ISMS 3: Will the US Have a Recession or a Soft Landing?
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Never has the US gov’t caused such a massive move in GDP. The question is, “which way is GDP going?” Will we see a recession or a soft landing?
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Reasons for a recession
- Extreme increases in interest rates are meant to slow down the economy
- The fastest rate-hike cycle by the Fed since the 1980s
- In the 2004 cycle, the target rate was hiked by 4.25% in total
- Same as in the current cycle, but it has now been done much faster
- The massive rise in mortgage rates is dramatically slowing the property market
- This, in turn, leads to crashing prices, which will make people feel less wealthy and hold them back from spending
- The yield curve has inverted, which has perfectly predicted prior recessions
- All recessions in the US since 1968 were preceded by an inverted yield curve
- The average time from inversion until the recession started was about 1 year (about mid-2023)
- The surge in spending supported by gov’t handouts is working itself out of the system
- Since 2Q21, households have demonstrated stronger than usual spending behavior
- Strong wage growth has contributed to more savings in 4Q21 onward
Reasons for a soft landing
- High employment means the economy is robust and can withstand the rate hikes
- Companies are highly profitable, which will allow them to bear a slowdown more easily
- Companies are sitting on tons of cash
- Individuals slowed their spending in anticipation of an economic slowdown
- Democrat party leadership will pump things up (e.g., strategic petroleum reserve)
- US banks are in a strong position, holding lots of cash and gov’t bonds
- Reducing the risk of a financial sector crisis that would exacerbate an economic crisis
- At the end of 2021, the banks had nearly 40% of their assets in cash and securities
- Compared to 13% at the end of 2007
- Gov’t spending is going to be crowded out by borrowing interest payments
- And then politicians will pressure the Fed to cut rates
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