asia timesby William Pesek
For a central bank with such a fabled research apparatus, the US Federal Reserve sure is missing some big clues that the US economy is stalling.
Minutes of the December Fed policy meeting show officials warned in unusually blunt terms that markets should not doubt their determination to curb inflation with
even higher interest rates.
Fair enough. Investors sometimes misread Fed thinking. It works both ways, though, with US central bankers occasionally missing or misdiagnosing cracks in financial markets that lead to deeper economic dislocations.
It happened in 2007-08 back when
Ben Bernankeheld the Fed’s reins. Is current Chairman Jerome Powell now making a similar mistake as bond markets quake?
Count Larry Fink among those wondering how the Fed is overlooking clear signs of economic stress. “We’re going to enter a period of more what I call malaise,” says the CEO of BlackRock, the world’s largest asset manager.
Fink is hardly alone in doubting America’s ability to maintain steady growth as an energy crisis stalks Europe and China confronts daunting headwinds.
Take Amazon Inc, which just announced layoffs affecting more than 18,000 employees. It’s the latest tech industry giant to hand out mountains of pink slips.
“This time last year, it looked like we were coming out of the pandemic,” explains Amazon CEO Andy Jassy. “Then Omicron happened, and the war in Ukraine happened, and the inflationary environment that we’re in happened, and now a very uncertain economy. This next year or two, the economy is going to test the
long-term resolve of a lot of companies.”
Facebook founder Mark Zuckerberg is sounding his own alarm at a company now known as Meta. “We thought that the economy and the business were going to go in a certain direction, and obviously it hasn’t turned out that way,” he notes.
As such, Zuckerberg adds, “we’ve had to pull back. Our operational focus over the next few years is going to be on efficiency and discipline and rigor, and just operating in a much tighter environment.”
Tesla CEO Elon Musk is even more convinced the world’s biggest economy is headed for trouble. “Fed needs to cut interest rates immediately,” he wrote on his recently acquired Twitter platform. “They are massively amplifying the probability of a severe recession.”
Growing pessimism is coming from market players, too. Over at Omega Advisors, CEO Leon Cooperman notes that his “recession thesis is the basic belief that we’ve borrowed from the future and we’re going into a period of time where that borrowing has to be given back.”
Christopher Smart, chief global strategist at Barings, warns that “we’re headed towards a
much slower economy next year. Our best guess is that we’re going to be in a period of stagflation for several months through maybe most of next year.”
Investor Michael Burry of
The Big Shortfame wonders “what strategy will pull us out of this real recession? What forces could pull us so? There are none. So, we are really looking at an extended multi-year recession.”
Adding to Washington’s troubles is a highly uncertain external scene, including China’s chaotic pivot away from the “zero-Covid” debacle. With authorities in Beijing failing to report credible data on infections and deaths, punters simply don’t know what they don’t know about Asia’s top economy.
“The global credit cycle buffered growth in the early days of the Covid pandemic, but it has turned negative more recently, with much of that
driven by China,” says economist Robin Brooks at the Institute of International Finance.
Perhaps most troubling is that Nouriel Roubini, who saw coming what the Fed missed in 2007-08, is sounding a fresh alarm. Not just about the US, but the entire global system.
“The world economy is lurching toward an unprecedented confluence of economic, financial and debt crises following the explosion of deficits, borrowing and leverage in recent decades,” says the New York University economist.
Roubini notes that in the private sector, he’s troubled by a “mountain of debt includes that of households — such as mortgages, credit cards, auto loans, student loans, personal loans — businesses and corporations — bank loans, bond debt, and private debt — and the financial sector, or liabilities of bank and nonbank institutions.”
The public sector hardly looks better. As Roubini notes, “central, provincial and
local government bonds and other formal liabilities, as well as implicit debts such as unfunded liabilities from pay-as-you-go pension schemes and health-care systems” all “will continue to grow as societies age.”
The bottom line, he adds, is that the bill is coming due to “years of ultra-loose fiscal, monetary and credit policies and the onset of major negative supply shocks.”
It means, Roubini notes, that “stagflationary pressures are now putting the squeeze on a massive mountain of public and private sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.”
So where’s the US Fed? Plotting its next rate hike. Such a crouch would normally
boost the dollar. But worries that Powell’s Fed is misreading financial trends is making for some unpredictable market reactions.
“One might ordinarily expect such a stance to be positive for the greenback, but subsequent performance suggests otherwise,” says economist Koichi Sugisaki at Morgan Stanley MUFG Securities.
“Markets are now pricing in a lower terminal rate than that implied” by the Fed’s December forecast “which is suggestive of an expectation that continued Fed rate hikes – even with inflation already cooling – will heighten the risk of recession and thereby eventually create a need for sizable rate cuts.”
Put simply, Sugisaki says, “markets now appear to be focusing less on where the Fed’s policy rate will end up than on the speed with which it might then need to be lowered.”
Earlier this month, Powell said that “I don’t think anyone knows whether we’re going to have a recession or not and, if we do, whether it’s going to be a deep one or not. It’s just, it’s not knowable.”
Yet there are clear indications in Fed data that the risks are to the downside. Case in point: a recent St Louis Fed report finding that more than half of the 50 US states display signs of slowing economic activity.
Its authors conclude that one can have “
reasonable confidence” a downturn is coming if just 26 states report slowing activity. Another study by the San Francisco Fed detects signs that recession risks are rising.
San Francisco Fed President Mary Daly can’t help but be puzzled by investors’ apparent optimism about the price outlook. “I don’t quite know why markets are so optimistic about inflation,” she said in December.
After all, says analyst Craig Erlam at OANDA, “policymakers are desperately trying to convince markets how serious they are about defeating inflation, to the point that investors are seemingly paying less attention.”
More recently, Gita Gopinath, the No 2 official at the International Monetary Fund, told the Financial Times that “I think it’s clear we haven’t turned the corner yet on inflation.”
Now, former Fed chairman Alan Greenspan thinks a recession is the “most likely outcome” of last year’s aggressive
rate hikes. Greenspan, it’s worth noting, oversaw the last time the Fed tightened as quickly as it is now back in the 1994-95 period. In just 12 months back then, the Greenspan-led Fed basically doubled short-term rates to 6%.
Asia remembers the episode all too well. The dollar’s surge in response to that tightening cycle made currency pegs in Thailand, Indonesia and South Korea impossible to defend. A wave of competitive devaluations set in motion the 1997-98 Asian financial crisis.
Greenspan, now an adviser to Advisors Capital Management, notes that recent hints in inflation and demand data that the US is cooling off probably won’t be enough to prompt the Powell Fed to throttle back. “I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession,” he says.
Wage increases and employment “still need to soften further for a pullback in inflation to be anything more than transitory,” Greenspan explains. “So, we may have a brief period of calm on the inflation front, but I think it will be too little, too late.” America’s unemployment rate was near an all-time low at 3.7% as of November.
Economists agree that because US inflation is coming from the supply side – including surging oil prices thanks to Russia’s Ukraine invasion – the real response should come from government officials. US President
Joe Biden’s White House needs to invest exponentially more in raising productivity and innovation to tame overheating risks, they say.
Yet with the House of Representatives now controlled by Republicans hinting at not funding the government or raising the debt ceiling – putting Washington on the
verge of default – it’s hard to see any legislative progress on increasing US economic efficiency.
In the interim, many investors worry the Fed’s hawkish policies are impeding private sector investments in raising America’s economic game.
BlackRock’s Fink told the New York Times last week that “after we get out of this burst of inflation, it is my fear that we are not going to have the ability for any fiscal stimulus for any time soon.”
“Deficits do matter, and at the same time, the central banks are going to take years in which they’re going to have to unwind all their quantitative easing, all their bond purchases that they did over the last ten years, and aggressively over the last few years,” Fink said.
In a 2023 outlook report, economist Phillip Hildebrand at BlackRock’s Investment Institute argued that a “recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation.” As a result, Hildebrand notes, “the Great Moderation, the four-decade period of largely stable activity and inflation, is behind us.”
Are Fink, Musk, Roubini, Zuckerberg et al right that something even more disruptive is afoot for 2023? All investors can do is buckle their seatbelts and brace for the turbulence to come.
Mr.BadGuy
Publisher
These soldiers are from a country whose president is a Jew Zelensky. Orthodox churches are also being destroyed in this country. Synagogues are not touched. Surprisingly, it turns out that Jews get along well with the Bandera Nazis.