When I see predictions like this I think "awesome, no global recession coming in 2023". I have not done a study on this, but it seems like every prediction I come across is just wrong.
Its like when I watch Artosis or Tasteless give a prediction during an SC2 tournament and immediately be wrong. "caster's curse" i think its called.
I am pretty into investing and for the past two years have been doing it almost solely on the basis of macro principles.
Inflation in the last 6 months in the US, as measured by the Fed’s CPI, has been about 2%. All the higher inflation headlines are simply comparing the CPI 12 months ago to today, but the fact of the matter is ever since June/July CPI’s annualized inflation is already at roughly 4% or lower. The Fed may not raise interest rates more than 0.5% above where they are today. If they stop there, the recession risk is IMO minimal because employment metrics are still very strong.
Almost all journalists do not know or understand this, which is why a lot are hand wringing that rates may need to raise much more from where they are today (to Volcker levels) to combat inflation, because from their perspective we have raised them so much only for inflation to have gone down by a third. What they don’t realize is we are already past the inflection point, and interest rate swaps aren’t pricing in much more increases. At least in the US, IMO the risk of a recession is minimal
Because unemployment is low that means that the Fed can't drop rates at all or else inflation will come back. And it is likely that if the Fed pauses rate hikes and the economy doesn't fall into recession that there will be another boom and high inflation again, which will kick off more rate hikes. This is the difference between short-term reactions of inflation to rates and long-term reactions.
What the Fed needs to meet its goals is unemployment running at 6-8% so that there's slack in the labor market. Until that happens, inflation will persistently come back. That implies that the Fed must create a recession to increase unemployment before it meets its goals.
And I suspect that it will be sufficient for the Fed to maintain rates at roughly where they are for 6-12 months in order to achieve a recession. We've spent way too long on cheap rates and there's too many zombie investments that require borrowing at stupidly low rates. When those loans adjust to higher rates and the borrowing costs of those entities double or triple (just like an ARM) those entities should all go under. You don't have to look past the vacancies in the malls and downtown cores of cities.
my view of "everyone is probably wrong" is how much everyone is predicting a soft-landing or mild recession in the US (including the title article, which is a good gauge of the centrist position). Rates are already at a level where they should cause detonations in the US economy -- it will just take 6-12 months at these current levels (and historically recessions that followed rate hikes have happened after 6-12 months -- there are time delays in the system).
+1 for mentioning the greatest casting duo of all time. Sad they moved on, hard for me to even guess how many hours i've spent with them on in background or foreground
Until his retirement I didn't know he had a wife and 3 kids, good for him - I'm kinda jealous, I won't lie. Life has a way of catching up, I guess, I'm not sad he's not casting GSL anymore, I'm happy that he has done and will likely continue to do well.
Secretly I hope his kids see his achievements and one decides to take the mantle later down the line. It'd be a first in history, a second-generation GSL caster.
Major economies are already in deepening recessions. Major producers are starting the year with significant impairment from COVID and supply line pressures. The threat of Russia's aggression affecting other countries remains. Energy prices are still obscene in Europe.
I hope things get better, but I think you'd be mad to plan for global growth this year.
> The threat of Russia's aggression affecting other countries remains.
Like what countries exactly? They can't even hold the ground they conquered in the previous months in Ukraine. Armenia already asked Russia's help and they refused - it was effectively a fatal blow to CSTO and has far-reaching consequences to the way Russia is perceived among its current and former allies.
I agree. Whenever the public/media assume something is definitely going to happen it seems like it always backfires. Another anecdote, I remember in 2020 there were all these articles with predictions about how 2021 would be the year of fintech... then all the fintech stocks imploded. It really does seem like following the herd is not the way to go.
Most recessions are identified after they've occurred, particularly on a global scale, since the evidence is rarely obvious. Not all countries, industries, states will be affected equally. It's completely possible the recession has already occurred and we're currently in the midst of it.
While this is true, the statement "We don't know that we're not in a recession" is not evidence that we're in a recession. Looking at the evidence that we do currently have--GDP, unemployment, etc.--that evidence strongly suggests that we are not in one.
This is kind of obvious if you take the amateur-level definition of a recession - two quarters of negative economic growth. A month after the end of the second quarter, when the statistics for that quarter become available, then you know that a recession started two quarters ago.
You know how journalists, for the sake of transparency, disclose holdings or interests when they cover a subject. There should be the reverse of that where they make a bet to show conviction in their beliefs. It would be a funny game. Most of them will bet $0.
By "like this" perhaps you mean something like "interesting". There's a bias towards good storytelling, especially in magazine articles that make their way to many eyed, like this one. Optimizing for a compelling read had to degrade the actual predictive value. How much, hard to say, and of course if you want anyone to pay attention you need to present it well. Bit, beware a well told story - it might be the rhetorical skill you're responding to, not any real expertise. (I'm looking at you, Oxford people :D :D)
It’s fair to be skeptical of economic predictions, as yes, most end up being wrong.
But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate, and pretty much all of history is pointing towards the current macro setup ending with recession.
By and large people tend to be overly optimistic that this time is different re economic cycles and monetary policy.
E.g. Wall Street analysts predicted 10% earnings growth in 2008, and ended up being -70%.
Economics as a "science" is when psychology majors cosplay as mathematicians. They demonstrate all of the trappings of a science; specialist jargon, mathematical notation, journals, conferences, but have scant little to show for it. They will be the first to tell you that the economic system is too complex for any one of them to understand, and point at "markers" to which they attach a level of causal significance that would make a real mathematician blush.
They are throwing darts in the dark.
God bless them, it's a hard job and someone should probably be looking into it, but never kid yourself about what their predictions are actually capable of.
>But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate
While this might be technically true in the sense that they're trying to fight inflation by tightening monetary policy, and that has the effect of slowing economic activity and driving up unemployment, I dislike the framing because it implies that the fed wants to high unemployment as some sort of end goal, as if they have some sort of diabolical agenda to oppress workers or whatever.
The Fed has a dual mandate. They do not actually want to raise the unemployment rate by itself, only insofar as with the very strong unemployment rates now, it gives them leeway to potentially increase it as they address their other mandate of taming inflation. Inflation in the US, contrary to popular belief, is already almost solved. Since July the MoM inflation per the FRED CPI rate is annualized at like 4%. Once the Fed feels like they have it under control they would not want to continue raising it just to increase unemployment.
Disclaimer, I have no idea if this is even slightly logical, I'm not an economist.
House prices have increased significantly above inflation for decades to the point of absurdity, many multiples of a households income. People in their 20s (and 30s) increasingly don't believe they will ever own a home.
If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase, would that bring them down in real terms without a "housing crash"? Could this be a "good thing" and does that even make sense?
No, the fundamental reason for lack of housing affordability is a lack of supply relative to demand. Since 2008 we've dramatically under built new housing units relative to household formation. Playing with inflation or interest rates may change who loses out, but it still doesn't change the fundamental problem that we don't have enough housing to go around.
This is one of the problems with rate hikes. They reduce production and investment. New home builds are down. Manufacturing is down. All of this is exactly the opposite of what we should want, which is low prices due not to a scarcity of money but to an abundance of wealth.
The number of housing units in the United States has been growing year on year and in 2021, there were approximately 142 million housing units in the United States.
1.43 million is the average annual new house starts since 1959.
Houses sold is around 6 million so only 25% of the sales are new houses.
Lack of building is probalby no the main reason. If the interest rates was 8-10%+ a few million houses would come for sale. With low interrest rates many people would rather have more houses than they need to protect against inflation.
Explain how housing prices remain stable while labor enjoys increasing wages without some other changes?
Write in complaint about never affording a home. I’ll be 40 next year and in an apartment. Largely, still, because my sub-generation got absolutely knee capped by the Great Recession and just general crap conditions.
As household wages have increased (especially with increasingly two full time professional incomes now, which was very rare 30 years ago) and internet rates have been low, the monthly cost of housing hasn’t changed as a percentage of take home py, it’s just you need two full time incomes to do it.
This is the fundamental problem though, because there is a shortage of housing, as wages increases, housing costs (either rent or mortgage) increase to suck up every available penny that’s earned.
What is needed is for housing supply to be able to meet housing demand.
>> the monthly cost of housing hasn’t changed as a percentage of take home pay,
That is by design. Banks figure your monthly payment as a percent of income. Then based on interest rates they figure out how much you can borrow. Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it. This is why lower interest rate cause higher house prices.
Interest rates are going up. Home prices have slowed. Speculation is over. Still waiting for the drop. The economy seems to have gotten really good at moving ahead in spite of pressure to slow. I fear there may be built up negative pressure that's about to give. Not sure though.
Yeah that is exactly what I think needs to happen in a perfect world.
Allow a wage-price spiral of about 6% a year, which would raise long rates, allow short rates to increase eventually without a recession and that would cut off the cheap money supply. Asset prices would fall in real terms because of persistently higher rates across the yield curve. In nominal terms they would be able to maintain more of their price while wages would inflate to the point where people would be able to buy houses and be able to pay back debts (particularly college loans).
Instead the Fed jacking up short rates right now is going to cause a recession, create high unemployment and cap wage growth and break unionization. This will be combined as usual by massive tax cuts for the rich as a bailout package, which will be the only thing possible to get past the Republican House. And the Fed will have to then sharply cut short rates and the cycle will continue. I doubt we'll be able to maintain rates at 0% for another ten years, but they're firmly opposed to trying to wage-inflate our way out of this, so we'll probably see shorter cycles between boom and bust as inflation starts to come back faster. There are no signs that they're going to start to give up on the way they've been running the economy though, I don't think there has been a massive fundamental shift in the economy -- other than no more 10 years of 0% with no CPI inflation.
"Allow a wage-price spiral of about 6% a year, " - Fed cannot create this wage-spiral. Fed only controls interest rates. From 2009-2016 interest rates were below 0.2% - and wages did not move.
Only employers can create this type of wage spiral - and I do not think they will do this. Employers are now looking into automation as much as possible to replace labor (supermarket checkouts, at fast foods order kiosks, online ordering, robots for cleaning hotel rooms, etc...)
>If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase, would that bring them down in real terms without a "housing crash"? Could this be a "good thing" and does that even make sense?
It's still only part of the equation since interest rates are much higher now so mortgage payments are double what they were a year ago. So even if the home price isn't rising, the costs to finance it are.
This is a good point. This is also somewhat dependent on how a particular country does mortgages. The USA does 30-year fixed rate, but that is not the norm in most countries. The main benefit of lower house prices (even if the monthly finance costs are the same) is that the amount you have to save for a deposit is reduced, which is often a significant barrier for young people.
I'm not so sure it would bring housing prices down as the owners can just rent them out for more than their mortgage as rent demand is also high. Rents have accelerated upwards along with the price of homes. Additionally I see most current owners just staying where they are as the cost to move is too great with increased borrowing costs.
Anecdotal but I have 150k of equity in my house that I bought ~3 years ago and a 4.15% interest rate. Not a great rate but if I was to refinance I am looking at 6%. Even if I was to sell, and get 150k out, any house I want to buy afterwards has appreciated at the same rate as my current one, so it is more expensive as is the loan.
I think the only fix is building more housing but now the loans builders need to take out to build are more expensive as well as are building materials so even new construction is very expensive. In addition, the rate at which new houses are built in so low that they don't appreciably affect existing supply in a hard enough way to even approach demand so prices stay high. The only real fix would be a government financed program that dropped hundreds of billions in near 0 % financing to builders to build hundreds of thousands of homes. That isn't happening.
> House prices have increased significantly above inflation for decades to the point of absurdity, many multiples of a households income
True and yet, compared to house price/income multiples in other developed countries, the US metric is remarkably low (yes, Fannie Freddie etc). Perhaps Americans are just catching up
> If we have a period of inflation, with increased wages (obviously with a painful lag),
This isn't obvious, wages can drive as well as lag inflation.
> but house prices remain stagnant with no increase, would that bring them down in real terms
Yes.
> without a “housing crash”?
Perceptually? Likely. Substantively? Only if it was a long, slow inflation, and therefore a long, slow real-value decline.
> Could this be a “good thing” and does that even make sense?
It’s the same thing, requiring the same conditions, as the real-value decline without inflation, but with inflation.
What I think you actually want is wages rising greater than both inflation and housing prices (not real decline in housing prices as such), so that wages rise with respect to housing. But the problem isn’t defining the output on that level, anyway, its dealing with housing supply/demand to make either scenario happen.
You could as well single out the average cost of a new car in the U.S. At $47K I suspect that too has fast outpaced inflation. I am not aware of an automotive parallel to a "housing crash" (aside from the obvious joke that, though it begs, I will not stoop to giving voice to).
> I am not aware of an automotive parallel to a "housing crash"
New car manufacturers don't like to drop prices, but they do like to offer cash back and below market rate interest incentives. Especially towards the end of the model year. Very low cost leases show up from time to time as well.
You also see things like pausing production when supply is outpacing demand. Sometimes it's subtle like stopping the line a few weeks before the scheduled stop, or starting it back a few weeks later, and sometimes it's a month off during the model year.
> If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase
This would require heavy regulation of the housing market. For example, we could add a hefty tax on any home that isn't owner-occupied. Otherwise, housing will remain one of the better places to invest earnings and the cost of housing will continue to rise with earnings. However, such a tax would likely increase the cost of renting.
>For example, we could add a hefty tax on any home that isn't owner-occupied.
But why are home prices going up? Is it because non occupying buyers are bidding with each other to drive up prices beyond what is rational? If so, banning those buyers might indeed bring prices down to a saner level. However, if prices are high as a result of supply and demand (ie. more people want to live in desirable places and we can't build more homes to accommodate), then banning non occupying buyers won't do much. Given how the overwhelming majority of home purchases are still done by owner occupiers, I'm very skeptical that it's the former, and it's much more likely that it's the latter.
No, that tax would disincentivize renting single family homes and similar. Corporate landlords wouldn't be taxed with it and are the meat of that market.
Remains to be seen how Powell and the current Fed perceive their joint mandate of low inflation/low unemployment. By indicators, the labor market is still resembling hermit crabs leaving shells empty anytime a shell gets filled with a crab. But I thought the market was overweighted in 2017/2018 and the Fed wouldn't raise rates until 2022.
As the economist stated here or elsewhere in this group of articles, the effects of raised rates take a year to take effect. It’s also economic dogma that the labor market reaches equilibrium after all the other markets.
Me, I’d raise rates no higher than 5.5% for a quarter or two. There’s every reason to not jerk so hard on the economy that the economy reacts wildly. I hope they're not seeking additional runway for a future regime of lowering rates. The time for that is a time that looks like 2017-2019-not a time compounded by fall out from pandemic, war, threats of war, and increased uncertainty. Ceteris paribus.
A wild reaction at this point looks like more people leaving the labor market than entering, I suspect.
Edit-economics in general may point to a recession. But this particular Fed has yet to convince me that they’re about their joint mandate of low unemployment and low inflation. They bought actual stocks (correction:bonds) during the Pandemic-a sure high point of departure from the past.
Hasn't it been inevitable every years? It seems like the media writes this headline every year. Anyone can find reasons for recession if you look hard enough. Who knows. I am not selling stocks.
The exact timing is always tricky but I have seen the .COM bubble and the 2008 crash. In both it was pretty clear that the economy was in a huge speculative bubble that made no rational sense but the bubble was prolonged until there was no way forward anymore. The 2001 crash was bad, the 2008 crash worse and I think this one will be even bigger. We ran up huge deficits during good times, kept interest rates artificially low to keep things going. And most of the superstar businesses (unicorns) don't even know how to be a business that makes profits.
Everything about this "boom" from 2012 on was, from a market perspective, about as artificial as you could get. At least the events leading up to the .COM and '08 crash there weren't central banks openly putting their thumbs on the scales by being an active market paticipant buying debt securities, the quality of that debt be damned, and making price discovery next to impossible.
The lesson investors took from '08 and certainly from 2020 was that the powers that be will gladly use moral hazard to protect asset prices. Profits are privatized and losses are socialized.
The media didn’t write this headline, or any headline for that matter, because the media is not a singular entity. A person wrote this headline for a publication.
Yes. And it’s actually correct. I’ve thought that US financial system and US dollar would fall since I was roughly 13. The problem is that at some point central banks and governments will be unable to avoid hyperinflation due to debt accumulation. They will be forced to print. Additionally, the debt is inevitable when politicians are bought and paid for and therefore incentivized to provide lucrative contracts to donors, and when interest rates are so low that borrowing is a good idea for private parties. On another note, there is inherent instability in debt-based economics (I don’t think capitalism actually exists at this point, as that word implies the accumulation of capital and current systems substitute capital with debt). If dollars are created through debt and leveraging that debt (as is the case in the USA) a massive default scenario like 2008 becomes a matter of time. If that scenario is large enough it will trigger a deflationary depression that will only further encourage printing as the central bankers try to avoid making all of the debts too expensive to carry. The fact that we’ve avoided a collapse of the current system for so long is more due to cleverness and media cover than anything else. The bankers figured out new ways to manipulate the economy and stall the inevitable but math is real and you can’t do it forever. On a final note, debt based economics will always sacrifice the wealth of future generations for the sake of the current, and this is being felt right now as younger generations are struggling to get started, and the the older generations are living in relative luxury.
"At some point" does a lot of heavy lifting. Without any information to quantify when this breaking point might occur, one might as well be talking about the heat death of the universe.
And what do you mean by "sacrifice the wealth of future generations for the sake of the current"? The government issues bonds to pay for stuff. Then at some point :) the bonds presumably become due, and future generations have to pay it back. Whom do they pay it back to? Isn't it back to themselves? Even assuming there's some proportion of foreign debt holders, they're getting paid back in the currency of the issuing state, which currency has generally deflated more than the bond rate over time, in other words effectively an interest free loan. If you could get a less than base inflation rate loan for 20, 30, 50, 100 years wouldn't you take it? Even assuming the 100 year horizon and thus the loan was to paid back by your estate, don't you think there's a good chance your estate would come out ahead after having paid back that low interest loan than if you had never taken the loan in the first place?
I'm just saying I'm not fully convinced that taking on national debt
is universally bad, if it's payable in the sovereign currency.
> future generations for the sake of the current, and this is being felt right now as younger are struggling to get started, and the the older generations are living in relative luxury.
I don't disagree with your overall point about sacrificing future generations for the current, but this specific point is probably true regardless as luxury often takes time to acquire.
Japan has had 0% interest for decades. It doesn't appear that there is actually an interest based time bomb if we entertain the idea of zero or even negative interest rates. It is only a problem when you insist on positive interest because if the exponential nature of compound interest.
I'm certainly not well educated in finance - but having had my business crushed by the events of 08/09, I started paying a lot more attention to economics than I had previously. From what I can gather, I think part of what is happening is that "the can" keeps getting kicked further down the road. That is to say, we should have already been in or even through a recession. By postponing it, it's just going to be that much worse.
Isn’t a recession necessary to curb inflation? Powell said that economy needs to cool down:
When rates are hiked, a home with a mortgage, using credit cards or seeking loans to start a business become much more expensive. That results in people stopping purchasing homes, cut down on spending, think twice about starting a business. In addition to that companies will lay off workers and enact hiring freezes.
Everyone says it, the signs are obvious, and people here still think we won’t land in a recession.
Kinda feels similar to the irrationality of tesla investors, where everyone knew that the company is overvalued and needs to come down. Yet people continued buying or didn’t want to sell. Why? I would like to know.
Not at all. A global recession has not been strongly forecasted like this for a long time. Sure, anyone can make a prediction, and you will always find some people predicting both directions, but that doesn’t form a common consensus.
A likely recession does not mean that selling stocks is advisable either.
Well, yeah, in fact the point is stronger. Economies are feedback systems and oscillate. Recessions are inevitably predicted every few years because recessions simply are inevitable every few years. And yeah, it seems likely (though obviously not certain) that we're due for another.
There's nothing particularly notable here. Speculation markets got overheated[1], now they're correcting and as a side effect money ends up more expensive to do "normal" activity too. Then we'll do it all over again until 2030 or whenever when we come back to write this kind of stuff as if it was a surprise.
[1] For lots of interacting reasons, I'm sure. There's good economics to be done to understand this stuff, but "ZOMG Recession" coverage is just tiresome.
Alarmists and pessimists always win either way: If the prediction comes true, they were right and if not everyone is happy and has no reason to blame the alarmists.
It's not just the media, but a lot of very heavy value investors, like Jeremy Grantham, believe that it has been inevitable the entire time. They maintain that we are in a bubble of sorts and that it must correct eventually.
Are recessions a healthy part of a normal economic ebb and flow? (Over the long-term)
I suppose an extremely long recession/depression (e.g. 5-10 years) would obviously be bad. But are recessions that last 1-2 years really something to panic over at a macro level?
My (less than informed) assumption is high growth followed by a slight contraction/recession isn’t objectively bad if it helps an economy consolidate and become more efficient during the period of contraction before the next upswing.
In economic theory, it is seen as a fact of nature -- moreso the evidence of economic cycles of varying lengths.
So in a sense, yes, one could consider it to be healthy -- like an economic animal shedding some fat.
But I wouldn't personally. Recessions have deep cultural, social and political impacts that, if not dealt with properly, lead to long lasting adverse effects: rise of extremisms, lower social mobility, increased intergenerational poverty and so on.
Because of 2008, millenials lost about 5 years of savings, skill accumulation, etc. they will never earn back.
I look at recessions as being analogous with a bodybuilding cut cycle. You go through a bulking cycle to build muscle and to do so you consume a calorie surplus. Because it's difficult to tailor your macros precisely, you most likely put on a bit of fat at the same time. So after a period of bulking you undertake a cut cycle, where you burn off all the fat you don't want.
In economic terms, in the bulk cycle there's lots of resources sloshing around so it's easy to start a business, get finance and grow. Then in the cut cycle, the businesses that prove their value remain and we collectively dispense of the ones that don't.
Whilst it is healthy for the overall group, it's not much comfort for the individual humans on the losing end and we should probably do more to help them rebuild their lives afterwards.
The problem with even short recessions is that we should question whether or not we really need actual people to endure actual hardships while worker efficiency continues upwards for the sake of imaginary numbers.
The demand for the work some of those people were doing only existed because of fantasy estimates of the value of a market.
When that fantasy evaporates, people face hardship.
Worker efficiency makes that more likely, not less.
The real question is if 10 years of fantasy chasing growth followed by a year or two of reality, is better or worse than constant hardship where we never allow the fantasy of chasing growth.
People have not been able to afford rent and food in rich countries to the point of creating social unrests, let alone in poor ones. Unironically check your privilege, man.
Your response is unquestionally a bad one. If someone is desperate and on the edge during economic good times, then they're going to fall off the chart when the economy falls over. Don't blame the economy. It isn't the "economy's" job to keep a population fed and content, this is for socialized economic policies to backstop, not some delusion that good times will always be good times any any policy that adjusts against bubbles and inflation are anti-poor.
This is from 11/18. A lot has changed in the last 1.5 months. Truss tax cuts, cited in the article, are not not on the table. Inflation has moderated. Etc.
I am still looking for aggressive growth. My strategy over the last ~9 months has been to buy (things I trust) on a continuous, daily basis. I intend to maintain this strategy all the way through next year as well.
When I start to see lots of headlines like "recession is inevitable", I remind myself that the stock market is a time machine and/or palantir operating at some arbitrary offset in the future.
Keeping my cash in safe bets and waiting until the Economist says "all clear" is going to be way too late to capitalize on much of the downturn or volatility.
This works if what you’re buying is fair value. Plenty of dotcom names went to 0, or took 15+ years to break even.
As long as there’s a future for the company and valuation is fair, you should be fine though.
I’m doing the same. My threshold is roughly PE 15 or less with strong balance sheet and decent growth. Lots of REITs that are pretty sure bets at closer to 10x or lower multiples.
Still would not buy any 10x or more PS companies. By and large going to be stinkers over the next decade imo
Readit News
Its like when I watch Artosis or Tasteless give a prediction during an SC2 tournament and immediately be wrong. "caster's curse" i think its called.
Inflation in the last 6 months in the US, as measured by the Fed’s CPI, has been about 2%. All the higher inflation headlines are simply comparing the CPI 12 months ago to today, but the fact of the matter is ever since June/July CPI’s annualized inflation is already at roughly 4% or lower. The Fed may not raise interest rates more than 0.5% above where they are today. If they stop there, the recession risk is IMO minimal because employment metrics are still very strong.
Almost all journalists do not know or understand this, which is why a lot are hand wringing that rates may need to raise much more from where they are today (to Volcker levels) to combat inflation, because from their perspective we have raised them so much only for inflation to have gone down by a third. What they don’t realize is we are already past the inflection point, and interest rate swaps aren’t pricing in much more increases. At least in the US, IMO the risk of a recession is minimal
What the Fed needs to meet its goals is unemployment running at 6-8% so that there's slack in the labor market. Until that happens, inflation will persistently come back. That implies that the Fed must create a recession to increase unemployment before it meets its goals.
And I suspect that it will be sufficient for the Fed to maintain rates at roughly where they are for 6-12 months in order to achieve a recession. We've spent way too long on cheap rates and there's too many zombie investments that require borrowing at stupidly low rates. When those loans adjust to higher rates and the borrowing costs of those entities double or triple (just like an ARM) those entities should all go under. You don't have to look past the vacancies in the malls and downtown cores of cities.
my view of "everyone is probably wrong" is how much everyone is predicting a soft-landing or mild recession in the US (including the title article, which is a good gauge of the centrist position). Rates are already at a level where they should cause detonations in the US economy -- it will just take 6-12 months at these current levels (and historically recessions that followed rate hikes have happened after 6-12 months -- there are time delays in the system).
Typically unemployment doesn't spike until months after recessions begin: https://fred.stlouisfed.org/series/UNRATE
There is no such thing as “the Fed’s CPI”.
BLS publishes the CPI, which the Fed does not use.
The Fed uses the PCE, published by the Bureau of Economic Analysis.
Appealing to your sense of whether predictions are correct is a conversation starter at best. We can track forecasts and see how accurate they are.
Anyway, here are two IMF working papers:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
Secretly I hope his kids see his achievements and one decides to take the mantle later down the line. It'd be a first in history, a second-generation GSL caster.
I hope things get better, but I think you'd be mad to plan for global growth this year.
Like what countries exactly? They can't even hold the ground they conquered in the previous months in Ukraine. Armenia already asked Russia's help and they refused - it was effectively a fatal blow to CSTO and has far-reaching consequences to the way Russia is perceived among its current and former allies.
Something to do with 3 quarters of negative growth
But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate, and pretty much all of history is pointing towards the current macro setup ending with recession.
By and large people tend to be overly optimistic that this time is different re economic cycles and monetary policy.
E.g. Wall Street analysts predicted 10% earnings growth in 2008, and ended up being -70%.
They are throwing darts in the dark.
God bless them, it's a hard job and someone should probably be looking into it, but never kid yourself about what their predictions are actually capable of.
While this might be technically true in the sense that they're trying to fight inflation by tightening monetary policy, and that has the effect of slowing economic activity and driving up unemployment, I dislike the framing because it implies that the fed wants to high unemployment as some sort of end goal, as if they have some sort of diabolical agenda to oppress workers or whatever.
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From now on, every recession can be blamed on journalists that refused to publish its prediction
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House prices have increased significantly above inflation for decades to the point of absurdity, many multiples of a households income. People in their 20s (and 30s) increasingly don't believe they will ever own a home.
If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase, would that bring them down in real terms without a "housing crash"? Could this be a "good thing" and does that even make sense?
Write in complaint about never affording a home. I’ll be 40 next year and in an apartment. Largely, still, because my sub-generation got absolutely knee capped by the Great Recession and just general crap conditions.
This is the fundamental problem though, because there is a shortage of housing, as wages increases, housing costs (either rent or mortgage) increase to suck up every available penny that’s earned.
What is needed is for housing supply to be able to meet housing demand.
That is by design. Banks figure your monthly payment as a percent of income. Then based on interest rates they figure out how much you can borrow. Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it. This is why lower interest rate cause higher house prices.
Interest rates are going up. Home prices have slowed. Speculation is over. Still waiting for the drop. The economy seems to have gotten really good at moving ahead in spite of pressure to slow. I fear there may be built up negative pressure that's about to give. Not sure though.
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Allow a wage-price spiral of about 6% a year, which would raise long rates, allow short rates to increase eventually without a recession and that would cut off the cheap money supply. Asset prices would fall in real terms because of persistently higher rates across the yield curve. In nominal terms they would be able to maintain more of their price while wages would inflate to the point where people would be able to buy houses and be able to pay back debts (particularly college loans).
Instead the Fed jacking up short rates right now is going to cause a recession, create high unemployment and cap wage growth and break unionization. This will be combined as usual by massive tax cuts for the rich as a bailout package, which will be the only thing possible to get past the Republican House. And the Fed will have to then sharply cut short rates and the cycle will continue. I doubt we'll be able to maintain rates at 0% for another ten years, but they're firmly opposed to trying to wage-inflate our way out of this, so we'll probably see shorter cycles between boom and bust as inflation starts to come back faster. There are no signs that they're going to start to give up on the way they've been running the economy though, I don't think there has been a massive fundamental shift in the economy -- other than no more 10 years of 0% with no CPI inflation.
Only employers can create this type of wage spiral - and I do not think they will do this. Employers are now looking into automation as much as possible to replace labor (supermarket checkouts, at fast foods order kiosks, online ordering, robots for cleaning hotel rooms, etc...)
It's still only part of the equation since interest rates are much higher now so mortgage payments are double what they were a year ago. So even if the home price isn't rising, the costs to finance it are.
Anecdotal but I have 150k of equity in my house that I bought ~3 years ago and a 4.15% interest rate. Not a great rate but if I was to refinance I am looking at 6%. Even if I was to sell, and get 150k out, any house I want to buy afterwards has appreciated at the same rate as my current one, so it is more expensive as is the loan.
I think the only fix is building more housing but now the loans builders need to take out to build are more expensive as well as are building materials so even new construction is very expensive. In addition, the rate at which new houses are built in so low that they don't appreciably affect existing supply in a hard enough way to even approach demand so prices stay high. The only real fix would be a government financed program that dropped hundreds of billions in near 0 % financing to builders to build hundreds of thousands of homes. That isn't happening.
True and yet, compared to house price/income multiples in other developed countries, the US metric is remarkably low (yes, Fannie Freddie etc). Perhaps Americans are just catching up
This isn't obvious, wages can drive as well as lag inflation.
> but house prices remain stagnant with no increase, would that bring them down in real terms
Yes.
> without a “housing crash”?
Perceptually? Likely. Substantively? Only if it was a long, slow inflation, and therefore a long, slow real-value decline.
> Could this be a “good thing” and does that even make sense?
It’s the same thing, requiring the same conditions, as the real-value decline without inflation, but with inflation.
What I think you actually want is wages rising greater than both inflation and housing prices (not real decline in housing prices as such), so that wages rise with respect to housing. But the problem isn’t defining the output on that level, anyway, its dealing with housing supply/demand to make either scenario happen.
New car manufacturers don't like to drop prices, but they do like to offer cash back and below market rate interest incentives. Especially towards the end of the model year. Very low cost leases show up from time to time as well.
You also see things like pausing production when supply is outpacing demand. Sometimes it's subtle like stopping the line a few weeks before the scheduled stop, or starting it back a few weeks later, and sometimes it's a month off during the model year.
This would require heavy regulation of the housing market. For example, we could add a hefty tax on any home that isn't owner-occupied. Otherwise, housing will remain one of the better places to invest earnings and the cost of housing will continue to rise with earnings. However, such a tax would likely increase the cost of renting.
But why are home prices going up? Is it because non occupying buyers are bidding with each other to drive up prices beyond what is rational? If so, banning those buyers might indeed bring prices down to a saner level. However, if prices are high as a result of supply and demand (ie. more people want to live in desirable places and we can't build more homes to accommodate), then banning non occupying buyers won't do much. Given how the overwhelming majority of home purchases are still done by owner occupiers, I'm very skeptical that it's the former, and it's much more likely that it's the latter.
As the economist stated here or elsewhere in this group of articles, the effects of raised rates take a year to take effect. It’s also economic dogma that the labor market reaches equilibrium after all the other markets.
Me, I’d raise rates no higher than 5.5% for a quarter or two. There’s every reason to not jerk so hard on the economy that the economy reacts wildly. I hope they're not seeking additional runway for a future regime of lowering rates. The time for that is a time that looks like 2017-2019-not a time compounded by fall out from pandemic, war, threats of war, and increased uncertainty. Ceteris paribus.
A wild reaction at this point looks like more people leaving the labor market than entering, I suspect.
Edit-economics in general may point to a recession. But this particular Fed has yet to convince me that they’re about their joint mandate of low unemployment and low inflation. They bought actual stocks (correction:bonds) during the Pandemic-a sure high point of departure from the past.
Is this true? I'm pretty sure the wildest thing they did was purchase corporate bonds via ETFs.
Difference without a distinction.
I’d still largely say this Fed is departing from history. The economy last saw a pandemic like covid in 1918. And that was during a world war.
Everything about this "boom" from 2012 on was, from a market perspective, about as artificial as you could get. At least the events leading up to the .COM and '08 crash there weren't central banks openly putting their thumbs on the scales by being an active market paticipant buying debt securities, the quality of that debt be damned, and making price discovery next to impossible.
The lesson investors took from '08 and certainly from 2020 was that the powers that be will gladly use moral hazard to protect asset prices. Profits are privatized and losses are socialized.
And what do you mean by "sacrifice the wealth of future generations for the sake of the current"? The government issues bonds to pay for stuff. Then at some point :) the bonds presumably become due, and future generations have to pay it back. Whom do they pay it back to? Isn't it back to themselves? Even assuming there's some proportion of foreign debt holders, they're getting paid back in the currency of the issuing state, which currency has generally deflated more than the bond rate over time, in other words effectively an interest free loan. If you could get a less than base inflation rate loan for 20, 30, 50, 100 years wouldn't you take it? Even assuming the 100 year horizon and thus the loan was to paid back by your estate, don't you think there's a good chance your estate would come out ahead after having paid back that low interest loan than if you had never taken the loan in the first place?
I'm just saying I'm not fully convinced that taking on national debt is universally bad, if it's payable in the sovereign currency.
I don't disagree with your overall point about sacrificing future generations for the current, but this specific point is probably true regardless as luxury often takes time to acquire.
From an adequate distance, fraction reserve banking looks a whole lot like a ponzi scheme.
When rates are hiked, a home with a mortgage, using credit cards or seeking loans to start a business become much more expensive. That results in people stopping purchasing homes, cut down on spending, think twice about starting a business. In addition to that companies will lay off workers and enact hiring freezes.
Everyone says it, the signs are obvious, and people here still think we won’t land in a recession.
Kinda feels similar to the irrationality of tesla investors, where everyone knew that the company is overvalued and needs to come down. Yet people continued buying or didn’t want to sell. Why? I would like to know.
A likely recession does not mean that selling stocks is advisable either.
There's nothing particularly notable here. Speculation markets got overheated[1], now they're correcting and as a side effect money ends up more expensive to do "normal" activity too. Then we'll do it all over again until 2030 or whenever when we come back to write this kind of stuff as if it was a surprise.
[1] For lots of interacting reasons, I'm sure. There's good economics to be done to understand this stuff, but "ZOMG Recession" coverage is just tiresome.
Are recessions a healthy part of a normal economic ebb and flow? (Over the long-term)
I suppose an extremely long recession/depression (e.g. 5-10 years) would obviously be bad. But are recessions that last 1-2 years really something to panic over at a macro level?
My (less than informed) assumption is high growth followed by a slight contraction/recession isn’t objectively bad if it helps an economy consolidate and become more efficient during the period of contraction before the next upswing.
So in a sense, yes, one could consider it to be healthy -- like an economic animal shedding some fat.
But I wouldn't personally. Recessions have deep cultural, social and political impacts that, if not dealt with properly, lead to long lasting adverse effects: rise of extremisms, lower social mobility, increased intergenerational poverty and so on.
Because of 2008, millenials lost about 5 years of savings, skill accumulation, etc. they will never earn back.
Ray Dalio discusses this in his video here: https://www.youtube.com/watch?v=PHe0bXAIuk0&t=483s
And basically the answer he gives is "yes".
In economic terms, in the bulk cycle there's lots of resources sloshing around so it's easy to start a business, get finance and grow. Then in the cut cycle, the businesses that prove their value remain and we collectively dispense of the ones that don't.
Whilst it is healthy for the overall group, it's not much comfort for the individual humans on the losing end and we should probably do more to help them rebuild their lives afterwards.
I don't think many people panic about a recession though. Maybe make some adjustments. Panic only comes across from media outlets.
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When that fantasy evaporates, people face hardship.
Worker efficiency makes that more likely, not less.
The real question is if 10 years of fantasy chasing growth followed by a year or two of reality, is better or worse than constant hardship where we never allow the fantasy of chasing growth.
People have not been able to afford rent and food in rich countries to the point of creating social unrests, let alone in poor ones. Unironically check your privilege, man.
When I start to see lots of headlines like "recession is inevitable", I remind myself that the stock market is a time machine and/or palantir operating at some arbitrary offset in the future.
Keeping my cash in safe bets and waiting until the Economist says "all clear" is going to be way too late to capitalize on much of the downturn or volatility.
As long as there’s a future for the company and valuation is fair, you should be fine though.
I’m doing the same. My threshold is roughly PE 15 or less with strong balance sheet and decent growth. Lots of REITs that are pretty sure bets at closer to 10x or lower multiples.
Still would not buy any 10x or more PS companies. By and large going to be stinkers over the next decade imo