Booms Don’t Die Of Old Age, They Are ‘Murdered’ By The Fed

Look, there are things that are “top of mind” over at Goldman, ok?

One of the things that’s “top of mind” at 200 West is “making money.” And in that regard this low vol. regime is a real pain in the ass … errr.. “mind.”

You can rest assured they’ll figure that out, even if it means becoming the first blue chip bank to open a Bitcoin trading operation. So don’t worry about whether the employees over there are going to go broke, because they’re doing ok – as far as I know, the average annual compensation is still well in excess of $300,000.


But “making money” isn’t all that’s “top of mind” for Goldman. Another thing that’s “top of mind” is the cycle and more specifically, where we are in it.

Because a lot of folks think where we are is “late” and if that’s the case, well then one wonders how exactly policymakers are going to be able to lean against the wind when the cycle turns given that we’re all still mired in NIRP and ZIRP and central bank balance sheets are not only bloated, but in fact still growing pretty much everywhere except in the U.S. Here’s Goldman’s Allison Nathan:

More than eight years into the US economic expansion— already the third-longest in post-war history—there are few signs that it will end anytime soon. The lack of inflationary pressures despite the closing of the US output gap—a good predictor of recession risk historically—sends a reassuring signal. And even the fundamental risks we are watching closely, such as corporate re-leveraging and commercial real estate (CRE), do not appear likely to derail the recovery in the near-to-medium term.

But with US equity indices at record-highs, 10-year Treasury yields only moderately off their lows, and valuations arguably looking stretched for both, whether “no recession” also means “no correction” is Top of Mind. 

Right. And it would be a real pain in people’s “minds” if risk assets were to correct in the absence of a recession to blame for the correction.

We’ll get into this more later (maybe), but for our purposes here, it’s worth noting that in one interview Goldman conducts as part of their latest “Top Of Mind” note, Omega’s Steve Einhorn reminds you that there are a number of data points which suggest we are not in fact late cycle. To wit:

First and foremost, the unemployment rate likely overstates the tightness in the labor market and how far along we are in the economic cycle. That’s best evidenced by the fact that, notwithstanding a 4.1% unemployment rate, wage inflation is moderate at around 2.5%. I would also note that the spread between the underemployment rate and the unemployment rate is still above average and the prime age employment-to-population ratio is still below average, both supportive of the notion that the labor market is more mid-cycle than late-cycle.

Beyond these observations, there is an almost unending number of metrics that suggest we are more mid-cycle than late-cycle in economic activity. The GDP gap, which measures output versus potential, has—almost without exception—been above zero and declining before we entered a recession during the last 40 or 50 years; today, it is below zero and rising. The share of cyclical components of GDP—consumer durables, residential investment, capital spending—is typically above average late in an economic expansion, but today it is below average. The Conference Board’s leading economic indicator composite is typically declining year-over-year six to nine months before the beginning of a recession, whereas it is currently up. The unemployment rate is typically up year-over-year late in the economic cycle, but it is now down. Inflation usually accelerates late in the cycle, but today it is moderating. Real money supply growth typically sinks late in the cycle, but it is now stable-to-growing. The fed funds rate is typically above Fed estimates of the neutral funds rate when we are late in the cycle, but today the funds rate is probably less than half of the neutral rate. The yield curve typically has a flat-to-negative slope late in an economic expansion, but currently the slope is positive. And credit spreads, which normally widen prior to the end of an expansion, are tight and stable-to-narrowing.

I have more examples, but I think those are enough to indicate that we are nowhere near a recession, that the probability of a recession anytime soon is quite low, and that mid-cycle characterizes the current economy better than late-cycle.

Ok, thanks Steve. But here’s the thing: Einhorn goes on to tell Nathan the same thing that everyone else has been saying lately. Namely that the risk here is a sudden upturn in inflation that catches everyone (including and especially the Fed) off guard. Here’s Steve one more time:

Neither economic expansions nor equity bull markets in the US die of old age; they are murdered by the Fed. So when you ask what the big risk is, the answer is problematic wage and consumer inflation—i.e., an outcome that turns the Fed hostile. A faster-than-expected rise in inflation is what would make the Fed willing to crunch the economy and bring about recession, earnings disappointments, and balance sheet challenges.

There you go. Everything should be fine as long as that inflation the Fed has been trying to create doesn’t suddenly show up and force Jerome Powell to “murder” us in our sleep.

For now we’ll leave you with a pretty epic annotated chart of historic U.S. booms and busts:




4 thoughts on “Booms Don’t Die Of Old Age, They Are ‘Murdered’ By The Fed

  1. Within the Federal Reserve and in the financial community at large there is considerable debate as to what the Federal Reserve should do next. I think this debate can be characterized as those who want normal interest rates versus those who favor normal monetary policy. Those calling for a normalization of interest rates suggest that interest rates should be returned to somewhere near the averages that prevailed since the end of World War II. In contrast, normal monetary policy has been to raise interest rates when it is clear that unemployment is too low, too many people have jobs and that wages are rising so rapidly that an inflationary spiral is likely.
    Those in the normalization camp want the Federal Reserve to hike interest rates now. The arguments for immediate rate increases are varied. Some claim that monetary policy is either ineffective or we have gotten to a point where it is no longer effective or warranted. Some say that the recovery from the 2008 super-recession has been very sluggish with real GDP growth generally less than 2% on average. They suggest fiscal policy should now be used to boost growth, rather than monetary policy. That some of these same people also claim that the economy is strong enough for rates to be raised is puzzling.

    One argument for higher rates is that the current level of interest rates is allowing “zombie” companies to stay in business. Presumably, higher interest rates would prevent these firms from paying their debt service. I suspect that the shareholders and employees and possibly customers and residents of the communities where the zombie firms are located think that putting those firms out of business is not a good reason to raise interest rates. Another argument often used to advance the cause of raising rates is that this would give the Federal Reserve more ammunition to use to counter the next recession.

    Certainly, lowering interest rates are a primary way to increase economic activity and counter recessionary forces. The logic of raising interest rates now so that when a recession occurs later there is more room to lower rates makes no more sense to me than one saying that since losing excess weight is a known way to treat type II diabetes, someone should go out of their way to become more obese now so that they have more weight to lose when they develop type II diabetes. The fallacy in both those arguments is that just as obesity can cause type II diabetes, higher interest rates can cause economic weakness and recessions…”

    • Just let the damn market set the price of money, ie., interest rates. Just like a central planner shouldn’t set the price of bread, they shouldn’ t set the price of money either.

      • Exactly. Wherever central planners have controlled food prices, it has ended in tears. So will controlling the price of money. The market will have the final say, with central banks left in ruins. The more they distort prices from reality, the worse the final outcome will be.

  2. Whoa! You’re letting them get away with 1929 crash was followed by monetary tightening?? The other way around methinks – which is highly relevant to now!

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