look). That makes it a new idea and someone was trying to get the jump on everyone else. If they are wrong it doesn’t matter to them. It’s news. Remember, slow and thoughtful helps you keep your financial sanity. You don’t have to react to every new thing. Paraphrasing what President Brigham Young was supposed to have said to the woman who came in for counseling, “Well sister, if your husband tells you to go to hell, well just don’t go.” If the newsies, financial pundits and governmental officials tell you we have to jump, well, just don’t jump (wait and see). Regardless of their screaming we will figure it out. Earplugs help. Enjoy family, friends and your favorite sport or book, take a walk, do something fun and relaxing. The screaming, finger pointing and loud noises will still be there when we get back and maybe, just maybe, there might be some calmer voices with some real, helpful information. We can always hope.

 

https://www.bnnbloomberg.ca/powell-says-soft-landing-very-challenging-recession-possible-1.1782346

https://www.politico.com/news/2022/07/04/recession-talk-surges-in-washington-00043818

https://www.bnnbloomberg.ca/us-recession-is-already-here-according-to-wells-fargo-investment-group-1.1789170

 

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/