Congress has averted a government shutdown in October but the political circus will resume in mid November. The risk of a US and thus global recession has never been higher, this time the wolf is here. Why?
One, every major US recession since 1974 has been preceded by a sharp rise in oil prices. Brent crude was $70 in early June and is near $95 now. The onset of winter coincides with a 3 MBD supply deficit in the global wet barrel market as Saudi Arabia will not play ball with Biden. This is the ultimate regressive tax hike on the global consumers. Yet OPEC will not be spared when recession triggers another 50% crash in oil prices in 2024, a replay of 2008-09 and 2014-15.
Two, Janet Yellen is the pied piper of the soft landing, goldilocks gospel. Yet this was exactly her message as late as October 2007 while Ben Bernanke assured the world with his straight face that “subprime will be contained”. Bernanke is now a macro advisor to the Citadel hedge fund and hopefully his dud forecasts do not force the Powell Fed into a systemic hedge fund bailout, as Greenspan did with LTCM in 1998. The end game of Yellen’s softlanding calls have invariably been the ultimate hard landing scenario – recession.
Three, Milton Friedman became a Nobel Laureate in economics for his insight that monetary policy works with long and variable lags while its greatest impact is in the labour market, the most important variable in the path to recession since consumer spending is 70% of the US economy. A surge in the jobless rate precedes a deep dive in consumer spending. After a 5.25% rise in borrowing cost by the Fed since March 2022, the most draconian monetary squeeze since the Volcker era, California’s jobless rate has spiked to 4.3%. The Golden State is the canary in the Fed’s coal mine and leads the nation by 4 months.
Four, Fed monetary tightening cannot stop unless the core PCE falls to at least 3% but it is 4% now and thus double the Fed’s dual mandate target. The Fed cannot pivot to easy money until growth nosedives and the economy sheds at least 200,000 jobs every month. A terminal 6% Fed funds rate in this cycle is all too possible in 2024.
Five, the high priests of NBER determine the onset of recession. Their economic indicators are now flashing amber and will be red by the end of 2023. The United Auto Workers (UAW) strike has now expanded to 25,000 people in the picket line, an economic shock that will traumatize the long supply chains of Detroit. Student debt repayments are another economic shock, as is $90 West Texas oil and the bond market bloodbath, with the yield on UST 10 at 4.61%. China is mired in deflation and Germany in a credit crunch. European bank lending has contracted faster than it did after Lehman’s death dive and Club Med’s debt crisis.
Six, US bank lending growth has plummeted, the CRE faces a $1 trillion maturity wall and refinancing risk. Credit card delinquencies have spiked as have subprime auto loan default. God help us now.
Also published on Medium.
