A Recession Looms, Blame the Fed and Biden, Not Russia

March 3, 2022

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2:00 pm

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41 comments

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Economics

Fed chair Jerome Powell from Fed photo gallery.

Recession On the Way

A recession is on the way.

Three rounds of fiscal stimulus, the last two mostly unwarranted, coupled with reckless QE by the Fed sealed the fate.

Russia will get the blame just like Covid got the blame.

Certainly Covid dramatically increased the severity of the recession, but yield curve inversions had already sealed the fate before the pandemic hit.

The same applies now. Russia will get the blame, but the economy was headed to recession anyway.

If the Fed had the power to stop recessions there would never be any. The same applies to the Bank of Japan and ECB.

And let’s not forget oil.

Not every recession is led by a 50% rise in crude.

But every 50% rise in crude has led a recession. pic.twitter.com/PN3vWuzQj9

— Jim Bianco (@biancoresearch) March 3, 2022

Five Reasons Huge Demand Destruction Coming Up

Stimulus wearing off
Fed tightening
Mortgage rates low but rising will kill cash-out refis and reduce purchases
Wealth effect of stock market collapse will be enormous
Neither China nor the US can save the global economy

Liquidity is drying up in multiple places simultaneously. And the near-term impacts of rising oil and commodity prices will also take their toll.

What Can Biden Do?

Unfortunately, the president is hell bent on making matters worse. He reaffirmed Build Back Better in his State of the Union address last night.

For details, please see Biden’s State of the Union Another Futile Plug for Build Back Better

Don’t look for the president to do anything useful. Instead, be thankful Senator Joe Manchin is still firm against Biden’s inflationary spending plans.

GDP Rear View Mirror

Strong GDP is in the rear view mirror.

For discussion please see First-Quarter GDPNow Forecast is Zero Percent and Falling Fast.

Inflation Measured Correctly Will Collapse

Inflation as measured by the CPI will slow but not collapse. Near term, CPI inflation is likely to rise. But the CPI is a poor measure of inflation.

If one counts asset bubbles, stock prices, and junk bond yields as a measure of inflation on the way up (and you should), then it’s appropriate to count them as deflation on the way down.

Looking ahead, I expect long term yields to drop and the Fed to attempt to put a floor on the market, but fail repeatedly.

Those mocking long-term bonds as an investment idea do not understand demand destruction, credit destruction, or wealth impacts.

Ironically, most are slaves to a CPI they they also scream is wrong.

In this environment, gold and miners rate to do well. Consumer discretionary and meme stocks are the last places one should want to be.

Also see Oil Prices Highest in 8 Years Fuel Inflation Concerns, Where to From Here?

Finally

Most People Have No Idea How Much Stocks are Likely to Crash

Let’s discuss value investor Jeremy Grantham’s thesis on “super bubbles” and his target for the S&P 500.

Most People Have No Idea How Much Stocks are Likely to Crash

The demand destruction from a stock market collapse will be breathtaking.

This post originated on MishTalk.Com.

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41 Comments

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prumbly

2 years ago

I guess the Ukraine war is just the scapegoat the Democrats wanted – which is why they encouraged it to happen. All it would have taken to stop it was to not allow NATO weaponry on Russia’s border in Ukraine – the exact same solution that prevented a war during the Cuban missile crisis (with the players reversed). But no, arrogant Brandon had to say “Ukraine can join NATO if they choose to”.

vanderlyn

2 years ago

fantastic post mish. thanks. this is the stuff i come here for. you really helped me figure things out back in the panic of 2007/8 and the run up to that. didn’t get even a scratch back then. made dough. same in 2000 bubble bursting. my gut and mind thinks this will be the mother of all busts since the 30s.

FromBrussels

2 years ago

OF COURSE it is not Russia ! You always organise your fn wars at the other side of the fn pond don t you ??

FromBrussels

2 years ago

Spoilt, in Gowd believing Americans, I suggest you pray on your fn naked knees that Putin does not lose this US provoked war ….that’s all I can say …..that gowd may bless fn America ….chances are dwindling by the day though…..I hope Russia has got most of their missiles pointed at your spoilt as ses THAT s what YOU deserve !

Doug78

2 years ago

Reply to FromBrussels

Come’on. I know you can be rational so act like your are. Be all have missile pointed at each orther.

FromBrussels

2 years ago

Reply to Doug78

if all this ends well ….I want to somehow fn see you in Brussels or in Paris ……or somewhere fn in between ……oK?

Doug78

2 years ago

Reply to FromBrussels

Sure

FromBrussels

2 years ago

Reply to Doug78

Lets hope so ….I am now goin to sleep, thinking about what s goin on and then I ll wake up hopin that the end is not near yet, although I think it is ….because fn Ukraine wants to be fn NATO……Mankind, it got what it deserves , don t it ?

KidHorn

2 years ago

Not only has covid stimulus ended, but everyone with school age kids is going to be hit with much higher taxes due because they’ve already received half their 2021 child tax credit.

FooFooFed

2 years ago

Everyone is forgetting this is a GLOBAL economy. The stock market does not represent the economy. There is a big Macro picture, don’t overlook it.

Jmurr

2 years ago

Reply to FooFooFed

But rapidly rising food and fuel prices will take up and ever increasing portion of household budgets.

Casual_Observer2020

2 years ago

Reply to FooFooFed

30% of consumer spending is responsible for 100% of the growth. The other 70% is literally generates no profits for any businesses. The shell game goes on but it’s only a matter of time before the party ends. I still see people who can barely afford it buying homes and teslas. When energy prices spike further not many places in the US will be able to withstand it.

Billy

2 years ago

I don’t think the end is near(within 10 years). I do think we have a gigantic can of debt that we keep kicking down the road.

One thing for sure is that our politicians keep selling our opportunities to the 1%ers. The ones in control see that the US, like Japan, have an aging population. Most people in this country who make the most money right now are retiring and about to retire within the next 10 years. They are being replaced by low-income people who pay less in taxes than the newly retires expect to receive though Social Security and Medicare.

It makes me think that’s why politicians may say they are against illegal immigrants but they keep on coming.

It makes me think that when politicians let out criminals from our jails and prisons, that they care more about their budget and less about protecting the law abiding citizens.

It makes me wonder about the ability to design a virus that can attack certain populations that will be a financial burden on our politicians.

Maybe one day someone will create a virus that will do that but in the meantime we have to deal with Covid which according to Sharon Kardia and Jon Zelner Professor of Epidemiology, Assistant Professor of Epidemiology:

vulnerable populations
like the elderly, those with chronic illness and mental health issues, and those without
the means to work from home or access affordable healthcare, they can have life-threatening
consequences.

Agave

2 years ago

Not expecting a recession yet. Within 2-3 years, probably.

Here’s how it’s gone down since about 1980, when Reagan came in and changed the game.

Republicans get elected. Cut taxes, especially for the well off, to provide a sugar injection and juice the economy. Of course it works in the short run, why wouldn’t it? Everybody feels good at first as the money filters into the economy, and the Rs ignore the deficits they create.

But, it goes overboard as the benefits flow mostly upwards, asset speculation gets out of control, the deficit balloons, and the Fed does their thing. The presidency is held by the Rs for at least 2 terms (in this case 3 with Bush I), as the hangover begins, in this case delayed while Bush I was engaging in his mideast war.

Clinton gets elected during a time when the public has turned more conservative. He takes on the deficit in a way the Rs would not, and brings it more in line with some moderate tax increases on the more well off. Eventually the economy hums again.

Bush II inherits a nice economy, with the exception of an overextension in tech plays. That pulls back in a recession, but mostly hurts those who got in late at the wrong time. The viable companies survive, and there’s a rebound. But Bush II goes on with his little mideast war adventurism based on a lie, a short term stimulator. Then he cuts taxes for the wealthy again. Another short term infusion of sugar. Then he goes really overboard, encouraging banks to loosen on lending to pump the housing market. We all know what happened then. The recession starts near the end of his second term, and Obama and the Dems have to come in again and clean it up. A process over 8 years. More reducing the deficit, but eventually they get things back on track. Trump takes over, inheriting a humming economy.

So what does he do? Cuts taxes for the wealthy of course, and browbeats the FED to lower interest rates. Also tells the IRS not to enforce tax scams of the wealthy, and cuts regulations that protect our health, environment and safety so corporations can get even MORE of the wealth as they no longer pay for the externalities they cause. Another sugar injection, and of course another phase of the market and other assets going up. Then the pandemic comes along, and the buffoon totally messes up the response.

This results in the need for massive injections of government money and extreme FED relaxing, and putting a pause on certain debt payments for loans and rental price protection, which of course gooses the economy in the short run. As Bungalow Bill described below previously. This is the genesis of today’s inflation, and was greater than what Biden added in his one injection after election. This was needed to stave off disaster, but would obviously lead to price inflation from the demand side, as did the supply chain issues from that angle, and now housing rent and oil prices, which are just beginning to show their impact. Price inflation is far from over for the time being, as I’ve stated here previously, back when the rage was that it was all transitory.

It’s funny because if the prior president had won in 2020, all this would be on his head, and people would be blaming him for what Biden inherited. I have little doubt that our vastly misinformed electorate will neither understand nor care about this, but just blame whomever is in office for their current inflation pain. All egged on by the vast right wing propaganda machine of Cucker Carlson and others.

I expect the stock market to wobble into mid March, and perhaps longer. After bottoming between 3900 and 4100 or so on the SPX, I expect it to again take off to 5500 to 6000 over the next year or two before the real recession and serious dump occurs. I follow experts in waves, cycles, and sentiment rather than news related impacts on the market (which tend to be more short term). So, if this proves wrong I will admit my mistake. So far what I’ve seen from them has been spot on though, ever since March 2020. They’re mostly republicans too, but politics does not impact their analysis, outside of events that may be many degrees outside the norm.

ajc1970

2 years ago

Reply to Agave

Nobody expects the inquisition

prumbly

2 years ago

Reply to Agave

Actually, President Trump’s tax cuts helped the poor and middle class far more than wealthy people, according to IRS data:

link to news.yahoo.com

But truth no longer matters. It’s all about the narrative, right?

Casual_Observer2020

2 years ago

Reply to prumbly

On a per capita basis it helped the top end far more.

Casual_Observer2020

2 years ago

Reply to Agave

We’ve been playing a shell game in the US and all things are now interest rate driven irrespective of who the president is. We are at an endgame now but few realize it. They thought covid was bad but it’s been so long since the last real recession that many have forgotten.

Cocoa

2 years ago

Recessions are an economic cycle. Deflationary crashes are bubbles that explode. This one is the FED’s creation starting with Greenspan. Oil shock doesn’t help, but usually wars are a symptom of a crash. Like Civil War, WW1 and WW2.

FooFooFed

2 years ago

Can anybody tell me why Swaps on 30 yr is still neg and 5 and 10s are around 0? If we were an actual functioning economy wouldn’t these swaps be positive? And looking back these fell just at the GFC 2008. So WTF has been going on for the past decade plus? The economy hasn’t even gotten back to where we were before GFC. We like to believe all is well but looking below surface is ugly.

Captain Ahab

2 years ago

Reply to FooFooFed

FooFoo gets it.

CRS65

2 years ago

A shallow recession is certainly possible in the U.S. over the next 12 months. However, I disagree the reasons Mish laid out above. The reasons in my opinion a recession, if it materializes, will be short and share are:

1. Unemployment is extremely low with more open job positions than available workers.

2. Household balance sheets are stronger than there otherwise would have been with the pandemic related fiscal programs.

3. Interest rates are still very negative and will likely continue to remain below neutral even with 3-5 rate increases and inflation trending down below 3%.

4. Housing market will likely remain very healthy for at least several years because mortgage rates are unlikely to exceed 5% and there remains a significant shortage of homes for young first and second time home buyers and this imbalance will not be resolved for many years.

It is frankly a red herring to try to equate strengthening the average U.S. household’s balance sheet and discretionary income to exacerbating the current inflation situation. Many components of the BBB plan, such as a continuation of the child tax credit, subsidized day care, and expanded Medicare and Medicaid coverage for things like dental care, hearing aids, home health care, and controlling prescription drug prices would strengthen the financial condition of the average U.S. household.

Tony Bennett

2 years ago

Reply to CRS65

“Household balance sheets are stronger than there otherwise would have been with the pandemic related fiscal programs.”

…

The bulk of fiscal stimulus gone. Now households are stuck with negative real earnings. Sure, asset holders (top 20%) are riding high. Everyone else?

“Real average hourly earnings decreased 1.7 percent, seasonally adjusted, from January 2021 to January
2022. The change in real average hourly earnings combined with a decrease of 1.4 percent in the
average workweek resulted in a 3.1-percent decrease in real average weekly earnings over this period”

link to bls.gov

SHOfan

2 years ago

Reply to CRS65

“Many components of the BBB plan, such as a continuation of the child tax
credit, subsidized day care, and expanded Medicare and Medicaid
coverage for things like dental care, hearing aids, home health care,
and controlling prescription drug prices would strengthen the financial
condition of the average U.S. household.”

You have made a good point, it is spending that would be valuable to most people. The downside is it represents more gov’t spending which is crowding out the private sector. That results in slower economic growth. Also, big increases to Medicare/Medicaid will drain the Health care trust fund faster. I think it is already scheduled to be depleted by around 2026. That is going to cause a big budget problem in only a few years.

CRS65

2 years ago

Reply to SHOfan

We have had ever increasing deficit public spending for the last 40 plus years, please illustrate how this has “crowded out” the private sector. The private sector has had an amazing 40 years of earnings growth, innovation, and productivity improvements. The pandemic period saw record numbers of new business entities started. I understand economics and I even agree with some of “Austrian Economics,” but history does not bear out that government spending increases have crowded out the private sector.

Christoball

2 years ago

Reply to CRS65

The old “Don’t throw out the Baby with the bath water trick.”

We must throw out the bath water. It shouldn’t be hard to save the baby; but that is not the original intention of government policies.

CRS65

2 years ago

Reply to CRS65

Reposting with fat finger error corrections:

A shallow recession is certainly possible in the U.S. over the next
12 months. However, I disagree the reasons Mish laid out above. The
reasons in my opinion a recession, if it materializes, will be short and
share are:

1. Unemployment is extremely low with more open job positions than available workers.

2. Household balance sheets are stronger than they otherwise would have been without the pandemic related fiscal programs.

3.
Interest rates are still very negative and will likely continue to
remain below neutral even with 3-5 rate increases and inflation trending
down below 3%.

4. Housing market will likely remain very
healthy for at least several years because mortgage rates are unlikely
to exceed 5% and there remains a significant shortage of homes for young
first and second time home buyers and this imbalance will not be
resolved for many years.

It is frankly a
red herring to try to equate strengthening the average U.S. household’s
balance sheet and discretionary income to exacerbating the current
inflation situation. Many components of the BBB plan, such as a
continuation of the child tax credit, subsidized day care, and expanded
Medicare and Medicaid coverage for things like dental care, hearing
aids, home health care, and controlling prescription drug prices would
strengthen the financial condition of the average U.S. household.

Tony Bennett

2 years ago

“Those mocking long-term bonds as an investment idea do not understand demand destruction, credit destruction, or wealth impacts.”

…

Wow, I may have to put you on my Christmas card list.

Tony Bennett

2 years ago

Your Fab Five on collision course with growing business inventories.

link to fred.stlouisfed.org

Business demand artificially stimulated with ginormous fiscal stimulus (turbo charged with rent moratorium + loan forbearance). Wreaking havoc with sales projections. If a business guessed wrong —-> Peloton. Many more to come.

A bit extreme, but an example. Back in 2020 hand sanitizer all the rage … not nearly enough. I recall on one of the tv shopping channels a gallon selling for $70. Last year a local grocer was GIVING AWAY quart bottles with $10 purchase.

FooFooFed

2 years ago

Reply to Tony Bennett

Inventory builds are huge!

MPO45

2 years ago

Reply to Tony Bennett

Send it all to Ukraine, they need it. There is always a market for goods somewhere.

Bungalow Bill

2 years ago

I don’t believe you can leave Trump out of this equation. Inflation just didn’t happen over night. It’s years of the Federal Reserve’s easing is now catching up with us. Trump encouraged it and played victim on Twitter everytime the Fed threatened to raise rates and tighten. Of course, before Trump won the elected king position in Merica, he was warning in his tweets the easing and low interest rates were going to lead to inflation. To sell the lie, he continued encouraging the Fed to ease and keep rates low, then COVID hit…Trump demanded two massive big government socialist COVID spending bills where he handed out money as if he was playing Bernie Sanders in a candy store. Obviously the Federal Government didn’t have a surplus of $4 trillion lying around and had to look to the Fed. Thomas Massie of Kentucky did try to warn us, but Trump threatened to kick him out of the GOP for getting in the way of Trump’s massive big government COVID handouts. Sure you got your free government checks in 2020, but you are paying for it now…

Dr_Novaxx

2 years ago

Reply to Bungalow Bill

Both parties share the blame Bill, Trump didn’t help by pushing the Fed to lower rates earlier, I agree. The only logical answer to this problem is to remove the Fed from the equation.

Congress needs to take bake their power to coin money & regulate the value of currency, according to the U.S. Constitution, Article 1, Section 8.5. They have abrogated this responsibility since passing the Federal Reserve Act of 1913.

vanderlyn

2 years ago

Reply to Dr_Novaxx

anyone still caught up on D v R teams have been played. we are a klepto empire like latin amerikan countries. the 2 sides try and convince the peasants for a vote. then they steal everything not nailed down. and round and round. if you don’t get it by 2022, you are too thick, or too silly, or most likely just been HAD. intelligence or wealth has no bearing on being a sucker. carry on please. the show is great with clowns in the audience.

RonJ

2 years ago

Reply to Bungalow Bill

“I don’t believe you can leave Trump out of this equation. Inflation just
didn’t happen over night. It’s years of the Federal Reserve’s easing is
now catching up with us.”

With years of easing, the FED couldn’t get 2% inflation. Stimulus checks for everyone, spiked the consumer punchbowl. Add in the supply chain mess. Add in limited oil supply. Stir. Pour over ice.

Christoball

2 years ago

Recession is a natural part of the business cycle, just as expansion is. There is no gloom or doom in business cycles, just as there is no gloom and doom in the seasons of the year. Should one try and prevent Winter or Prolong spring. One must accept what they can’t change, and find joy in the opportunities that we will behold.

Tony Bennett

2 years ago

Reply to Christoball

(Very) well said.

Captain Ahab

2 years ago

Reply to Christoball

Actually, there are mass psychological patterns affecting economics. Expect to see mass panic when the markets drop 10% in a day. At one level, psych patterns are the basis for technical analysis, but the technicians are seldom aware of it.

The seasons also affect people psychologically. We might expect suicide rates to peak during the cold dark months of winter. HOWEVER, suicide is greatest during the late spring and early summer months. WHY? Allergies are most likely.

Hansa Junchun

2 years ago

Uh uh, Mish. Blame the Russians. Blame the Russians. NOT blaming the Russians makes you a traitor, according to the U.S. State Dept. Did you see the cable they “withdrew” but still published for the world to see?

“Continuing to call for dialogue, as you have been doing in the Security Council, is not a stance of neutrality; it places you in Russia’s camp, the aggressor in this conflict,” the cable link to axios.com, according to Axios, which saw parts of the document.

This is the West: there is NO neutrality permitted anywhere in the world. You WILL be in this war. There is NO escape. There is NO avoidance.

CRS65

2 years ago

Reply to Hansa Junchun

Sorry, but when a much bigger nation, with a vastly superior military advantage attacks a smaller nation in order to put that nation under its control, there is no morally debatable position. Such raw hostility and violence inflicted upon another nation and its people has be universally condemned.

PreCambrian

2 years ago

Well you are part right. The Fed QE is a horrible policy, agreed. While some aid (stimulus) was needed for Covid, it was poorly directed and conceived and much didn’t do what was intended and indeed aggravated inflation. However without any stimulus or QE we would have had a recession sooner. So I don’t think that it is Biden’s fault, mainly the whole entire system. What should have been done, which might have avoided this entire mess was reasonable increased deficit spending during Obama’s second, third, and fourth years (after the GFC) along with normalization of interest rates by the Fed. The Fed tried to do with QE (monetary) what could only be done with a financial (fiscal) stimulus and it obviously didn’t work. It really made things worse (more fragile).

A Recession Looms, Blame the Fed and Biden, Not Russia

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