We Are In a Recession By Design
No Matter How You Slice It
Parts of this are reprints from prior posts
Today we read an article by Simon White of Bloomberg Markets entitled Fed Just Getting Started As Economy About To Slow
There is currently ~80% chance the Fed does lift rates by 50bps in May, and there are now over eight 25bps hikes priced in over the remaining six meetings of 2022. It seems, though, that the Fed is just gearing up its tightening as the economy is about to slow.
This is the closest that the legacy media has come to admitting there is a recession. What Simon did was not easy we'd wager. Allow us to pick up the baton. We are in a recession. That is why a yield curve inverts. The Fed doesn't want a recession. They need one. Call it collateral damage of needing to get inflation under control.
'Recession is Half Our Mandate'
Remember when Powell said "Inflation is half our mandate"? He immediately tried to correct himself saying "price stability is 1/2 our mandate" But it was too late. Watch the clip.
We are here to say recession is their mandate now. But they cannot say it. Why is it their mandate? Because price stability is the actual mandate. What they feared a year ago was price instability on the deflationary side. Now, they fear price instability on the inflationary side. The yield curve proves it.
The current yield curve inversion is largely a result of 3 very real economic factors- inflation, rising rates, and geopolitical turmoil; all of which we have right now. Restated: Inflation (shrinks profit margins), rising rates (less investment capital available), and war (misdirected resources/restricted trade) are recessionary. Inverted yield curves are the market taking those risks seriously. We are in recession.
100% of the time so far...
Curves invert because market participants are in aggregate and for differing reasons; independently coming to the conclusion the economy is slowing. Either that changes very soon, or we are almost certainly in one right now. If commodity prices don't come down, it will be a massive stagflationary recession. This is the opposite of the Goldilocks economy.
They Need a 'Small' Recession
It is our contention that an inverted yield curve is a manifestation of recession risk being realized, not a cause of one if (when) it comes. Here's the Fed in their recent publication (Don't Fear) The Yield Curve, Reprise explaining that fear of an inverted yield curve can cause a feedback loop and create a recession.
Nevertheless, as FDR might have pointed out, it can only make things worse if investors not only fear the prospect of a recession, but at the same time, are spooked by that fear itself, which is mirrored in inverted term spreads.
The Fed therefore intimates the inverse: Not looking at the yield curve will reduce fear and may reduce the risk of recession. As if the reality would cease to happen if we just didn't look. We say nonsense. The curve predicts nothing. The curve discounts the realization of a recession.
Fed said not to look...
We are already in a recession, they know it, and just don't want it to get ahead of itself before they finish their hiking cycle. They need to instigate a recession before the markets overheat. Sadly, a majority of the public has been eviscerated of intelligence to the point that our fearless leaders are scared to admit it. Job security and group think is why the Fed is scared to tell those leaders the truth.
They need price stability. And that is fine. Say it. We know there's a war in Europe and China is screwing with supply side economics. Just say it. Fighting inflation is risking recession. Otherwise, they learned nothing from their "transitory" error.
Yield curve inversion is not a driver of the economy. Inversion is the result of economic realities already manifest by other coincident indicators. In this case: Inflation, rising rates, and war have caused the yield curve to invert. This is a controlled takedown.
If The Yield Curve Inverts, There Has To Be a Reason
The collective actions of participants in the economy are why the yield curve inverted. We are in a recession right now. Bonds are a slow moving juggernaut of all digested information in the world. The yield curve is affected when global market participants for differing reasons in different time frames telegraph recession by their actions.
Yield curves don't predict, they react...
The inverting yield curve for our money is not a cause of recession. It is indicative of one baked in. Inflation, Hawkish Banks, and Global turmoil are the antecedent causes of curve inversion. The yield curve is simply reflecting ( to use the Fed's own mirror metaphor) those very real weights on the economy.
Either We Get a Recession or Spiraling Inflation
If the curve doesn't un-invert immediately we are virtually guaranteed a recession. To the extent that it gets “normal” again, that indicates how long the recession or how bad it can be. Make no mistake. The economy needs a recession. The alternative is wage-price spiral inflation. But they cannot tell you that. If they did, the wage-price spiral thing would be an even greater “reverse-causality” risk. There have been only 2 times in the past 75 years the classic yield curve inverted and we did not get a recession (see pic below). One of those exceptions was before leaving the Gold standard. Source
More Bloomberg Data:
On average it takes around three years from the first Fed hike to recession. However all but one of the recessions inside 37 months (essentially three years) occurred when the 2s10s curve inverted before the hiking cycle ended. Source
The Fed Fears Inflation More Than Recession
Supply-side inflation that is untameable by monetary policy alone can in turn feed wage-price spirals. Wage price spirals lead to self-reinforcing behavior as companies raise prices. That bakes in a more permanent perception of inflation. This is what the Fed correctly fears.
Restated: If this supply-chain driven inflation cannot be gotten under control, then wage-price inflation starts accelerating as people demand more money (strikes, quits etc) to make ends meet. Otherwise, why work? This in turn creates a self-fulfilling inflationary prophecy and people start chasing prices higher. Like FOMO but for survival. These wage-price spirals do not stop until they break economies historically.
Wage-price Spiral Inflation Risk Higher Unemployment and Bigger Recessions…
So, eventually after a wage-price spiral kicks in, unemployment rises precipitously because profits cannot keep up. Therefore the Fed has two choices now. Keep steepening, or long term rates have to rise.
Powell needs a recession to keep his job, Biden needs a recession to have any hope of winning midterms, and the West needs a recession to have any chance of breaking Putin. We are in one right now. Why else would the market already be discounting lower rates right after the hiking cycle is done? Call it the Covid recession part 2. Either we get the full recession, or we get much worse inflation.
Measured from beginning or end of hike cycle, using 2s/10s or T-Bill/30 year. No matter how you slice it, we are in a recession.