There may be no soft landing, as a snapshot of US indicators shows the economy in free fall.
Sentiment indicators have either crashed or are currently bouncing around the bottom.
Consecutive Fed rate hikes in 2022 have tipped the world’s largest economy into freefall.
In December 2022, the US Business Confidence Index (BCI) stood at 99.05
A decrease from the previous month, and continues a downward trend that began at the end of 2021. No one believes the fake part-time job numbers. More people are out of the workforce at any point in US History, with
job productivity, its lowest level since 1974. The economic collapse could be coming, despite the cooked part-time job numbers.
“Consecutive Fed rate hikes in 2022 have tipped the world’s largest economy into freefall”
Sentiment indicators red flag an economy in freefall
Consumer Confidence Index decreased in January following an upwardly revised increase in December 2022. The Index now stands at 107.1 (1985=100), down from 109.0 in December (an upward revision).
The spiraling cost of credit is pricking the real estate bubble, and with the economy in free fall, a tsunami of bad loans could lie ahead
The last shoe to drop, a real estate crash, is in play.
Central banks have in cahoots hiked rates to crush consumption to put out the inflation fire.
But with Fed fund rates now at just 4.5%, what this means for US households is that the cost of servicing a typical variable rate mortgage has skyrocketed to 56.25% in one year.
This meant that the monthly mortgage payment for the typical $380,000 loan rose from $1,600 per month to nearly $2,500, dramatically limiting the number of households that could finance a house purchase, according to an ING think tank.
“The last shoe to drop, a real estate crash, is in play”
So the current Fed rate of 4.5 to 4.75% is accelerating the economy into freefall and a potential financial crash, bearing in mind the crux of the 2008 financial crisis was a crisis in the mortgage back bond market.
Households are being crushed from every angle, unless conditions improve an economic collapse could be dead ahead.
Food hyperinflation is visible as coffee and eggs prices doubled since 2022. Non-discretionary items, food, accommodation, medicine, and transport costs are all in double-digit inflation, and further interest rate hikes will do little to tame the hyperinflation in non-discretionary items.
Further rate hikes with an economy in freefall could trigger a currency crisis
Already a few countries are experiencing a currency crisis, including Turkey and the UK.
When the BoE raised the interest rates last week to 4%, GBP cratered by more than 1%, which is an early indication of a currency collapse. Typically, a currency should rise when the central bank raises rates. Higher rates attract global capital inflows.
“When foreign investors sell gilts, GBP is sold and the currency depreciates on the Forex” – Win Investing
So why did GBP fall when the BoE raised interest rates?
The largest borrower is the government and Gilt investors are fretting about the country’s capacity to service the debt, and payout yield payments on the bonds, in a backdrop of declining tax revenue in what could be a steep recession for the UK.
When foreign investors sell gilts, GBP is sold and the currency depreciates on the Forex.
The above scenario is also playing out in the eurozone, the heavily indebted peripheral states with a large public sector cannot afford higher interest rates, particularly in a declining economy. Moreover, the engine of the eurozone Germany is deindustrializing due to high energy costs. Productive economies with large industries fold without access to an abundant supply of affordable safe energy. For Europe, there may be no alternative to Russian gas. The Chernobyl disaster of 1986 is a case study of what happens when an area becomes contaminated with radiation. The ghost city of Chernobyl, the mutant animals where the radiation makes it unsafe for humans for at least twenty thousand years highlights the danger of using nuclear fuel for civil and military purposes.
Depleted Uranium (DU) weapons used in the Iraq War, half the veterans are dead, and there are many birth defects.
But back to an economy in freefall, the surge in mortgage rates has resulted in a steep drop in home buyer demand while the supply of homes for sale is on a gradual rise. As a result, home prices are now falling in every major city. With house price-to-income ratios remaining stretched by historical standards, further large falls are expected.
So the Fed Chair knows the US economy and those within its orbit, cannot keep afloat without stimulus.
Darren Winters wrote in a piece entitled, Currency Crisis,
Powell stated that the economy would not know how to function without stimulus measures because those measures had been active for so long, according to the October Fed meeting of 2012.
“The current interest payment on the 31 Trillion USD public debt is more than 500 billion USD, the fourth most expensive budget item” – Win Investing
With the world’s largest economy in free fall, the central bank liquidity cycle could have reached a trough
Investors are already gauging the early stages of the Fed’s great pivot, which could be in play. Fed fund rate hikes are declining from 75 bps, 50 bps, to 25 bps points, So risk assets are recovering with NASDAQ, experiencing its best month in January since 1975.
The writing is on the wall, US households and the government cannot afford expensive credit, and the Fed head knows it.
The current interest payment on the 31 Trillion USD public debt is more than 500 billion USD, the fourth most expensive budget item.
Moreover, expanding the debt ceiling means increasing the debt, which will increase the supply of treasuries, and unless the Fed does QE, and buys the treasuries, yields will rise.
Households and the government are already struggling to service the debt.
The Fed will not slay the golden goose, its debt model
Buying cheap means when central bank liquidity is nearing a trough and investor psychology sentiment is moving away from depression.
The seeds of the next bull market, a short cover rally as the bears scramble to ditch their shorts, could be underway.
Buyers will come when we see a conclusion to the war in Europe.
Meanwhile, investors remain depressed and on the sideline, which is why Dalio thinks cash, USD, is king.