Saturday, October 12, 2019

Now even the Fed admits that recession is in play for 2020, and decides to be Bubblicious

The more you look at data and its analysis by alleged experts, the more you can’t help but think our economy is in a precarious spot. Moves from the Federal Reserve reiterated that this week.

The first involved Federal Reserve Chairman Jerome Powell saying that the Fed would be more active in keeping money flowing through the economy.
During a speech and question-and-answer session at conference for the National Association of Business Economists in Denver, Powell announced that the central bank would soon start expanding the size of its balance sheet, adding bank reserves to the financial system to avoid a recurrence of the unexpected strains seen in short term money markets last month…

In August Fed officials stopped allowing their balance sheet to shrink as U.S. Treasury securities on their books matured, but banks have been running down their reserves as they bought new debt being issued by the U.S. Treasury to fund the federal government’s nearly $1 trillion budget deficit.

Reserves dropped to less than $1.4 trillion last month, from $2.8 trillion in 2014, when the Fed stopped buying assets. As a result the lack of liquidity in short term money markets caused overnight interest rates to spike well above the interbank fed funds rate last month.

The Fed now wants to provide enough bank reserves so the central bank can control its policy federal-funds rate and other short-term lending rates without the regular market intervention it has undertaken over the past three weeks.

Sure enough, at the end of this week we found out that the Fed was going to step in more than they already have been.
The Federal Reserve said on Friday that it would begin buying about $60 billion per month in Treasury bills to ensure “ample reserves” in the banking system, a program that will continue at least until the second quarter of 2020.

The program is in response to recent disruptions in short- term money markets that pushed the target federal funds rate to the top of its range. The Fed deemed the move “technical,” and not a change in the “stance” of monetary policy. The Fed also said it would offer regular repurchase agreements at least through January to ensure there are ample reserves even during spikes in demand.
So naturally, Wall Street said “MOAR COCAINE!”, and pumped up the market by 320 points on Friday.

But it's not the type of action you take if things are solid economically. Combined with recent interest rate cuts, it's certainly not the action the Fed would be taking if the economy was half as good as Trump/GOP claims it is.

And based on the minutes released from the last Fed meeting in September, the central bankers know it.
Federal Reserve officials had grown more worried about the U.S. economy by the time they met in mid-September, according to minutes of the central bank’s meeting released Wednesday.

“Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad,” the minutes said.

There was even talk about possible recession, with several Fed officials noting that the probability of a recession “had increased notably in recent months.”…

“Softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected,” the minutes showed.

A few weeks after the Fed meeting, a worse-than-expected reading in the ISM’s manufacturing gauge heightened investors concerns that a recession could hit the economy. But these fears ebbed somewhat after the September employment report showed that the unemployment rate hit a new 50-year low reading of 3.5%.
The flip side of that low unemployment rate is that the job market is likely maxed out. And even with that low unemployment, year-over-year wage growth dropped below 3% in September, and private sector job growth is at multi-year lows.

A prominent Wall Street economist says another stat tells him recession is likely coming in 2020. CBS Marketwatch says that Stephen Gallagher of Societe Generale was its most accurate forecaster of what the economy did in August, and here’s his warning.
Gallagher’s recession story is a relatively simple one: U.S. recessions are typically preceded by an erosion in corporate profit margins, or profit per dollar of revenue. Costs generally rise near the end of the cycle while sales flatten out.

Profit margins for U.S. nonfinancial corporations peaked in 2015 at 15.2% of gross value added, and have fallen to 10.9% in the latest quarter….

“The erosion in margins is the key to business-cycle dynamics,” Gallagher said in an interview. If the U.S. does enter a recession in 2020, “history is very likely to view it as a trade-war recession,” he wrote early in 2018. But trade tensions are only the catalyst, not the main cause, he says.

When companies’ margins are fat, they are able to roll with the punches. But when profits are thin, managers cut costs at the first sign of danger.
Another way profits have been squeezed is through continued deflation in many goods-producing parts of the economy, which reports from the Bureau of Labor Statistics showed to be continuing in September in both the domestic and international markets. If prices of energy, food and manufacturing products continue to fall, these businesses have a lot less money available to spend on hiring and retaining workers, and this has already started to show itself with manufacturing employment flatlining for 2019.

Which also helps explain why the Fed is trying to pump more money into the economy and keep demand artificially high. It’s trying to keep the outward appearance of a growing, healthy economy and banking sector, while things are a lot more shaky below. But if jobs and wages stall out, I doubt easy money would prevent a recession anyway, and choosing to pump up the stock market while Main Street flails, savings is discouraged, and Social Security only has a 1.6% increase for 2020 seems like the wrong strategy to take.

Stay on your toes, folks. It feels even more tenuous than it has been over the last few months.

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