Are we headed for a world wide meltdown?

Exhibit 1 below was written by Bill Dudley, who formerly was Vice Chair of the Fed and before that Chief Economist for Goldman Sachs.

Exhibit 2 is my observation.

Exhibits 3 and 4 are observations of a colleague who fancies himself a macro thinker. He's smart, although not on the same plane of brilliance as Lusty Lad and Captain Midnight. (Lusty Lad is highlighted to annoy WTF as part of my strategy to cure him of his Stockholm Syndrome.)


Exhibit 1:

The Fed Has Made a U.S. Recession Inevitable

By Bill Dudley


U.S. Federal Reserve Chair Jerome Powell has made two ambitious assertions about the central bank’s management of the economy. In his latest news conference, he said that the Fed’s new, more inflation-tolerant monetary policy framework bears no responsibility for the recent sharp surge in consumer prices. Then, the following week, he cited three historical examples — the tightening cycles of 1964, 1984 and 1993 — as evidence that the Fed can achieve a “soft landing,” slowing growth and curbing inflation without precipitating a recession.

I disagree with both. The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.

Under the monetary policy framework, introduced in August 2020, the Fed is supposed to target average annual inflation of 2%, which means allowing for occasional overshoots to make up for previous shortfalls. Yet in the current recovery, the central bank translated this into a more specific commitment. It would not start to remove monetary stimulus until three conditions had been met: inflation had reached 2%; inflation was expected to persist for some time; and employment had reached the maximum level consistent with the 2% inflation target.

This was a mistake. As I wrote last June:

This means monetary policy will remain loose until overheating begins – and cooling things off will require the Fed to increase interest rates much faster and further than it would if it started raising rates sooner. […] The delay in lifting off, for example, is likely to push the unemployment rate considerably below the level consistent with stable inflation, increasing the odds that the Fed will need to tighten sufficiently to push the unemployment rate back up by more than 0.5 percentage point. Over the past 75 years, every time the unemployment rate has moved up this much, a full-blown recession has occurred.

This scenario is playing out now. The labor market is “extremely tight” (Powell’s words), inflation is running far above the Fed’s objective and the central bank is only beginning to remove extraordinary monetary accommodation. Powell blames bad luck — surprises such as snarled supply chains that officials could not have anticipated. To some extent he might be right, but the Fed nonetheless bears responsibility for being so slow to recognize the inflation risks and begin to tighten policy.

So can the Fed correct its mistake and engineer a soft landing? Powell is correct that the central bank tightened monetary policy significantly in 1965, 1984 and 1994 without precipitating a recession. In none of those episodes, though, did the Fed tighten sufficiently to push up the unemployment rate.

1964: The federal funds rates rose from 3.4% in October 1964 to 5.8% in November 1966, while the unemployment rate declined from 5.1% to 3.6%.

1984: The federal funds rate rose from 9.6% in February to 11.6% in August, while the unemployment rate declined from 7.8% to 7.5%.

1993: The federal funds rate rose from 3% in December 1993 to 6% in April 1995, while the unemployment declined from 6.5% to 5.8%.

The current situation is very different. Consider the starting points: The unemployment rate is much lower (at 3.8%), and inflation is far above the Fed’s 2% target. To create sufficient economic slack to restrain inflation, the Fed will have to tighten enough to push the unemployment rate higher.

Which leads us to the key point: The Fed has never achieved a soft landing when it has had to push up unemployment significantly. This is memorialized in the Sahm Rule, which holds that a recession is inevitable when the 3-month moving average of the unemployment rate increases by 0.5 percentage point or more. Worse, full-blown recessions have always been accompanied by much larger increases: specifically, over the past 75 years, no less than 2 percentage points.

The Fed needs to adjust how it puts its monetary policy framework into practice. It shouldn’t be completely reactive, waiting passively until inflation exceeds target and the labor market is extremely tight. Such extreme “patience” forces it to slam on the brakes, increasing the likelihood of an early recession. Also, officials need to be more forthright about the road ahead: Getting inflation down will be costly, in terms of jobs and economic growth.

https://www.bloomberg.com/opinion/ar...-it-inevitable

Exhibit 2: Like the Fed, the European Central Bank is behind the curve in responding to inflation. Western Europe is also handicapped by out of control prices for natural gas and coal. And Europe is not ENERGY INDEPENDENT like the USA. I wonder if perhaps there's an analogy to us in 1973, 1982 or 1991, when high oil prices helped push the U.S. into recessions.

Exhibit 3: Real estate accounts for almost 30% of China's GDP:

https://www.cnbc.com/2021/11/09/chin...ge-magnus.html

Real estate developers in China have way too much debt. Evergrande alone owes $300 billion, and it's effectively bankrupt.

Chinese people historically have invested in real estate the way, say, WTF and The Waco Kid invest in stocks. They'd rather invest in houses than pieces of paper.

President Xi, who believes he's an economic genius, has decided Chinese people should only own one house to live in. He's shut off bank financing for real estate developers. The developers aren't really able to borrow from foreigners either, because of sentiment toward the sector.

My colleague looked at monthly sales of the developers, and January and February of 2022 look nasty -- they're down 50% YoY.

Is a meltdown in real estate about to set off a meltdown in the Chinese economy? Will China go into recession?

Well respected fund managers like Kyle Bass and Jim Chanos have been betting on this for years. Maybe it's about to happen.

Exhibit 4: Japanese national debt as a % of GDP is something like 250%. The Japanese economy has been moribund for years. The Japanese central bank has been trying to create inflation for years, as a way to increase GDP growth.

Well, it looks like now they've got it. Or they're about to anyway. Producer Prices are up 9% YoY. The Yen has weakened to around 124 to the dollar, which means the cost of imports will be up. Japanese wages are next.

So what's the central bank's response? They've decided to cap 10 year government bond rates at 0.25%, come hell or high water, by buying bonds to keep the yields down. What happens if they eventually have to jack interest rates way up to control inflation? Well, given they're drowning in debt, it won't be pretty.

Interesting times we live in.

Its the end of the world as we know it and I feel fine...just like to make fun of the no life trumpy cartel on occasion for some amusement

Its the end of the world as we know it and I feel fine...just like to make fun of the no life trumpy cartel on occasion for some amusement Originally Posted by Tsmokies

Do you miss him? I think I do. I'm taking up crochet to kill time since cable news isn't worth watching any more.

this is the world wide meltdown

Exhibit 1 below was written by Bill Dudley, who formerly was Vice Chair of the Fed and before that Chief Economist for Goldman Sachs.

Exhibit 2 is my observation.

Exhibits 3 and 4 are observations of a colleague who fancies himself a macro thinker. He's smart, although not on the same plane of brilliance as Lusty Lad and Captain Midnight. (Lusty Lad is highlighted to annoy WTF as part of my strategy to cure him of his Stockholm Syndrome.)


Exhibit 1:

The Fed Has Made a U.S. Recession Inevitable

By Bill Dudley


U.S. Federal Reserve Chair Jerome Powell has made two ambitious assertions about the central bank’s management of the economy. In his latest news conference, he said that the Fed’s new, more inflation-tolerant monetary policy framework bears no responsibility for the recent sharp surge in consumer prices. Then, the following week, he cited three historical examples — the tightening cycles of 1964, 1984 and 1993 — as evidence that the Fed can achieve a “soft landing,” slowing growth and curbing inflation without precipitating a recession.

I disagree with both. The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.

Under the monetary policy framework, introduced in August 2020, the Fed is supposed to target average annual inflation of 2%, which means allowing for occasional overshoots to make up for previous shortfalls. Yet in the current recovery, the central bank translated this into a more specific commitment. It would not start to remove monetary stimulus until three conditions had been met: inflation had reached 2%; inflation was expected to persist for some time; and employment had reached the maximum level consistent with the 2% inflation target.

This was a mistake. As I wrote last June:

This means monetary policy will remain loose until overheating begins – and cooling things off will require the Fed to increase interest rates much faster and further than it would if it started raising rates sooner. […] The delay in lifting off, for example, is likely to push the unemployment rate considerably below the level consistent with stable inflation, increasing the odds that the Fed will need to tighten sufficiently to push the unemployment rate back up by more than 0.5 percentage point. Over the past 75 years, every time the unemployment rate has moved up this much, a full-blown recession has occurred.

This scenario is playing out now. The labor market is “extremely tight” (Powell’s words), inflation is running far above the Fed’s objective and the central bank is only beginning to remove extraordinary monetary accommodation. Powell blames bad luck — surprises such as snarled supply chains that officials could not have anticipated. To some extent he might be right, but the Fed nonetheless bears responsibility for being so slow to recognize the inflation risks and begin to tighten policy.

So can the Fed correct its mistake and engineer a soft landing? Powell is correct that the central bank tightened monetary policy significantly in 1965, 1984 and 1994 without precipitating a recession. In none of those episodes, though, did the Fed tighten sufficiently to push up the unemployment rate.

1964: The federal funds rates rose from 3.4% in October 1964 to 5.8% in November 1966, while the unemployment rate declined from 5.1% to 3.6%.

1984: The federal funds rate rose from 9.6% in February to 11.6% in August, while the unemployment rate declined from 7.8% to 7.5%.

1993: The federal funds rate rose from 3% in December 1993 to 6% in April 1995, while the unemployment declined from 6.5% to 5.8%.

The current situation is very different. Consider the starting points: The unemployment rate is much lower (at 3.8%), and inflation is far above the Fed’s 2% target. To create sufficient economic slack to restrain inflation, the Fed will have to tighten enough to push the unemployment rate higher.

Which leads us to the key point: The Fed has never achieved a soft landing when it has had to push up unemployment significantly. This is memorialized in the Sahm Rule, which holds that a recession is inevitable when the 3-month moving average of the unemployment rate increases by 0.5 percentage point or more. Worse, full-blown recessions have always been accompanied by much larger increases: specifically, over the past 75 years, no less than 2 percentage points.

The Fed needs to adjust how it puts its monetary policy framework into practice. It shouldn’t be completely reactive, waiting passively until inflation exceeds target and the labor market is extremely tight. Such extreme “patience” forces it to slam on the brakes, increasing the likelihood of an early recession. Also, officials need to be more forthright about the road ahead: Getting inflation down will be costly, in terms of jobs and economic growth.

https://www.bloomberg.com/opinion/ar...-it-inevitable

Exhibit 2: Like the Fed, the European Central Bank is behind the curve in responding to inflation. Western Europe is also handicapped by out of control prices for natural gas and coal. And Europe is not ENERGY INDEPENDENT like the USA. I wonder if perhaps there's an analogy to us in 1973, 1982 or 1991, when high oil prices helped push the U.S. into recessions.

Exhibit 3: Real estate accounts for almost 30% of China's GDP:

https://www.cnbc.com/2021/11/09/chin...ge-magnus.html

Real estate developers in China have way too much debt. Evergrande alone owes $300 billion, and it's effectively bankrupt.

Chinese people historically have invested in real estate the way, say, WTF and The Waco Kid invest in stocks. They'd rather invest in houses than pieces of paper.

President Xi, who believes he's an economic genius, has decided Chinese people should only own one house to live in. He's shut off bank financing for real estate developers. The developers aren't really able to borrow from foreigners either, because of sentiment toward the sector.

My colleague looked at monthly sales of the developers, and January and February of 2022 look nasty -- they're down 50% YoY.

Is a meltdown in real estate about to set off a meltdown in the Chinese economy? Will China go into recession?

Well respected fund managers like Kyle Bass and Jim Chanos have been betting on this for years. Maybe it's about to happen.

Exhibit 4: Japanese national debt as a % of GDP is something like 250%. The Japanese economy has been moribund for years. The Japanese central bank has been trying to create inflation for years, as a way to increase GDP growth.

Well, it looks like now they've got it. Or they're about to anyway. Producer Prices are up 9% YoY. The Yen has weakened to around 124 to the dollar, which means the cost of imports will be up. Japanese wages are next.

So what's the central bank's response? They've decided to cap 10 year government bond rates at 0.25%, come hell or high water, by buying bonds to keep the yields down. What happens if they eventually have to jack interest rates way up to control inflation? Well, given they're drowning in debt, it won't be pretty.

Interesting times we live in. Originally Posted by Tiny

If these are interesting times, I'm going to hate seeing what "fucked up" times look like.

Stop whining. You live better than all the kings of the last 10,000 years.

Stop whining. You live better than all the kings of the last 10,000 years. Originally Posted by VitaMan

name one

You do have color tv, don't you Wacko ? Electricity ? Or are you living the cave man life ?

You do have color tv, don't you Wacko ? Electricity ? Or are you living the cave man life ? Originally Posted by VitaMan

i R a multimedia GOD


bhahahahahahahaaaaaaaaaaaaa

living large....like a king. Ragnar never had it so good.

living large....like a king. Ragnar never had it so good. Originally Posted by VitaMan

if you say so

Wait! WUT?!? Is there an upside? What is the stock play on the plummet to the bottom? Real estate still seems good, not necessarily on the commercial side though. Housing is tight AF now. With rates going up, it won't get better.

Wait! WUT?!? Is there an upside? What is the stock play on the plummet to the bottom? Real estate still seems good, not necessarily on the commercial side though. Housing is tight AF now. With rates going up, it won't get better. Originally Posted by Why_Yes_I_Do

Captain Midnight has suggested buying cheap, out of the money put options as insurance to protect against a bear market. Maybe something to consider.

Could higher interest rates send housing into a spin, since mortgage payments will be higher? Will housing still be tight AF if we get knocked into a recession?

Or since the Fed seems intent on keeping interest rates lower than inflation, will home prices keep going up? Could residential real estate be a good store of value? I’ve got no idea myself.

Stop whining. You live better than all the kings of the last 10,000 years. Originally Posted by VitaMan

Are we headed for a world wide meltdown?
Originally Posted by Tiny

Sounds like you and lusty are for sure!