16. Beyond the Balance Sheet
The general consensus today is that the economy is in for "a soft landing," which means economic activity will slow but not turn negative. If economic activity were to be negative for two consecutive quarters, it would be viewed as a recession. Although a few economists think we still may go into a recession, they are saying it will be mild and expect a strong comeback later in the year. Is this majority view correct?
On the positive side, the economy has had two successive quarters of very high non-farm labor productivity. With a long-term average of 1.5%, the economy’s labor productivity hit 3.5% and 4.7% sequentially. Biden had averaged until two quarters ago barely 1%. Also, on November 30, the Chicago PMI for manufacturing unexpectedly jumped to 55%, up from 44%; above 50% is out of contraction. Also, on December 8, labor net hires were 199,000, and unemployment dropped from 3.9% to 3.7%, certainly not suggesting a recession. Additionally, last week, Michigan consumer sentiment came in much higher than expected at 69, reversing a four-month downward trend. All these indicators confirm the recent consensus opinion that the economy would have a soft landing. But will it?
Early in 2023, the consensus opinion was that the economy would fall into a recession. Today, on December 14, 2023, after a core CPI of 4%, a core PPI that declined from 2.71% to 2.44%, and Fed speak that has indicated likely three reductions of rates in 2024, the consensus opinion on the economy is that we will have a soft landing and, in the worst case, a mild recession. This is a presidential election year, and the party in power will make every effort to continue spending borrowed money to avoid a recession, even if the consequences of that borrowing will be negative and felt later.
Here at Sunshine and Transparency, this is what we see in the cards for 2024: 1) We are going further into debt at the mind-boggling rate of $79,000 a second, and over $10 trillion of the $33.9+ trillion will have to be refinanced in 2024, at a cost above 4%, raising the total interest cost in calendar ’24 to near a trillion! 2) The inverted yield curve between 2yr govt. debt and 10yr gov. debt has persisted for nearly two years along with the inversion between Fed funds(the overnight rate) and two-year debt. This means that the interest rates of the shorter-term debt in both cases are higher than the interest rates of the longer-term debt, which is the opposite of what you see without Fed intervention. When these two inversions persist for about two years, there is an 85% chance the economy will recess. The leading indicators have been negative for 19 months. 3) The ISM manufacturing index has been below 50% in recession territory for 12-14 months. The December 1 reading of ISM was 41.7%. 4) Excess household savings in 2021 were 2.1 trillion due to Trump's injection of four trillion in 2020 and is now less than $400 billion and will run out in the first quarter. The excess savings along with increased wages have been propelling consumer spending, keeping the economy growing to date. 5) Gross Domestic Product (GDP) grew at 4.7% in the third quarter, but when you take out government, teachers, military, and medical (50% paid by government), the growth was 3.3% and declining. 6) Gross Domestic Income (GDI) usually parallels GDP; however, last quarter, they diverged. GDP went up, and GDI went down, underscoring a disconnect between consumption and spending. 6) After a 28% rise in M2 (money in circulation) in 2021 orchestrated by Powell and leading to inflation in ’22 with a one-year lag, we have had a decline of about 4% in M2 in ’23 with another one-year lag; this should constrict capital in ’24. 7) For the last year or so, the Fed has stopped printing money for the first time since Ben Bernanke came into office in 2004. Since 2004, their balance sheet composed of bonds, the Fed had purchased in the market grew from about $450 B to $8.9 trillion. In mid-'22, the Fed stopped printing by buying bonds. When bonds on their balance sheet matured, the treasury sold new debt to replace the retiring debt, causing two things to occur: as bonds come due, the Fed balance sheet shrunk from $8.9 trillion to $7.3 trillion as of 12/14, leaving foreigners and our banks to purchase all US debt issuance. Secondly, the monies received by the Fed when a bond held by them came due are significantly less than the money they paid for the bond. The Fed’s losses in receiving significantly less than they paid surpassed $100 billion in September of this year and counting. 7) Defaults on credit cards and car repossessions have significantly picked up recently.
Most analysts thought consumer spending would run dry this year, underestimated the tremendous amount of debt Trump issued in 2020 due to Covid, and the extent it increased household savings. They also underestimated the extensive amount of debt spending Biden has legislated, which will surpass Trump's $7.5 trillion addition to our debt this year. Therefore, the analysts made early calls for a recession in 2023. That money has led to a boom in consumer spending and is about to run out. That coupled with the horrific debt spiral that is not being addressed and the Fed not printing money to pay for the debt treasury issues (the self-licking ice cream cone) look to cause a recession in the first half of ’24, and the markets are in a topping face with DOW already setting a high and SPX within 1% of a high and Nasdaq within 5% of the highs made at the end of 2021.
A recession could be averted, but you would expect to see Congress moving to mitigate the huge annual overspending and the deficit; you don’t. Although a few Congressmen talk about the debt, the two major presidential candidates, Biden and Trump, are promising no cuts before the election, and no one is talking about constructive tax revisions. A recession could be postponed by adding more short-term debt spending to the hole we are in, making the eventual recession more severe. The next few years promise to be the most challenging seen this century, and when we recess, there will be no guarantee it will be short, particularly with the unaddressed borrowing needs we have, which worsen every month and go unaddressed. I would expect a recession by April of ’24, and after making a nominal high, I expect the markets to sell off by April at the latest. The sell-off could start sooner.
Have a blessed week!
Tony Christ