Misplaced Recession Debate
Housing leads recessions and recoveries. What’s on the way?
Much of the debate over “recession” is misspaced. I believe a recession started in May and that a third quarter of negative GDP is on the way.
Some believe a third quarter of declining growth will mean a recession started in the first quarter.
I peg recession to a decline in retail sales and a big crumbling in housing that both started in May.
It doesn’t matter. What does matter is the shape of the economy going forward. And a fourth quarter of negative growth would not surprise me in the least.
History of Fed-Blown Bubbles
The Fed has blown three consecutive massive bubbles: The DotCom bubble, the housing bubble, and what’s now widely called the everything bubble.
In each case, the Fed blew larger and larger asset bubbles. The wealth effect stimulated spending and borrowing.
Low interest rates fueled a massive housing bubble again.
In the wake of the DotCom crash the Fed blew the housing bubble. In the wake of the housing crash and Great Recession the Fed started the Everything Bubble.
The Everything Bubble culminated with unprecedented pandemic stimulus, QE, and absurdly low interest rates.
De-Globalization Impact
De-globalization is underway. A key ramification is higher inflation.
The fed no longer has the wind of globalization at its back pushing down prices. It has inflationary aspects of globalization blowing stiffly in its face.
That’s another reason to not expect the Fed to soon come to the rescue with QE and lower rates.
For discussion, please consider De-Globalization: New Supply Chains Are Inefficient and Will Drive Up Inflation
Now what?
Expect a Long Period of Weak Growth
It’s payback time for three consecutive bubbles. Expect a long period of weak growth, no matter how it’s labeled.
This time there will not be bailouts. Nor will the Fed quickly reverse on interest rate policy out of fear of stimulating more inflation and unwanted demand.
Unless asset housing prices crash, the housing sector figures to be weak for a long time, with the Fed unable or unwilling to offer much assistance.
Housing tends to start and end recessions. But where is housing going if prices remain high along with 5+ percent mortgage rates?
An asset crash in general is likely. If so, the wealth effect impact on spending rates to be huge.
What About Jobs?
- The Covid-recession was very short, two months, not even a full quarter of declining growth. The pandemic was also accompanied by the greatest job losses in history.
- I expect the opposite of the Covid-recession: A long period of weak growth accompanied by relatively strong unemployment numbers.
Countless times over the last six months I heard jobs are are too strong for there to be a recession.
Such talk is nonsense.
We may easily see three or four quarters of negative GDP with relatively strong jobs because we never fully filled the losses from the pandemic.
Employment Levels in Retirement Age Groups
Age 60+ Employment
- In 2022: 22.09 Million
- In 2008: 13.46 Million
- In 1999: 8.22 Million
- In 1981: 7.21 Million
There are over 22 million people age 60 or over who are still working. We have never seen anything like this before, so don’t expect prior recessions to be a model for this one.
Millions of these people will retire. Employment may drop substantially when these boomers and Gen X employees retire, but falling employment and rising unemployment are not the same thing.
I’m Calling BS on the Second Straight Amazing Jobs Report, Understanding Why
On August 5, I commented I’m Calling BS on the Second Straight Amazing Jobs Report, Understanding Why
Although I expect jobs (more specifically unemployment) to be strong in this recession, the numbers don’t jive.
Synopsis Since March
- Employment -168,000
- Jobs +1,680,000
That’s a bit much and I smell revisions or wild data swings one way or another coming up.
Another possibility is overcounting jobs while undercounting retirements. As of January, there were 22 million people of retirement age still working.
Fed’s Hands Are Tied
The Jobs data speaks for itself. That is half of the Fed’s mandate. If jobs (unemployment) is relatively strong as I expect, the Fed will have met that half of its mandate.
The Fed’s other mandate is price stability. Everyone on the planet knows the Fed flunked. It gets grade F.
The Fed does not want another grade F. It will err on the side of caution unless there is a credit event or huge rise in unemployment.
De-globalization, asset bubbles, and fear of inflation add up to a fed reluctant to cut. Higher rates and high housing prices will not stimulate that important cyclical aspect of the economy.
Cyclical Components of GDP, the Most Important Chart in Macro
If you missed it, please note Cyclical Components of GDP, the Most Important Chart in Macro
My follow-up article was A Big Housing Bust is the Key to Understanding This Recession
Housing leads recessions and recoveries and housing rates to be weak for a long time.
Add it all up and you have the opposite of the Covid-recession, a long period of economic weakness with minimal rise in unemployment.
It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it’s over. That happened once already.
This post originated at MishTalk.Com
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Mish
There will be continued upward pressure on oil and gas prices for the rest of this decade, because demand for oil and gas will continue to grow, while supply remains constrained due to the reduction in capex spending by oil companies in the previous decade.We are now approaching a supply crunch. OPEC is out of spare capacity and US shale oil and gas is near its peak. Infrastructure spending has declined (think pipelines and refineries).And we have been prematurely tapping into SPR reserves because of political agendas. It is going to be difficult to refill those reserves when prices climb next year, in part because the extra demand will help push prices up, just like the extra supply from those reserves have helped lower prices recently.Add on the European restrictions on Russian oil which start in December and you have a recipe for more upward pressure on oil and gas prices next year.Meanwhile oil and gas companies have been using their huge cash flows to pay down their debt and buy back shares. Some are already debt free.With less debt and fewer shares, in 2023 their cash flows per share are going to be enormous as prices rise. Even if economic growth only averages 1%/a for the remainder of this decade, these companies will continue to thrive.
influence was pervasive. Friedman at “the Chicago School” in 1932:
worked the whole problem out, which Viner was unable to do”…
errors in Keynes’ fundamental equations. Mints wrote Keynes in Friedman’s
behalf – & for the class.
impetus to write the General Theory.”…”Keynes’ subsequent repudiation in the
General Theory of those parts of the Treatise on Money grew out of these
criticisms.”
Friedman proposed (12/16/1959), that reserve requirements should be the same
for both time/savings & transaction-based deposits. Further he advised that
the commercial banks (money creating depository institutions), only become
financial intermediaries (where savings are matched with investments), when
there is a 100% reserve ratio applied against all of their deposit liabilities.
money creating, depository financial institutions (DFIs), should have the same
legal reserve requirements, both as to types of assets eligible for reserves,
as well as the level of reserve ratios. Policy should limit all reserves to
balances in the Federal Reserve banks (IBDDs), & have UNIFORM reserve
ratios, for ALL deposits, in ALL banks, irrespective of size.
John Maynard Keynes’ opus “, pg. 81 (New York: Harcourt, Brace and Co.),
gives the impression that a commercial bank is an intermediary type of
financial institution (non-bank), serving to join the saver with the borrower
when he states that it is an “optical illusion” to assume that “a depositor
& his bank can somehow contrive between them to perform an operation by
which savings can disappear into the banking system so that they are lost to
investment, or, contrariwise, that the banking system can make it possible for
investment to occur, to which no savings corresponds.”
Theory, it is necessary to substitute the term non-bank in order to make his
statement correct, viz., the Gurley-Shaw thesis, the DIDMCA of March 31st 1980
which directly caused the S&L crisis, the remuneration of interbank demand
deposits.
Bank Reserve Requirements. The commission completed their recommendations after
a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve
Requirements — Analysis of Committee Proposal”
After a 45 year hiatus, this research paper was
“declassified” on March 23, 1983. By the time this paper was “declassified”,
Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].
American, Yale Professor Irving Fisher –
1920 2nd edition: “The Purchasing Power of Money”:
“If the principles here advocated are correct,
the purchasing power of money — or its reciprocal, the level of prices —
depends exclusively on five definite factors”:
“Each of these five magnitudes is extremely
definite, and their relation to the purchasing power of money is definitely
expressed by an “equation of exchange.”
“In my opinion, the branch of economics which
treats of these five regulators of purchasing power ought to be recognized and
ultimately will be recognized as an EXACT SCIENCE, capable of precise
formulation, demonstration, and statistical verification.”
Link: “Extrait du Bulletin de ISI of 1937”. – History and
forms. Irving Fisher (1925) was the first to use and discuss the concept of a
distributed lag.
In a later paper (1937, p. 323), American Yale Professor
Irving Fisher stated that the basic problem in applying the theory of
distributed lags:
“is to find the ’best’ distribution of lag, by which is
meant the distribution such that … the total combined effect [of the lagged values
of the variables taken with a distributed lag has] … the highest possible
correlation with the actual statistical series … with which we wish to compare
it.”
…Thus, we wish to find the distribution of lag that
maximizes the explanation of “effect” by “cause” in a statistical sense”.
To quote economist John Gurley, “Money is a veil, but when
the veil flutters, real-output sputters.”
Two excellent comments from both Prumbly and vanderlyn. You both raise very valid points that will have an impact on future growth and inflation. Perhaps your comments will influence Mish.However, I also believe that Mish has pretty much nailed it overall. Partly because he has finally stopped focusing on whether its a recession or not. I’m not sure how he finally came to the conclusion that we are in for a long period of slow growth (recession or not), but I am going to give credit to many of the commenters here who may have influenced him. For example, I see some influence from mpo45, who has repeatedly mentioned the impact of boomers retiring over the next decade. And the influence of many others who keep mentioning the strong job numbers.Hopefully, we can now agree that the rest of the decade will be likely be dominated by slow growth and high inflation (3-5%).And if so, how should we be investing to take best advantage of this economic reality?What most investors want is solid returns that can beat inflation with as little risk as possible.Looking at Warren Buffett, that has been his focus for 70 years. He has just declared his intention to acquire up to 50% of Occidental. Because he understands that they are going to be a cash flow monster for the rest of this decade. After he gets to 50%, look for him to make an offer for the entire company. He wants “all” of that cash flow.The same is true for almost all oil and gas companies going forward. Slow economic growth will mean continued demand growth for energy. Oil and gas companies are becoming cash flow beasts. Everyone should consider owning some of these companies in their portfolio, based on their individual risk tolerance.I also believe that the next “big thing” is going to be Hydrogen. Thanks to the coming subsidies of up to $3/kg in the US. I have not yet completed my research into this area yet, but I will be glad to share it on this blog when I’m done. Perhaps others here are already ahead of me in this area and can share what they know as well.As always, thanks for the great blog Mish.
definition that the recorded collective “wealth” of the system exceeds
the real wealth.”
amount is about one-fifth of the $2.1 trillion shortfall recorded during
the same period in 2021. The CBO projects that the federal budget deficit will shrink to $1.0 trillion in 2022. Federal budget deficits are a contributor to total debt: but unless the funds for borrowing originate directly from the Fed or a bank, they are not Lent or borrowed into existence. All funds lent directly from the Fed or Banks is lent into existence. Since much of the deficit spending is paying off previous debt; Perhaps Fed or Bank originated deficits go bye bye into accounting neverland when discharged.
Agree. Recession or not, we are in for a period of slow growth. Which areas are best positioned to do well in this scenario.