The Soft landing Thesis
Contrary to the mainstream Financial prophecy (including my own), The Federal Reserve (FED) persists in its narrative that there will not be a recession in the near future. This statement presents itself as a stark contrast to the forecasts of various banks and financial pundits (again, including myself) who prophesize a “soft landing” – an Economic condition defined by slowed growth that doesn’t necessarily culminate in a recession.
A focal point of this debate surrounds the trajectory of oil prices. The economic crystal ball gazers are divided on whether the prices are reaching a bottom and if an upward trend will soon be observed. The implications of such a change could be monumental, leading potentially to inflationary pressure. If prices go up from here, we are likely to get a double tightening effect, first from the FED, the second from the energy markets. In essence, recessionary.
(Source: Seeking Alpha)
In addition, several real figures have exhibited a deceleration, while numerous leading indicators appear fragile, signaling an impending recession. These discrepant views have cultivated an atmosphere of uncertainty, leading to a market fraught with risk.
(Source: Darth Powel)
The Paradox within The FED’s Projections
Among these differences, there lies an inherent inconsistency in the FED’s narrative. On one hand, they predict an increase in unemployment around 30 to 40 basis points, but on the other, they deny the possibility of a recession. This contradicts the conventional definition of a recession, which fundamentally involves a hike in unemployment.
However, it is important to differentiate between the FED’s words and their actions. For instance, while they vocally reassure against a potential recession, their yield curve-based probability of a recession—according to the New York FED—stands at its highest since 1982. This discrepancy between words and actions furthers the financial ambiguity.
(Source: NY Fed)
Moreover, the FED’s tightening measures from zero are the most severe ever seen from a central bank, hinting at possible financial turbulence. It’s like a pendulum that might be swinging too far in the other direction, potentially disrupting the economic balance.
An interesting assertion is that the FED is intentionally engineering the market, striving for an inverted yield curve because it cannot afford high rates at the long end for U.S. government financing. This deliberate strategy, in conjunction with their goal to control inflation without suffocating the economy, reveals their position as not just economic but also political.
An Economic Victory Too Soon?
The economic landscape is far from benign. It seems we’re standing on the precipice of a significant deceleration, if multiple indicators are to be believed. Amongst the melee of market participants, there’s a rising chorus singing prematurely of a soft landing and economic victory. But, let’s not forget, the aftermath of the rate hikes has yet to fully resonate through the economy’s layers.
A more significant cause for pause is emerging on the horizon – an issue that should jangle the nerves of every investor. We’re navigating through an era of unprecedented debt levels, where each incremental rate hike could metamorphose into a form of monetary expansion due to its outsized impact on the fiscal deficit. That’s the Luke Gromen thesis and it has been gaining a lot of traction recently.
Now, if this idea takes root and swells, it could unleash massive tremors through US debt markets and shake the foundations of the USD. This could trigger a recalibration of all asset classes higher, adjusting for the implied debasement.
(Source: Tyler Durden via Talk Markets)
Yet, amid the short-term machinations, U.S. equities present a hazardous asset class. If economic data continues its downward spiral or as inflation rears its head again, these stocks could take a severe hit. Concerns also swirl around the potential surge in energy costs – a factor that could push the FED’s policy levers and thereby, ricochet through long bonds and equity valuations.
In stark contrast, other asset classes such as Bitcoin and Gold seem to cut a simpler profile when it comes to risk structure. They may emerge as the beacon in the storm for investors willing to tread cautiously amidst these turbulent times.
In conclusion, while the global economy teeters vulnerably on the tightrope of the tightening cycle, amidst a din of varied predictions and contradictions, it’s critical to keep our eyes wide open. Continuous vigilance is crucial as we chart a course through these uncertain financial waters, ever alert to the shifting currents and looming storms.
Disclosure: This text expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, wherever there is the potential for profit there is also the possibility of loss. Additionally, the present article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Some information and data contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. The author trusts that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
