As the Federal Reserve converges on the nation’s capital this week for its last policymaking meeting of 2022, consumer inflation expectations are falling again.
According to the New York Fed’s latest Survey of Consumer Expectations, consumers expect a median inflation rate of 5.2% in the year ahead. That’s almost 0.75 percentage points lower than what they expected in October.
Over the next three years, consumers expect a median rate of 3% – a tenth of a percentage point lower than in October. And their median expectation over 5 years is slightly down at 2.3%.
The move downward reverses an increase in expectations shown in the prior month that, if unbroken, would certainly have given the Fed an excuse to continue with their 75 basis point rate hikes well into the new year.
The NYFed’s monthly survey is “a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads.”
According to the NYFed, “Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.”
As it is, there’s no guarantee that Powell & Co. will step down their aggressive tightening on Wednesday with a presumed 50bp increase – although Fed Funds futures traders believe there’s 75% chance of that.
That would take rates to a range of 4.25%-4.50% – up from 0%-0.25% before the campaign to rein in non-transitory inflation began in March.
As Courtenay Brown and Neil Irwin point out, perception is usually reality – that is, if consumers believe high prices will stick around, they can (and usually do) become a reality; the same goes for expected lower inflation.
Turns out that October's jump now appears to have been a blip on the radar screen of an otherwise months-long downward trend of inflation expectations – consistent with rising prices at the gas pump.
Fortunately, for consumers, the cost of crude oil and gas has been falling since late spring/early summer and is now an average $3.26 a gallon across the country (it was $4.99 in mid-June), according to AAA.
Critics, second guessers and Monday morning quarterbacks are speaking out en masse since the Fed’s 50 basis point rate hike on Wednesday.
In perusing mainstream headlines and articles since then, I’ve found that 9.5 out of 10 of op-ed writers, economists and other pundits believe that Chair Jerome Powell and his policymaking colleagues are on the verge of sending the economy into a recession.
They say, no ifs, ands or buts about it. The only question is, How deep and prolonged will the downturn and resulting pain be? In other words, forget about any soft landing.
The consensus of the naysayers is that the Fed started their quantitative tightening too little, too late. This side also argues that:
(1) The Fed’s projection of last year’s inflation surge being transitory was naïve (at best) and potentially catastrophic (at worst); and
(2) As a result, they kept interest rates too low for too long and kept buying Treasuries and mortgage-backed securities when they should have stopped that much earlier.
Sorry for the cliché, but the more things change, the more they remain the same.
Nowhere is this more painfully obvious than in the financial industry – where cracks are expanding in already porous credit dykes all over the world.
You think we'd have learned from the disastrous effects of the Great Recession 15 years ago.
But after additional years of excess from banks stuck with piles of buyout debt, a pension blow-up in the UK and real-estate troubles in China, South Korea and more recently the U.S., we’re finding again that what’s past is prologue.
Thanks to global central bank rate hiking, cheap money is quickly becoming a thing of the past.
Distressed debt in the U.S. alone jumped more than 300% in 12 months, according to Bloomberg News.
Plus, high-yield issuance is much more challenging in places like Europe, and leverage ratios have reached record levels.
The aggressive rate hikes have dramatically changed the landscape for lending – stressing credit markets and pushing economies toward recessions, a scenario that markets have yet to price in.
Nearly $650 billion of bonds and loans are distressed, according to Bloomberg.
It’s all adding up to the biggest test of the stress tolerance of corporate credit since the 2008 financial crisis and may be the spark for a wave of coming defaults.
Will Nicoll, chief investment officer at M&G, said, “It is very difficult to see how the default cycle will not run its course, given the level of interest rates.”
Banks say their wider credit models are proving robust so far, but they’ve begun setting aside more money for missed payments.
Loan-loss provisions at systematically important banks surged 75% in the 3rd quarter compared to 2021 – a clear indication they’re preparing for payment issues and defaults.
Most economists see at least a moderate GDP slump over the coming year.
Some, like Paul Singer of Elliott Management, however, fear a deep recession could cause significant credit issues because the global financial system is “vastly over-leveraged.”
Citigroup economists believe rolling recessions are likely across the globe next year, with the U.S. likely to slip into one by the middle of next year.
Mike Scott at Man GLG warned that “markets seem to be expecting a soft landing in the U.S. that may not happen.”
The equities market is a very strange beast, it truly is. Let's take Friday for example.
The fed has been pretty straight forward in telling you that they are going to hike rates until they get up and over 5%. Despite the howls from the market participants, Powell has also said that there would be no rate cuts in 2023.
But Wall street doesn't believe him. See, they've got all this history about the Fed, and for decades the play was always the same. Fed hikes rates to cool down an economy, overshoots, panics and then starts cutting rates.
When rates are being cut, stocks move higher. Why? Companies can borrow more money at a cheaper price. They can use that money to buy up their own shares, and thus reduce the float and therefore push the stock price higher.
Wall street LOVES low rates and the evidence is easy to see. Look at what the DOW has done since 2010. After the 08/09 financial crisis, the fed went into panic mode and printed money like madmen. Do you know where the DOW was in 2010?
No, really.... think about this for a minute. The DOW Jones has been in existence since 1896. Did you know it was that old? Yessirree it is. And from 1896 all the way to 2010 the best it could do, was end the year at 10,600. That's it. 10K in over 100 years.
From 2010 to 2022 it made it to 34,561. Now the back of the cocktail napkin tells me that this is a gain of about 24,000 points.
So, if it took 114 years to go from its humble beginning of 12 stocks, to the current 30 stocks in 2010 and only gained 10K points... why did we gain 24K points in just 12 years? What changed?
You all know the answer to this riddle. Zero interest rates and trillions of freshly minted/printed dollars, that's what. If the fed is cutting rates, and/or keeping them there, AND printing trillions at the same time, the market gets orgasmic and up it goes. We have the proof, it's there in black and white.
But the fed has changed course now, and has been aggressively hiking rates. Well that's sort of peeing in their punchbowl and they hate it. That's why in 2022 we saw the S&P down 20% and the debt heavy NASDAQ down 34%.
After exploding out of the starting gate a few weeks ago, the paper markets are getting a big smack in the face this week.
Stocks slumped for a third straight session yesterday, as the S&P declined by 0.8%, and it’s now down 2.5% for the week – on track for the first negative week of the year.
On the other hand, Treasuries have done well this week. Remember that bond prices move in the opposite direction of their yields (thus, falling yields mean rising prices).
The benchmark 10-year yield, which started this holiday-shortened week at just shy of 3.5%, took a nosedive on Wednesday and is now poised to finish the week about 10 basis points lower – at 3.4%.
Notably, the 10-year vs. the 2-year yield curve inversion (3.4% vs. 4.2%) continue to signal that investors at best see the Fed reversing course over the coming year and reducing rates. At worst, they see a coming recession.
The 10-year vs. 90-day yield inversion is even greater.
In the precious metals market, gold is up 0.7% for the week and is up 5.6% since January 1st. Silver is slightly up for the week (0.2%) but is slightly down since the start of the year (0.3%).
Matt Phillips is right when he observes that “the debt ceiling circus has arrived in D.C.” and it’s not going away anytime soon.
He writes today that the closer the federal government gets to “stiffing creditors” and going into an unprecedented default, “the bigger the implications will be for the markets and the economy.”
As I wrote in Friday’s article, the government hit its $31.4 trillion debt limit last Thursday.
While that’s a big deal, it’s nothing compared to what will happen to financial markets if the government defaults sometime mid-year.
For now, it just means the Treasury Department has to start using "extraordinary measures" – like drawing down its cash balances and deferring contributions to government pension funds – to keep paying its bills.
Treasury Secretary Janet Yellen told Congress that her department can keep juggling payments at least until June.
Markets don't appear to be overly worried at this point. But just wait. As Phillips points out, the longer the debt ceiling drama plays out — and the closer the government comes to default — the crazier markets will get.
That's exactly what happened in the summer of 2011, when we last came perilously close to the Thelma & Louise Driving Over the Edge moment into the abyss.
That year, as the crisis got worse into July and early August, the S&P 500 plummeted 15% and credit spreads that determined costs for home mortgages and corporate borrowings surged.
That jump came as investors grew leery of lending in the face of growing risk and uncertainty.
On the other side, those who say they want to cut government debt levels will likely claim that the turmoil the debt fight raised over a decade ago was worth it – despite the U.S.’s lowered credit rating.
They point to the Budget Control Act of 2011 that resulted from that debt limit fight, which helped cut federal budget deficits in subsequent years (note that it hasn’t actually helped cut the national debt, an important distinction).
So, however it turns out, the fight over raising the debt ceiling and avoiding default is going to hang over the markets for a good chunk of the year.
And, at least for investors, according to Phillips, “it's likely to be a bummer.”
The Fed, the Bank of England and the European Central Bank all raised interest rates this week again to fresh multi-year highs.
They just can’t seem to help themselves.
At the same, they each suggested or explicitly warned that there is more tightening coming plus a willingness to hold their policies at hawkish levels for a while.
They just can’t seem to help themselves.
Let’s focus on the Fed. Inflation and all of its major drivers fell in the last half of 2022.
I’m not going to say it fell sharply, steeply or significantly, because some prices have come down – some even sharply, some just a tad – and some have not at all.
The so-called price deceleration occurred despite the pace of economic growth, which picked up in the second half of the year and unemployment remained fairly static.
We know that the goal of the Fed’s statutory dual mandate is to balance the risks of inflation versus the benefits of solid economic growth and maximum unemployment.
Jeremy Bivens points out that currently, “the benefits of low unemployment are enormous, and the risks of inflation are retreating rapidly.”
Here’s what he wrote before the Fed’s 25-basis point rate hike on Wednesday:
“If the Fed lets the current recovery continue [quickly] by not raising interest rates further at this week’s meeting, 2023 could turn out to be a great year for the economic fortunes of American families.
“It is time for the Fed to stand pat on interest rate increases and wait to see how the lagged effects of past increases enacted in 2022 will filter through to the economy.
“Continuing to raise rates in the early stretches of 2023 will be a clear mistake and pose an unneeded threat to growth in the next year.”
He envisioned a Powell press conference after a meeting at which the Fed decided to leave rates alone, emphasizing these points:
Eternal optimist Treasury Secretary Janet Yellen says she sees a path for avoiding a recession, with inflation down significantly and the economy remaining strong, given a strong jobs market.
"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years," Yellen exclaimed.
"What I see is a path in which inflation is declining significantly and the economy is remaining strong."
Of course, being the team player she is, Yellen said inflation remains too high.
But she believes it could fall a lot more because of action taken by the Biden administration, including steps to reduce the cost of gasoline and prescription drugs.
Labor Department data out last Friday showed job growth jumped up steeply in January – nonfarm payrolls leaped by 517,000 jobs and the headline unemployment rate dropped to a 53-and-a-half-year low of 3.4%.
The strength in hiring, despite growing layoffs in tech, overnight reduced investor expectations that the Federal Reserve was close to pausing its cycle of hiking interest rates.
Unemployment is Higher Than What They Tell Us
Ambrose Evans Ambrose-Pritchard writes in The Telegraph that “monetary tightening is like pulling a brick across a rough table with a piece of elastic.
“Central banks tug and tug: nothing happens. They tug again: the brick leaps off the surface into their faces.”
Or as economist Paul Krugman puts it, the task is like trying to operate complex machinery in a dark room wearing thick mittens.
Lag times, blunt tools, and bad data all make it impossible to execute a beautiful soft-landing.
Way back in late 2007, the economy went into recession, a lot earlier than originally thought and almost a year before the demise of not-too-big-to-fail Lehman Brothers.
But the Federal Reserve apparently didn’t know – or acknowledge – that at the time.
The initial data release was way off base, as it frequently is at certain points in the business cycle.
The Fed’s main predictive model was showing an 8% risk of recession at the time. Today, by the way, it’s under 5%. Evans-Pritchard remarks, “It never catches recessions and is beyond useless.”
Fed officials later complained they wouldn’t have taken their hawkish stance on inflation the next year had the data told them what was accurately happening in real time.
And, more importantly, they wouldn’t have set off the chain reaction leading the global financial system to come crashing down.
Evans-Pritchard, however, ponders that had the Fed and its peers overseas paid more attention – or any attention for that matter – to the quickly evolving slowdown in the first half of 2008, they would have seen what was coming.
So, where does that leave us today as the Fed, European Central Bank and Bank of England hike rates at the fastest pace and more aggressively in four decades, with massive QT as icing on their cake?
According to Evans-Pritchard, the monetarists are again crying the apocalypse is coming! They’re accusing central banks of inexcusable errors:
First, they unleashed the high inflation of the early 2020s with an explosive monetary expansion.
Then, they swung to the other extreme of monetary contraction – disregarding both times the standard quantity theory of money.
First off, let me start with this. Sunday is my 40th wedding anniversary. Forty years ago, my better half lost her mind and said yes in front of a crowd of 100 people at our little church in South Amboy, NJ.
I’m not terribly sentimental about things, but it’s hard to not remember the wedding or the days leading up to it. My friend Jack from “college” ( trade school) flew in to be my best man. Well on the night before the wedding, Jack and I are in my condo, getting ready for bed and there’s a ring of the doorbell. Hmm that’s odd, it's a cold February night in Highlands NJ, it’s snowing, and it’s almost midnight.
I went down to answer the door and there’s a truly “knock out” beautiful girl standing there, dressed like she just came back from a night in the clubs. Oh, and she was definitely “buzzed.”
She said she needed to see David, she needed to see if she could spend the night, because for some reason she couldn’t go home. Well David was the person that owned the condo before me. So I had to explain to her that Dave’s not here any longer, he moved with the military, and I hope you can try another friend.
But she was insistent. She needed a place to stay for the night and wanted in. She was pleading to come in, and then suggested she could make it worth my while. It was at that point, I started to think ‘Hey, I bet one of my goofy friends is behind this, and I’m getting set up here.” So I told her, “I’m getting married at noon tomorrow, and no I can’t let you in, it wouldn’t quite look right. “ She finally left in a huff, cursed me out and to this day I don’t know if it was coincidental, or if I was being tested somehow. Well it’s 40 years later and I guess I passed.
It’s been wonderful. Have there been rough patches? You bet. But you take the bad with the good, and in the end, it has worked out as well as I could have asked for. For all you out there that are working on 30, or 40 or 50+ years, Congrats and Kudo’s. We’ve become a rare breed.
Okay so the high stakes game of chicken continues. Not only did the CPI come in hot, the PPI came in hot. But the market ignored both and every dip was bought. They wouldn’t let it fade. Then to top it all off “The Bullard” and fed head Menard both suggested that they wouldn’t be against a 50 basis point hike in March.
When you’ve been writing articles for as long as I have, and in some (many) of them you make predictions, you know you will win some and lose some. You simply hope to win more than you lose.
My thesis on inflation and the Fed has been right unfortunately. Some of the catchy little phrases I’ve used is “it’s different this time” and I’ve gone to great lengths to suggest that this current fed, is NOT going to be bullied by the market.
In fact, one of the more comical things I’ve seen in the last 3 months has been the so called “experts” on the market, explaining how the Fed MUST pivot towards cutting rates, and how they most certainly will. Yet time after time, whether it’s Powell, or Mester, or Bullard or whomever…they simply say “higher for longer.” And then the experts go off in a huff and a puff.
The world we live in right now, is crazier than at any time in my life. We, (Humanity) is being attacked as never before. I mention the WEF ( World Economic Forum) a lot, because in years past the globalist scumbags tried to keep their plans secret. From the Club of Rome, the Builderbergers, the CFR, etc, all kept their dirty little agenda’s hidden from the public. But not Satan-Klaus and his band. They tell you right to your face how much they hate you and want you dead.
Hey at LEAST they’re telling you the truth. They are all in on population reduction, eliminating your choice of food, what kind of travel you can or can’t do, taking over your healthcare, setting up 15 minute cities, eliminating dairy farms, cattle ranches and on and on. Right in your face.
But other than them, 99.9% of everything else you’re told is pure BS. Safe and effective comes to mind. Or Trump was a Russian plant, or we didn’t blow up the Nordstream pipeline, or Iraq having WMD’s, or Russia had no incentive to invade Ukraine, or Russia is paving the way to conquer Europe, or there’s 89 genders, or ivermectin is dangerous and doesn’t work, or, or, or, or etc ad-infinitum. You get it. Everything’s a lie.
So, if everything is a lie ( amazingly except what the WEF says they want to do to you) it’s awful hard to figure out fact from fiction. The gift of discernment is very important in trying to understand the ultimate goals of the various agenda’s.
When it comes to the Fed and hiking rates, I am on the record in these pages back in March of last year, as saying that inflation would be more than people expected, and last longer than people expected and that the fed was going to use rate hikes to fight this inflation. Oh, and just so you understand, my theory is that they’re using inflation as the cover for rate hikes.
A major study out last Friday finds that the Federal Reserve has never reduced inflation from high levels, much like today’s, without causing a recession.
The paper was written by a group of leading economists, with three current Fed officials addressing its conclusions at a conference on monetary policy.
When inflation takes off, as it has over the past two years, the Fed normally reacts by raising interest rates – sometimes forcefully – to try to put the brakes on price increases and cool the economy in the process.
The higher rates, directly or indirectly, make mortgages, car loans, credit card debt and commercial lending more expensive.
But sometimes – again, like today – inflation remains stubbornly high, requiring even higher rates to rein it in.
How does one be proud of something they’ve done or said, without looking boastful? It’s not easy, because it will usually appear that you’re patting yourself on the back to get attention.
Well, I want attention. Not for being right, but for alerting people to what the hell is going on out there.
I had this conversation the other day with a good friend. He’s tried to tell people about what’s really going on with things… from the jabs, to the banking system to the WEF, to CBDC’s and most don’t want to hear it.
Trust me I know. Ask me how I know.
So, when Powell started hiking rates, I said over and over “this is not to fight inflation, he’s hiking rates into a shaky economy to crush the middle class, cause things to break, consolidate power”
And I’ve been right. Bravo, good job and all that crap. My point is that like so many things I’ve stated over the past 30 years, some/most of it seems insane to the “normal” people. For instance when I write these articles, I often amuse myself by asking myself how many people are going to roll their eyes, call me a nut and simply discard what I’ve said. Usually it’s a lot.
So, Powell hiked and hiked, going from 0 to 5% faster than any hike schedule in modern history. His cover was inflation, which is horsecrap. That’s the excuse for his hiking rampage, not the reason. The reason was just shown to you in living color this week.
Central bankers aren’t stupid they’re simply evil. They knew damn well that keeping rates artificially suppressed for over a decade would cause trouble down the road. They also know that jacking rates as fast and high as they have would cause duration instability in many banks, especially smaller regional banks. Yet they did it.
Now banks are blowing up. Why? Because when rates were zero, banks would have no choice but to buy long dated bonds, just to get a lousy 1.5%. But when they got pushed to 5%, the bonds on their books went down mark to market. ( Bond yield and price are inversely related. Thus, as the price goes up, the yield decreases, and vice versa. This relationship exists because the bond's coupon rate is fixed, which requires the price in secondary markets to change to align with prevailing interest rates in the market.)