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The drenching Hurricane-turned-Tropical-Storm Hilary is forecast to leave a destructive swath up the western U.S. this week as relief workers in Maui continue their search for any signs of life among the 850 missing residents of Lahaina over 3,000 miles away.
Meanwhile, economic prognosticators are wondering what’s in store this weekend at the Kansas City Fed’s symposium in Jackson Hole, WY.
The annual summer conference, which will be held Thursday through Saturday, features a slew of speakers who will largely be preaching to a pre-occupied choir.
They will mostly pontificate their profligate theories (or, if you prefer, officiously wax poetic) about this year’s theme – “Structural Shifts in the Global Economy.”
Dispassionate and Fedspeak enough to escape the attention of most common Americans? You betcha!
Although the stream of papers slated to be delivered and discussed at the event have yet to be released, one thing is clear:
Perhaps the most compelling mantras underlying the Structural Shifts theme should be focusing on the storm debt – public and private – brewing in the U.S.
As Jennifer Sor suggests in a recent Business Insider article, troubles are already bubbling up to the surface “as loans pile up and borrower confidence falters.”
Banks Were an Early Sign
We recall how the Covid pandemic upended our lives and economy – as well as those of people around the world.
The largely mandated shutdowns in early 2020 caused a devastating reduction of economic activity and huge job losses not seen since the Great Depression.
The downturn came as government restrictions and citizens’ fear of the virus kept people at home and businesses and schools shut – both here and abroad.
Workers in jobs that paid lower wages and required face-to-face encounters with consumers – in the hospitality and retail industries, for example – were especially affected.
Those facing massive employment and earnings losses were disproportionately women, workers of color, workers without a college degree, and foreign-born workers.
Congress, the White House and the Federal Reserve enacted significant fiscal and monetary relief measures in 2020 and 2021 to prevent the economy from facing a depression and to relieve hardships faced by everyday Americans.
Most economists agree that those actions helped fuel an economic recovery starting as early as May 2020, making the deepest recession in the post-World War II era also the shortest.
According to the National Bureau of Economic Research, the consensus arbiter of official business-cycle dating, the economic downturn lasted just two months – March and April 2020.
On the one hand, the CBPP says the expansion in economic activity in the recovery from the pandemic recession was stronger and quicker than initial forecasts.
Those cautious projections may have been tainted by the Great Recession of 2007-2009, which at the time was the worst recession since the Great Depression.
The recovery from which also was disappointingly slow, with high unemployment – in the range of 6-9% – lasting several years after the economy began to grow (see chart above).
Declaration of Independence –
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
Preamble to the U.S. Constitution –
“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”
Happy Independence Day to a deeply divided America.
As we celebrate another 4th of July holiday, the rifts in our nation’s collective conscience have never seemed wider.
It’s always a good day to remind ourselves of the unrealized ideals set forth in our country’s founding documents.
Yes, you can argue – with hundreds of historical examples in hand – that it’s always been this way.
That “we the people,” “life, liberty and the pursuit of happiness,” and “one nation…with liberty and justice for all” have always been worthy – but unfulfilled – platitudes for our experiment in self-governance.
Indeed, it’s been almost two and a half centuries since that Declaration was adopted by representatives from the nascent 13 colonies.
But with 24-hour cable and internet news and round-the-clock social media diatribes overwhelming our daily realities, perceptions of a future dystopia abound.
This American Division is stark; some even think it’s irreconcilable. Perhaps they’re right. But that doesn’t mean a 21st century Civil War is inevitable.
It isn’t…not yet anyway (but see the end of this essay; another January 6th event could be lurking around the corner).
If we’re being honest with ourselves, Americans have been at war with ourselves since our founding – it’s the nature of a democratic republic.
On the one hand, as our nation’s first chief justice of the U.S. Supreme Court John Marshall observed, “Between a balanced republic and a democracy, the difference is like that between order and chaos.”
On the other hand, as the wise Ben Franklin once quipped, “If everyone is thinking alike, then no one is thinking.”
Indeed, unity per se was never a goal of the nation’s founders, except maybe in an apocryphal sense. Turns out, democracy is a messy, often ugly process.
And in any event, policymaking in a democratic republic was never expected to be unanimous; it’s always been the art of achieving what is possible at any given time.
The problem with our ever-evolving internal war of words is that it’s growing more and more un-civil.
And that’s what some fear is leading to another Civil War – one with guns and blood and Americans killing other Americans.
But we’ve struggled with that very experience since our founding…and it continues as we celebrate our nation’s 247th Independence Day.
It's time to stock up on gold. Reuters' Seher Dareen reports that gold prices are near two-month lows in holiday-thinned trading today.
On the one hand, the "agreement in principle" to raise the nation's $31.4 trillion debt limit is easing investor worries.
On the other hand, chances that the Federal Reserve will raise rates at its next meeting in two weeks is tempering the demand for bullion.
Spot gold was mostly unchanged at $1,944 per ounce by 1:15 EDT this afternoon, while U.S. August futures were up to $1,962.
The news from the Capitol of a debt deal, which still has to pass both houses of Congress -- no done deal to be sure -- came on a low-volume day with the U.S. and parts of Europe on holiday.
Until a couple of days ago, most investors were betting that the Fed would keep its benchmark rate steady and wouldn't raise them on June 14th.
Last week's economic data changed that view, with investors now expecting the Fed's FOMC to raise rates for the 11th time since March last year.
Fed Fund futures now show a 59% chance of a 25-basis-points increase and a 41% chance of rates holding steady -- with rates peaking in July at 5.32%.
A little over two weeks ago, over 90% of futures traders were expecting a rate freeze, with only 10% seeing a 25bp rate hike.
Tim Waterer at KCM Trade said, "With a possible June rate hike by the Fed still in play, it is the greenback and U.S. treasury yields which continue to prosper."
Gold has no yield of its own, so it tends to fall out of favor with investors when interest rates rise and vice versa.
The dollar index was near a two-month high, and that's been weighing on gold prices. A stronger dollar makes bullion more expensive for holders of other currencies and vice versa.
Carlo Alberto de Case at Kinesis Money said, "As long as we remain above $1,900, I don't see too much risk of further decline."
Spot silver was down 0.63% today at $23.17, platinum was up 0.24% at $1,024, and palladium was down 0.63% at $1,412.
It's always good to add gold and silver to your nest egg. But from a pure pricing perspective, it's even better to be adding them today.
You know what “they” say: past performance does not guarantee future results.
What we can say, however, is that some statistical measures are better at predicting the future than others that make investors’ lives easier.
And one such metric that's been capturing the attention of economists and investors for over 60 years is the New York Fed's recession probability tool.
Writer Sean Williams explains this indicator as the difference in yields between the 3-month and 10-year Treasury bonds (the “spread”) to forecast how likely it is that a recession will come to pass in the coming year.
A normal yield curve is sloped upward and to the right, showing bonds with longer maturities (10-20-30 years) with higher yields than bonds scheduled to mature sooner – kind of what we typically see in a healthy economy.
When troubles in the economy stir up, though, the yield curve tends to become inverted – that is, shorter-term bonds have higher yields than longer-term bonds.
A yield-curve inversion doesn't guarantee a forthcoming recession. But Williams (and others before him) note that every recession after World War II has been preceded by a yield-curve inversion.
According to the latest NY Fed's recession-probability indicator, there's a 68.22% chance the country will enter a recession over the next 12 months.
Williams notes that's the highest probability of a recession occurring in the next 12 months in over 40 years.
“Not coincidentally,” he says, “we're also witnessing the largest yield-curve inversion between the 3-month and 10-year note in more than four decades.
Since 1959, there have been eight instances when the NY Fed's recession-forecasting tool has exceeded a 40% probability of an economic downturn.
With the exception of October 1966, every other previous time a reading has been above 40% the economy has dipped into recession – that's 57 years without a miss.
One of the reason recessions matter is because no bear market has bottomed since World War II before the National Bureau of Economic Research has officially declared a recession.
I’ve been trying to climb out of crisis mode lately.
Soulful Bob Marley keeps replaying in my head: “Don’t worry ‘bout a ‘ting. Cause every little ‘ting gonna be alright…”
But as we get ready to head into another spring weekend, I’ve been finding it hard to find a meaningful and timely topic to write about that doesn’t entail some impending disaster, tragedy or danger.
There’s the Inflation Crisis…
Fed governor Michelle Bowman traveled all the way to Germany to tell a crowd attending an ECB symposium that the Fed will likely have to continue raising interest rates if price growth and the jobs market don’t further cool down.
She's clearly an outlier right now. Over 83% of Fed Funds Rate futures traders on the CME believe the Fed will (although not necessarily should) pause rate hikes at the Fed's next meeting in mid-June.
I think they should have paused a few months ago -- mainly to avoid the coming recession -- but that's another story for another time.
(FYI...inflation, as measured by the CPI – All Urban Index, increased 4.9% year-over-year in April. Core inflation, which excludes food and energy prices, rose 5.5% annually – despite a 12.6% fall in oil and other energy commodities.)
And the Debt Crisis…
The government is another day closer to X Day when it runs out of extraordinary measures to continuing paying its bills – and when global financial markets start to implode.
But with President Biden and House Speaker McCarthy delaying until next week their next “negotiating” pow wow that had been scheduled for today – while their staffs presumably get closer to a blueprint for compromise, I’m waiting to write about that, too.
So, the Banking Crisis…
“The banking system is sound and resilient.”
That’s what the Federal Reserve’s press release said on Wednesday in the statement announcing another 25 basis point interest rate hike.
Sound and resilient.
A few hours later, multiple media sources reported that PacWest Bank is exploring strategic options, including a possible sale.
Is PacWest the Next to Fail?
Shares of PacWest stock were already down about 80% since February. After the news hit, the stock took another 50% nosedive.
In fact, since January 1st, its share price has tanked – having fallen from $22.95 to a new 52-week low of $3.17 as of yesterday’s market close.
Bloomberg’s Joe Wiesenthal noted in his Thursday column that “overall, the ‘banking system’ may be sound and resilient, but there's clearly anxiety surrounding individual banks that hasn't gone away.”
PacWest sank over 50% in early trading and was halted multiple times because of volatility.
At the same time, Tennessee-based First Horizon Bank also fell 33% after the regional lender and TD Bank announced that they were terminating their merger agreement.
The banks jointly said that the move was because of uncertainty around when (not if) TD would receive regulatory approval for the deal and was not related to First Horizon.
Other notable declines included a drop of 38% for Western Alliance and 12% for Zions Bancorp. The SIPDER S&P Regional Banking ETF (KRE) was down more than 5%.
Western Alliance’s fall came despite the company advising Wednesday evening that deposits have grown since the end of March.
KBW CEO Tom Michaud said, “That hasn’t taken the heat off of the stock, or the bond prices. Investors are very nervous.
“And I think what they’re nervous about is the fact that Silicon Valley lost 75% of their deposits in 36 hours. There’s not a bank in the world that could really sustain that.”
“The banking system is sound and resilient.”
That’s what the Federal Reserve’s press release on Wednesday said in the statement announcing another 25 basis point interest rate hike.
Sound and resilient.
A few hours later, multiple media sources reported that PacWest Bank is exploring strategic options, including a possible sale.
Is PacWest the Next to Fail?
Shares of PacWest stock were already down about 80% since February. After the news hit, the stock took another 50% nosedive.
In fact, since January 1st, its share price has tanked – having fallen from $22.95 to a new 52-week low of $3.17 as of yesterday’s market close.
Bloomberg’s Joe Wiesenthal noted in his Thursday column that “overall, the ‘banking system’ may be sound and resilient, but there's clearly anxiety surrounding individual banks that hasn't gone away.”
PacWest sank over 50% in early trading and was halted multiple times because of volatility.
At the same time, Tennessee-based First Horizon Bank also fell 33% after the regional lender and TD Bank announced that they were terminating their merger agreement.
The banks jointly said that the move was because of uncertainty around when (not if) TD would receive regulatory approval for the deal and was not related to First Horizon.
Other notable declines included a drop of 38% for Western Alliance and 12% for Zions Bancorp. The SIPDER S&P Regional Banking ETF (KRE) was down more than 5%.
Western Alliance’s fall came despite the company advising Wednesday evening that deposits have grown since the end of March.
KBW CEO Tom Michaud said, “That hasn’t taken the heat off of the stock, or the bond prices. Investors are very nervous.
“And I think what they’re nervous about is the fact that Silicon Valley lost 75% of their deposits in 36 hours. There’s not a bank in the world that could really sustain that.”
As the Wicked Witch of the West orders her minions toward the end of Wizard of Oz, “Seize them!”
And seize them, they did.
San Francisco bank First Republic was taken over by the Federal Deposit Insurance Corporation over the weekend and was sold to too big to fail JPMorgan Chase in the pre-dawn hours this morning.
All in a day’s work.
It was the third bank failure in two months and the second-largest in the nation’s history, and the one unanswered question now is, is there a systemic banking crisis or not?
What’s Going On?
JPMorgan, the country’s largest bank, will assume all of First Republic's $92 billion in deposits, including ones that weren't insured.
The FDIC didn't even need to invoke its so-called “systemic risk exception” to insure them, as it did with Silicon Valley and Signature Banks.
Members of Congress who run the banking committees in both houses generally praised the federal takeover of First Republic and called its sale to JPM an example of a successful public-private collaboration.
Rep. Maxine Waters of California and the top Democrat on the House Financial Services Committee said: “This prompt and cost-effective sale of the bank protects depositors, limits contagion, and ensures that no cost is borne to our nation’s taxpayers.”
Perhaps. Still, such effusive praise should raise our eyebrows, given the nearly $17 million in campaign contributions the commercial banking industry gave to members of Congress in 2022, according to OpenSecrets.org.
But as Pam and Russ Martens of Wall Street on Parade remind us, it shouldn’t be lost (but, apparently, it has been on the regulators that approved the sale and their fans in the Capitol) that JP Morgan is a five-time felon, with the same CEO – Jamie Dimon – at its helm.
But I digress…
We now know that the economy has started to put on the brakes.
GDP growth slowed in the 1st quarter to 1.1%, the Bureau of Economic Analysis reported yesterday – significantly less than the consensus Wall Street expectation of 1.9%.
At the same time, one of the Fed’s preferred measures of inflation (if not its favorite), the Personal Consumption Expenditures index, headed in the wrong direction to 4.2%, higher than the expected 3.7%.
Some say that suggests the economy has continued to expand amid high inflation and tighter financial conditions, that growth rate isn't sustainable,
Pantheon Macroeconomics’ chief economist Ian Shepherdson believes the economy will slow further as households cash in their savings and more investments while dealing with more challenging financial conditions.
Shepherdson warns that the economy will enter a sharp slowdown over the current quarter, causing GDP to shrink by 2%.
"It would be dangerous,” he said, “to extrapolate that apparent strength in the 1st quarter into an expectation of a decent spring and summer."
Chris Zaccarelli, chief investment officer of Independent Advisor Alliance added, “[Yesterday’s] data was the worst of both worlds, with growth down and inflation up.”
For over a year now, some of the financial world’s so-called best and brightest – billionaire investors, hedge fund managers, and economists – have cautioned that rising rates will eventually trigger a recession.
In one of its banner anthems from the early 2000s – “Roll with the Changes” – the popular classic rock band REO Speedwagon belts out the sing along chorus, “Keep on rollin’, keep on rollin’…”
NY Times columnist David Brooks seems to feel the same way about the American economy.
In a recent column, he observed: “You can invent fables about how America is in economic decline…But the American economy doesn’t care. It just keeps rolling on.”
Brooks’ colleague David Leonhardt notes that when it comes to economic innovation and productive might, no country can match the U.S. – with Apple, Google, Amazon, Tesla and OpenAI blazing new trails.
Leonhardt writes, “The standard measure of a nation’s economic performance is per capita gross domestic product — the value of the economy’s output divided by the size of the population.”
He points out that even as China’s share of global GDP has skyrocketed over the past few decades, the U.S. still comprises virtually 25% of worldwide output – about the same as in 1990.
But as Nobel laureate and economist Paul Krugman reminds us, GDP doesn’t measure everyday Americans’ standard of living.
Because per capita GDP is an average, it can be distorted by outliers. One major example: income inequality in the U.S. is significant, which means the wealthy own a much larger share of output than in other countries.
As Leonhardt points out, per capita GDP in the U.S. has risen 27% in the new millennium – from around $50,000 in 2000 to a little over $60,000 at the end of 2021 (it was less than $25k in 1970).
“But median household income has risen only 7%,” while income for the top 0.1% of earners has [soared] 41%.”
Broader quality of life metrics show even more clearly how the U.S. isn’t looking so good relative to other comparable nations.
Leonhardt notes we have the lowest life expectancy of any high-income country, with “uniquely poor access to health insurance and paid parental leave.”
Krugman says, “It’s always important to bear in mind that GDP, at best, tells us how much a society can afford.
“It doesn’t tell us whether the money is well spent; high GDP need not translate into a good quality of life. Individuals can be rich but miserable; so can countries.
“And there are good reasons to believe that America is using its economic growth badly.”
Leonhardt thinks it’s a mistake to see the economy as separate from living standards:
“The unequal American economy continues to churn out an impressive array of goods and services while also failing to deliver rapidly improving living standards. And polls suggest that most people aren’t fooled.”
The government’s Producer Price Index for March, out today, showed that wholesale prices out and out declined from February – a possible sign, some say, of further cooling in prices in the coming months.
Axios’ Courtenay Brown and Neil Irwin say the latest numbers highlight a shift in America's inflation dynamics – namely, falling energy prices earlier this year, which is putting downward pressure on overall inflation.
The PPI, which is a measure of the change in the cost of suppliers' goods and services, fell 0.5% in March after a flat reading the month before.
The index is up 2.7% year-over-year through March (PPI peaked at more than 11% last June).
A good chunk of last month’s decline is a result of plunging energy prices that fell 6.4% in March (they’ve been rising again since then). Food prices rose 0.6%, after three straight months of declines.
Economist Bill Adams at Comerica says, "PPI surprised to the downside, but its details show the release is unlikely to bring the Fed off of the inflation fighting warpath."
That’s a sentiment shared by others. Over two-thirds (68%) of CME Fed futures traders see another 25-basis point rate hike announcement at the end of the next FOMC meeting on May 3rd.
Adams explained, "March's slowdown was concentrated in goods prices, especially energy goods.
“By contrast, core services prices are still running hotter in year-over-year terms than they were between last April and January."
Over the last several months, consumers’ expectations of future inflation have been steadily falling – a sign perhaps that Americans had confidence in the Fed's war on prices.
Courtenay Brown and Neil Irwin, who say that changed last month, pointed out today that for the first time in six months, median inflation expectations of everyday households in the year ahead rose.
They increased, in fact, by a half-percentage point to 4.7%, according to the New York Fed's latest Survey of Consumer Expectations.
The report comes as expectations for the level of price increases for everyday goods and services — like food, gas, rent and medical care — decreased in March.
After 2023's hotter-than-expected inflation reports, the March data suggest that the public now believes inflation won’t fall quite as much as they have been anticipating.
Brown and Irwin caution, however, that one month of new numbers doesn’t necessarily mean that “inflation expectations are becoming unanchored. But,” they add, “more readings of this kind could worry officials.
Median inflation expectations at the three-year-ahead horizon ticked up by 0.1%, to 2.8%, but they fell slightly (by 0.1 percentage point) to 2.5% at the five-year-look-ahead timeframe.
Consumers also pushed up expectations for household income growth and, for the first time since last fall, how much they plan to spend.
Mean unemployment expectations — or the mean probability that the unemployment rate will be higher one year from now — increased by 1.3 percentage point to 40.7%.
The average perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. But the average probability of voluntarily leaving one’s job declines by 1.5 percentage points to 19.3%.
They warned, too, that it was getting harder to get a loan – a point Brown and Irwin say is worth watching in the wake of the recent bank failures and bailouts.
The share of households reporting that it was more difficult to access credit compared to one year ago rose to the highest level in the survey's 10-year history.
Notably, year-ahead expectations about households’ financial situations also improved – with fewer expecting to be worse off and more respondents expecting to be better off a year from now.
A lot of news competing for our attention – financial, political and otherwise – as a new week unfolds:
But here’s the story I want to highlight today:
David Hollerith reports today that depositors pulled another $126 billion out of U.S. banks in the week ending March 22nd – primarily from the nation's largest institutions.
The largest 25 banks in the U.S. by asset size lost $90 billion (on a seasonally adjusted basis), according to the Fed.
Smaller banks, which suffered a huge run the previous week as regional lenders Silicon Valley and Signature Banks were going bust, were able to stabilize their assets, gaining back $6 billion.
Total industry deposits fell to $17.3 trillion, down 4.4% from the same week a year ago – the lowest level since July 2021.
Hollerith says the new numbers reinforce some trends that were already in place.
For example, deposits had been falling at all banks before the Silicon Valley failure in the first two months of 2023. Deposits for all banks were also down 5% annually in last year’s 4th quarter.
Many observers attribute this systemic shift to pressure being applied by the Fed’s aggressive (obsessive?) campaign to bring down inflation closer to its 2% target.
During the early part of the pandemic, when interest rates were virtually zero, banks were drenched in deposits.
When the Fed started raising those rates last March to cool the economy, customers who had deposits began seeking out places with higher yields.
The first year-over-year deposit decline for all banks came in the 2nd quarter of 2022.
As we’ve pointed out, some of this money has been flowing to money market funds, which are offering investors a rate of return in the range of 4-5%.
Since January 1st, investors have poured over $500 billion into those funds, according to too big to fail Bank of America.
That’s the highest quarterly inflow since a peak earlier in the pandemic, and another $60 billion was added to these funds in the past week.
Government and banking officials have been working to prevent massive deposit outflows in the aftermath of last month’s bank failures.
Federal regulators pledged to cover all depositors at both banks they seized, hoping that would calm any panic, and also promised to help other regional banks if needed.
Eleven megabanks also decided to provide another troubled regional lender, First Republic, with $30 billion in uninsured deposits to stabilize its dire situation.
The challenge that outflowing deposits create for all banks is that if they raise rates on their deposits to keep or attract customers, their profits fall, making shareholders wary.
But if they lose too many customers, as SVB did, they lose critical assets and may have to sell assets, like long-term Treasuries, at a loss to cover withdrawals.
SVB customers withdrew $42 billion in one day, leaving the bank with a negative cash balance of $958 million, forcing regulators to seize the bank, which was the 16th largest in the U.S.
Courtenay Brown and Neil Irwin open their Friday column with these startling headline-like declarations:
“Sunday night bank bailouts on both sides of the Atlantic. Joint announcements by global central banks. Fear and uncertainty sweeping markets.”
Brown and Irwin say the last 10 days have felt similar to the 2008 Great Recession.
But there are crucial differences, they point out, that lower the risk that recent events will have “the same seismic impact on the world economy” as back then.
Undoubtedly, the still-unfolding run on bank deposits has raised the odds of a recession, especially with a Fed’s hellbent focus on bringing down inflation at virtually whatever cost.
Crisis? What Crisis?