Archive for category: #Capitalism #EconomicCrisis #Finance

Former Treasury Secretary Summers was one of the first economists to warn that federal policymakers were underestimating the threat of persistent inflation,

“Throwing Americans out of work with a recession is not the solution to fight inflation,” wrote Sen. Elizabeth Warren.

resident Joe Biden speaks during the White House Conference on Hunger, Nutrition, and Health at the Ronald Reagan Building in Washington, DC, September 28, 2022.

OLIVER CONTRERAS/AFP via Getty Images

• Inflation surged more than expected in September, raising new questions around the economy’s future.
• The Fed’s anti-inflation efforts haven’t worked, fueling speculation on rising interest rates.
• The White House could suffer ahead of midterms while Fed tightening could continue to affect stocks.

Some economic-data releases are hugely complicated, leaving experts and everyday Americans more confused about the country’s economic health.

But the September inflation report was crystal-clear in showing trouble ahead. Nearly every detail within painted a bleak picture of the country’s near-term future and made a self-induced recession even more likely.

The Consumer Price Index rose 0.4% in September and showed a year-over-year pace of 8.2%, both measures surpassing economists’ forecasts. Core inflation, which excludes volatile food-and-energy prices, jumped 0.6% last month, with a year-over-year gain of 6.6%. That marked the fastest core-price growth since 1982.

The details of the report were just as dire. Shelter inflation replaced food and gas prices as the biggest driver of headline inflation, accelerating to the fastest one-year pace since 1982 as well. Inflation for medical care and transportation services like airlines and mass transit also worsened throughout the month.

For the Federal Reserve, the new data makes its battle against inflation — which has included multiple historically large rate hikes — look futile. For the stock market, the prospect of further Fed tightening is a major headwind with indexes already near 2022 lows. And the White House now has to grapple with a fresh batch of negative inflation headlines mere weeks before the hugely consequential midterm elections.

Investors stare down a market reckoning

The stock market’s path through 2022 has been a simple one: If it looks as if the Fed will slow its hiking cycle, investors cheer and stocks rally. Conversely, signs that the central bank will keep tightening typically lead to sudden declines and fears of an economic downturn.

The first hours of Thursday’s trading session met that precedent. The S&P 500 plummeted as much as 2.4% soon after markets opened as investors read the report as a clear sign that the Fed will continue its hiking plans, though those losses reversed themselves by midday and stocks rebounded into the afternoon.

Options traders are now pricing in 0.75-point rate hikes for both the Fed’s November and December meetings. Such moves would firmly press the brakes on economic growth.

That leaves stock investors with a steep uphill climb through the rest of this year and 2023. Higher rates make borrowing more expensive for companies, which typically slows firms’ profit growth, and traders will set an even higher bar for companies to clear when they start announcing their quarterly earnings.

“These inflation numbers will be a major pain point for the markets. The coming earnings season would have to be doubly strong to offset the strong headwinds of will be an ever-aggressive Fed,” Yung-Yu Ma, a chief investment strategist at BMO Wealth Management, said. “Earnings season might not be bad, but being strong enough to reverse this tide will be a tough go.”

With several large rate hikes surely on the way, trading is likely to get more volatile before cooling down.

Strong inflation leaves the door wide open for the Fed to keep up its fast hiking pace

The September CPI read might’ve made investing a whole lot more complicated, but it makes the Fed’s decision process much easier.

Projections central-bank officials made in September already signaled the Fed would raise rates by another three-quarters of a percentage point in November before easing to a half-point hike at its December meeting. Market positioning heading into Thursday morning echoed that projection.

The new inflation data changed outlooks in a matter of minutes. Markets are now bracing for back-to-back 0.75-point hikes through the end of the year as well as continued hiking through early 2023.

“After today’s inflation report, there can’t be anyone left in the market who believes the Fed can raise rates by anything less than 75bps at the November meeting,” Seema Shah, the chief global strategist at Principal Asset Management, said. “Slowing growth yet rising inflation — the combination none of us, and least of all the Fed, want to see.”

With Fed officials consistently hinting that their tightening plans are far from complete, significantly higher interest rates are practically a given for at least the next year.

Worse-than-expected inflation endangers Democrats’ already-shaky election hopes

The Thursday report was the last opportunity for Democrats to win a surprise inflation cooldown they could campaign on through Election Day.

What they got was a worst-case scenario. Republicans already favored to wrest control of the House now have a new talking point that’s relevant to all Americans, and as campaigns enter their final sprints, surging inflation could even dent Democrats’ hopes to keep the Senate.

That likely dooms the Biden administration to a dull two years before the 2024 elections. Democrats’ fragile control of Congress allowed President Joe Biden to pass much of his legislative agenda, albeit with many packages slimmed down. Yet much of the blowback — from Republicans and moderate Democrats alike — centered around the policies putting more cash into the economy when inflation was on the rise.

With core inflation higher than it was at any point during the pandemic, Republicans are poised to push spending cuts and deficit reduction should they take the House. Chances at bipartisan policymaking will be few and far between, and until inflation shows clear signs of easing, the GOP will likely aim to reverse many of the White House’s recent victories.

Nouriel Roubini.

REUTERS/Rick Wilking

• Economics professor Nouriel Roubini warned the global economy faces a stagflationary debt crisis.
• Reckless borrowing has amplified the risks of stubborn inflation and economic stagnation, he said.
• Roubini, known as “Dr Doom”, predicted an imminent US recession and more pressure on stocks and bonds.

The debt-ridden global economy could face a punishing period of stubborn inflation, declining output, and higher unemployment, Nouriel Roubini has warned.

“The decade ahead may well be a stagflationary debt crisis the likes of which we’ve never seen before,” he said in a Time essay published on Thursday.

Roubini, an economics professor at NYU Stern, is nicknamed “Dr. Doom” for his dire predictions. He noted that over the past 60 years, whenever the Federal Reserve has tried to crush US inflation north of 5% when unemployment was below 5%, the result has always been a “hard landing” or recession.

US inflation was 8.2% and unemployment was 3.5% in September, the economy has shrunk for two straight quarters, and the labor market appears to be cooling. As a result, Roubini expects a full-blown domestic recession by the end of this year.

The veteran economist sees similar challenges around the world. He emphasized that private and public debt, as a share of global GDP, has soared from 200% in 1999 to 350% today. Meanwhile, several of the world’s central banks are quickly hiking interest rates to counter surging inflation, making those debts more onerous.

“Rapid normalization of monetary policy and rising interest rates will drive highly leveraged households, companies, financial institutions, and governments into bankruptcy and default,” Roubini said, flagging the risk of “massive insolvencies and cascading financial crises.”

This “debt trap” means that if financial markets seize up and the global economy slumps into a recession, central banks and governments will have limited scope to help without fueling inflation or squeezing debtors, he added.

Roubini noted that tighter monetary policy is already taking its toll. “Bubbles are deflating everywhere — including in public and private equity, real estate, housing, meme stocks, crypto, SPACs, bonds, and credit instruments,” he said. “Real and financial wealth is falling, and debt and debt-servicing ratios are rising.”

If central banks balk at the impact of their policies and “wimp out and blink,” the result could be persistent inflation and economic decline, Roubini said. He highlighted several other stagflation drivers, including greater protectionism, reshoring, and xenophobia. Ageing populations who spend instead of save, the supply disruptions caused by Russia’s invasion of Ukraine, and climate change also made his list.

Finally, Roubini offered some advice to investors navigating a tough market. He warned that stocks and long-term bonds could nosedive, and recommended short-term and inflation-indexed bonds, gold and other precious metals, and disaster-proof real estate as better bets.

Read more: Cathie Wood says most investors will be missing out on ‘unbelievable opportunities.’ She explains why disruptive innovation will scale from less than 10% of the stock market to more than 60% by 2030, and shares the areas she’s most excited about.

The Federal Reserve is finally on the right path when it comes to fighting inflation, but it’s likely to result in a painful economic contraction, says Robert Rubin

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• The risks of prolonged inflation and a global recession are growing, according to S&P Global in a note.
• S&P predicted stocks could plunge as much as 14.5% by mid-next year as inflation remains sticky.
• “Monetary tightening beyond current expectations could lead to a deeper-than expected recession.”

The risks of a longer period of inflation and a global recession are rising, and US stocks could plunge another 14% by mid-next year, according to S&P Global. 

“The potential for a prolonged period of rising inflation and low economic growth is increasing,” S&P Global analysts said in a note on Wednesday. “If the Fed’s ongoing efforts to curb inflation fail, the US economy could face a hard landing, and monetary tightening beyond current expectations could lead to a deeper-than expected recession.”

Warning signs continued to flash on Thursday morning shortly after the release of the September Consumer Price Index report, which shows inflation coming in hotter than expected. Headline CPI clocked in at 8.2% and core-inflation reached a 40-year-high.

The high inflation reading is setting expectations for another aggressive rate hike by the central bank, which Wall Street pundits have warned could bring a serious recession and create more headwinds for stocks. JPMorgan CEO Jamie Dimon predicted last week a recession will hit in six to nine months, and stocks could plunge another 20%. Others foresee an even steeper downturn, and top economist Nouriel Roubini warning of a stagflation ary-debt crisis and a 40% sell-off in the stock market.

In addition to stalling the US economy, Fed tightening threatens other economies, as a strong dollar exports further inflation abroad as it surges against rival currencies. 

In particularly, energy-strapped Europe is a concern, as the war between Russian and Ukraine is likely to drag on, which will exert more strain on the supply for energy markets and drive prices even higher.

The research firm estimated that the Fed could raise the fed funds rate to at least 5%-5.25% by mid-next year, and will likely stay “higher for longer” compared to current expectations – which could lead stocks to plummet as much as 14.5% by mid-2023, analysts warned. 

Wharton professor Jeremy Siegel is a long-time market commentator.

REUTERS/Steve Marcus

• Not even September’s stubbornly high CPI report could change Jeremy Siegel’s view that the Fed needs to stop hiking interest rates.
• Siegel told CNBC on Thursday that the Fed’s focus on lagging indicators is setting the economy up for disaster.
• “If the Fed waits for the core to get down to 2% year-over-year, it will drive the economy into a depression,” Siegel warned.

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The release of September’s CPI report on Thursday showed that inflation remains stubbornly high, but that’s not enough to convince Wharton professor Jeremy Siegel that the Federal Reserve should continue with its aggressive interest rate hikes.

In fact, Siegel warned that the Fed’s overreliance on lagging inflation data could set the economy up for a disaster.

“If the Fed waits for the core [inflation] to get down to 2% year-over-year, it will drive the economy into a depression,” Siegel told CNBC on Thursday. 

Siegel highlighted that leading inflation indicators are coming down substantially, especially in the housing market, but that won’t flow through official government inflation readings for months, if not years. “When will it get into the core? Months if not years down the line,” Siegel said. 

September’s CPI report showed prices rose 0.4% month-over-month and 8.2% year-over-year, ahead of expectations for a respective 0.2% and 8.1% increase. 

“I am not at all surprised by the number because the number is ridiculous. It has no meaning to what the actual rate of inflation is. Housing, which is almost 50% of the core rate, is the most distorted of all,” Siegel explained.

The professor highlighted that the rate of increases in rent prices has slowed dramatically compared to last year, and he now expects housing prices to fall up to 15% from current levels as activity in the real estate market slows due to higher mortgage rates.

Siegel thinks the Fed is on the verge of going overboard with its monetary tightening policy. In addition to ongoing reductions in its balance sheet, the Fed is expected to raise interest rates by 75 basis points in both November and December following the September CPI report.

Those rate hikes would go too far in his opinion, and the Fed only has room for one more 50 basis point rate hike. “I think we’re at a very tight moment now. I’d give them another 50 basis points, but if they do 75 [in November and] 75 [in December] and then move into 2023 with continuing with it, they’re going to go overboard,” Siegel said. 

Much of the conundrum the Fed finds itself in is due to the fact that the pendulum of their monetary decisions has swung too far to one side during the pandemic. Now it’s swinging to the other side.

In other words, the Fed was too easy for too long 0% interest rates during the pandemic and into early 2022, at a time when inflation was showing signs of increasing. They should have tightened sooner, according to Siegel. Now they’re over correcting with interest rate hikes as inflation is high, but is leading indicators show signs it is falling.

And that overcorrection is what could send the US economy into more than just a recession—which is already expected by many commentators—and into a depression. 

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Blog / 13th October 2022