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Assets Not Pricing ‘Inevitable’ Recession, Former Dudley Employer Says
Inevitably, Bill Dudley's "inevitable" recession call prompted pushback from some market participants and served as an excuse for analysts to deploy various models in an effort to determine if, in fact, an economic downturn in the US is now a foregone conclusion.
Earlier this week, in an Op-Ed for Bloomberg, Dudley blamed the Fed for inflation and suggested a soft landing is all but impossible. It wasn't a wholesale indictment of flexible average inflation targeting (AIT). Rather, it was an ind
https://www.denverpost.com/2008/01/09/goldman-sachs-forecasts-recession-in-2008/amp/
https://www.federalreservehistory.org/essays/great-recession-of-200709
Just thought some history could be helpful. Essentially, economists are bad at predicting recessions until we’re in one. Let’s piece things together, in Dec 2007, the recession that led to the GFC started. In Jan 2008, economists didn’t know we were in a recession, but started to forecast that a recession was 40% probable. Markets didn’t know/reflect we were in a recession until the Lehman Brothers bankruptcy in Sept 2008.
Lets confess that if you are Goldman, there are incentives to downplay recession, but if you are ex-NY Fed you are free to speak the truth. It sounds so obvious that it actually is embarrassing to write it here.
Things are changing so fast- we are going to have a truncated cycle this time is my outlook. What is that worth- not much. I have an itchy trigger finger to reduce equity allocations for my clients. It boils down to risk management and risk adjusted return. It may not be the right move but if I do it I will not second guess myself.
This comment from Kevin Warsh from about a year ago is interesting and in hindsight he probably would have provided better leadership at the Fed, but, trump picked Powell instead and here we are with QE rolling on like the Columbia river.
“The longer they wait, the more expensive it will be. The bigger shock it’ll be to markets, the bigger risk that it’ll be to the real side of the economy.
“My guess is we’re going to see increases both in volatility, as well as in the volatility of volatility, as we’re racing through the next 12 months with a series of facts that we can only hypothesise now.
“But if I look broadly across assets, I would say our governments have been trying to bid up asset prices for most of the last dozen years, especially over the last 12 months or so.”
What seems obviously ridiculous in retrospect is that the pandemic recession started and ended in 3 months, in terms of how that was measured.
If there were ever any doubts that economic measurement techniques were broken or manipulated, that quantum fast crisis fix is absolutely absurd. Regardless of that stupidity, it set the stage for the naive chit chat of inflation being transitory and the illusionary belief that the V-recovery was not a distorted anomaly.
As the Fed bought into their excellent policy execution and buried their collective heads as far as possible into the sand, they instead focused on which ties to wear, what tint of makeup to wear and which noncommittal words to use to defend themselves.
Apparently, sometime after the recession was over in June 2020, thought must have been given to unwinding stimulus, especially for banks or large entities that may not have needed full life support?
It’s possible that the Fed, during mid 2020 was simply going about fulfilling statutory obligations connected to the Cares Act, and as with TARP before it, they were doing as congress mandated?
Nonetheless, within all the bureaucratic politically poisoning interlaced in these messes, it should have been obvious that inflation was being swept under the rug. That was a process and choice and it was deception and it was mismanaged if not corrupt. It was criminal to not plan ahead for where we are today.
Getting technical, historical measures that use 3 mo yield are suspect because in prior pre-recession periods, Fed was not holding FF and thus 3 mo at or near ZLB.
More broadly, look at how quickly Goldman’s model goes from very low probability of recession to very high probability. It sits at very low for years, then goes near-vertical to very high in a very short time. It’s almost binary. It would be interesting to see: when the model flips from “nothing to worry about” to “be very worried now”, has the market already rolled, or is the roll to come?
At the end of the day, we’re (ok, some of us) not actually interested in forecasting recessions, we’re interested in forecasting the bear markets that typically begin before the recessions are apparent.
The concept that the Fed has around 900 super smart economic gurus, who all missed the inflation possibilities, had me think this is another example of monkeys at keyboards.
From a Wikipedia scan, this comes up:
“For Jorge J. E. Gracia, the question of the identity of texts leads to a different question, that of author. If a monkey is capable of typing Hamlet, despite having no intention of meaning and therefore disqualifying itself as an author, then it appears that texts do not require authors. Possible solutions include saying that whoever finds the text and identifies it as Hamlet is the author; or that Shakespeare is the author, the monkey his agent, and the finder merely a user of the text.”