Something Wicked This Way Comes

It’s becoming more difficult to shake the feeling that something bad is about to happen to the US economy, markets or, quite possibly, both.

“We need to recognize that we’ve got an overheated economy that we are going to need to cool off,” Larry Summers said, in remarks that made headlines Friday. He was speaking to Bloomberg’s David Westin, for this week’s edition of “Wall Street Week,” a program which, over the past 12 months, morphed into a kind of personal forum for Summers to wax semi-hysterical about the perils of Joe Biden’s economic policies.

The problem is, Summers was mostly right, with the obligatory caveat that when it comes to economics, a soft science, no one is ever right on purpose — only by accident.

He went on to suggest that “Washington policymakers” are placing too much emphasis on supply-side issues. “We are basically moving towards higher entrenched inflation,” Summers warned, adding that,

It’s there in expectations. It’s there in wages. It’s there in labor shortages. It’s there in the pervasive pattern across many different prices. The Fed’s going to have a very real challenge cooling the economy off and doing it in a controlled way. That has not been done very successfully [in] the past.

Asked whether Brian Deese is correct to assess that resolving supply chain issues will, for the most part, clear things up, Summers was unequivocal. “No. He’s wrong,” Summers told Westin. “We have a massive, overheated labor market,” he continued, citing labor shortages “in everything from psychotherapy to McDonald’s.”

Not that anyone needs a reminder, but the latest JOLTS data showed 4.5 million people quit a job in November. A million of those came in leisure and hospitality alone. The figure (below) speaks volumes.

Try as they might to project calm, Fed officials are plainly worried. Charles Evans on Thursday said policy is “not well positioned” for inflation. And Christopher Waller told Kathleen Hays that although three hikes for 2022 is still “a good baseline,” persistently high inflation could make the case for “four, maybe five, hikes.”

Unfortunately, the data is starting to roll over. Friday brought a spate of poor numbers including a horrendous drop in retail sales, a lackluster read on sentiment and an unexpected drop in factory output. If growth decelerates just as the Fed embarks on an aggressive tightening campaign… well, that’s a noxious mix.

“Inflation is an economic and political problem,” BofA’s Michael Hartnett said, on the way to joking that “Joe needs 50bps from Jerome at the January FOMC meeting.”

Obviously, that’s not forthcoming. A hike this month would be a shock to markets. A 50bps hike would be positively jaw-dropping, not because it couldn’t be justified, but because in the era of forward guidance and cooperative policy scripting with the market as co-author, blindsiding traders is a non-starter. Never mind that the taper isn’t complete.

“As the Fed enters the pre-meeting period of radio silence, the tone has unquestionably been established as one of eagerness to begin combating inflation,” BMO’s Ian Lyngen and Ben Jeffery said Friday, noting that headed into the FOMC meeting later this month, there’s “been chatter about an even earlier end to QE in anticipation of a March hike.” Any such move would be immaterial from a mechanical, flows perspective (it’s just one month). But the signaling effect would be important. Frankly, it might do more harm than good to the extent it telegraphed panic.

Despite a bounce on Friday, the dollar just logged a fourth consecutive weekly decline. “Global investors’ belie[ve] the US is fading fast,” BofA’s Hartnett wrote, in the same note cited above. “Dollar debasement [means] yields up and dollar down,” he added, drawing a historical parallel via the figure on the left (below).

Somewhat ironically, cash may not be the worst place to hide (figure on the right, above).

The Fed, Hartnett warned, is poised to be “very hawkish” for the next nine months. On his view, stocks and credit will post negative returns this year driven first by a rates shock and then, in the second half, a “likely recession panic.”


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12 thoughts on “Something Wicked This Way Comes

  1. This talk about inflation in wages is neoliberal horse-hockey. “Essential” workers deserve to make a living (i.e. more than poverty) wage. If the U.S. economy can’t deliver that without throwing everything and everyone into a conniption fit, then maybe it’s time to rethink the system.

    1. Well, if you have a landscape of a toxic mix of numerous fiscal and monetary policy mistakes then probably not because it means they have likely over shot with tightening and killed the economy forcing a recession. Essentially, we have created demand destruction and a potential path to disinflation or possibly outright deflation as soon as March.

      Also important to keep in mind is that demand destruction is almost entirely a burden forced on the consumer (lower income) class.

    2. Although, retail sales dropping would intuitively seem to reduce inflation…. consider the way inflation is calculated. If JOLTS is correct and 10 million plus jobs are unfilled, then wage growth may continue increasing. And rents are also increasing as more people move to safer places and better school districts if they can afford it. The inventory of homes for sale in desirable areas continues to dwindle. Soooo….How exactly is the Fed raising interest rates going to reduce rents and wages which are major factors for calculating the rate of inflation. Is the drop in retail sales due to goods being unavailable ?? Tried to buy a new pickup truck or SUV lately–very low inventory on car lots. Used car prices I believe are also used as a significant factor to calculate inflation. Oh and by the way, if the Fed tapers and raises the interest rate, will that lower prices for oil and gas ?? Don’t the costs of energy permeate into almost everything. And I’m not really hearing that supply chain problems are improving. The number of cargo ships off the ports in California is over 100 ships–is that not accurate ?? So if we look carefully at the actual causes of inflation which appears to be due to inadequate supply of goods and services, then I’m skeptical about how the Fed raising interest rates at the pace they are saying… actually reduces inflation. I’m well aware of Omicron. I’m not blaming any political policies–just wanting to know if my economic observations are correct. Please correct any of my assumptions Mr. H….because I’m likely one of the many illiterate “hoi polloi” ?(I did grow up in a small town in the Midwest)

  2. Inflation? Rethink the system? Don’t we have heavier issues to address? What’s the big picture?

    Many still-living “Boomers” are taking our nest egg and retiring. Why not? And younger members of our society are leveraging the pandemic to trade up to a better job. That all sounds okay for them. But our workforce capacity is shrinking. Our friend, Heisenberg, has written about this before in regard to the rise of China. Far in our future, we’ll be running out of the population necessary for our economy to grow. As we speak, our birth rate grows nearer to nil. Our economy today still grows, even despite the pandemic. But that’s just not always going to be the case.

    For years the paranoid, radical ignoramuses in the so-called republican party (I call them rebut-li-cans) have cowered in fear of hard-working, family-loving, and good people from Mexico (that by their history and Catholicism would vote republican in substantial proportions if they had any piece of the American pie). But heaven forbid that more brown people would come to the great white USA! The administrations of G.W. Bush and Barack Obama tried unsuccessfully to pass meaningful and useful answers to the immigration needs of our country, but were turned away by near-sighted, self-serving, God-fearing white people, most of whom represented (shall we say) remote, isolated areas of the United States.

    No matter. Wherever in the USA we may originate, this eventuality will eventually befall us. Whether we like it or not, we cannot carry on by identifying ourselves as a white nation educated in ignorance that lives in tidy communities in remote enclaves and expects our economy to forever dominate the earth with our dollar as the world currency.

    To hell with a little inflation. That’s nothing. If we don’t import more population, who’s going to buy the crap we sell, most of which is made in China? At some point, within the time of our collective lives, the audience for the parlor game we’re playing will buy its goods elsewhere and leave the United States behind. Immigration for the United States has always been, and still can be replacement parts, grease, and lubrication that can keeps economic US machinery working. And immigration can even grow the economy. The brown people that wish to come to our country to work and feed and house their families, from wherever they may originate, are the future of our country, whether some prejudiced white people like it or not.

    Immigration isn’t the only answer to our abundant problems, but it’s something. It’s one action we can take to address the spiral into which we’re falling as country. The largest problem today is congressional rebut-li-cans that vote “NO!” on everything because, God-forbid, democrats had a part in writing most bills in the Congress. In its current state our country is utterly dysfunctional. Rebut-li-cans will not abide with any bill or initiative put forth by the democratic party. Rebut-li-cans are consciously, willfully becoming authoritarian. They’re goal is merely to take power for themselves. They fundamentally do not regard democrats as their partners across the aisle. They seem not to give a damn about the country. And they will certainly choose not to open the doors of our country to decent “brown” people to work and participate in our democracy. But the US won’t be a democracy if rebut-li-cans get their way by being deniers of democratic initiatives. And it may be sooner rather than later that the American economy, as we know it, evaporates into the wind due to negligence – rebut-li-can lack of participation in our participatory democracy.

    Rebut–li-cans invite disaster by playing a game of economic and political roulette. The pandemic is just one trigger to future events that may not go well for most of us if the rebut-li-cans get their way. If so, we will experience economic calamity. We all better align our thinking with reality. Life is short. In time, the Fed will figure out how to address the modest spike of inflation we see today. It will require time, but it will be addressed. It’s not a real worry. We have seen this story before. But what becomes of our politics? And following therefrom, what becomes of our economy?

    H., you’re the political scientist. What’s your thought?

    1. Alot of fair and accurate points. Unfortunately, I see no leadership to lead us out of our current broken system. History tells us that right-wing extremists authoritarianism usually falls, but not before creating significant destruction in some form or another. Currently, the damage is relatively minor, but I fear we are about to hit the tipping point where the destruction escalates hyperbolically. We are more likely than not to see things get a lot worse before the non-extremists (the majority) are willing in large enough numbers to put their foot on the throats of the extremists to force psychological capitulation. Extremism does not wain through righteous logical arguments.

      It’s a series of causitory events that have played out repeatedly throughout history.

  3. Extremism is especially tough when there are two extremes 180 degree’s apart staring over a deep chasm… What about some sanity for a change !!

    1. Jewish space lasers causing California fires, COVID19 is a hoax, vaccinations are a communist plot to control you and the universe of alternative facts emanating from the right are not 180 degrees off. They are the definition of insanity. The current extreme left is on par with Eisenhower who built the interstate highway system and Nixon who created EPA. Whereas the last Republican president tried to destroy the United States Postal Service.

    2. There is not 2 extremes. There is a Neo-Confederate Nazi extremist movement brainwashing a bunch of people to believe there are 2 extremes. You don’t even have to be the part of the extremism to be a part of the problem.

      1. Perhaps to give a little more context, in the US political spectrum when you remove the right wing extremist propaganda lens: you have right wing extremists which are the entirety of the Republican party with most of the party now representing a far far extreme and a small less extreme cohort (Cheney, Romney, Kinzinger). The few independents split between slightly right of center and left of center, but caucus with the Dems as they represent the non-extreme. The Democrats cover a broad spectrum of conservatives (Biden, Sinema, Manchin), moderates and left of center (Sanders, Ocasio-Cortez). There is no representation of a far left ideology in federal government.

        For reference issues that have a far left perspective:
        Nationalizing all industrial production
        Eliminating open markets
        Nationalizing financial markets

        There is no one in federal office promoting these Control Economy perspectives.

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