Ambrose Evans-Pritchard suggests that a recession might be on the horizon again and Fed decisions are critical: “The risk of a US recession next year is rising fast. The Federal Reserve has no margin for error.
Liquidity is suddenly drying up. Early warning indicators from US ‘flow of funds’ data point to an incipent squeeze, the long-feared capitulation after five successive quarters of declining corporate profits.
Yet the Fed is methodically draining money through ‘reverse repos’ regardless. It has set the course for a rise in interest rates in December and seems to be on automatic pilot.
“We are seeing a serious deterioration on a monthly basis,” said Michael Howell from CrossBorder Capital, specialists in global liquidity. The signals lead the economic cycle by six to nine months.
“We think the US is heading for recession by the Spring of 2017. It is absolutely bonkers for the Fed to even think about raising rates right now,” he said.
The growth rate of nominal GDP – a pure measure of the economy – has been in an unbroken fall since the start of the year, falling from 4.2pc to 2.5pc. It is close to stall speed, flirting with levels that have invariably led to recessions in the post-War era.
“It is a little scary. When nominal GDP slows like that, you can be sure that financial stress will follow. Monetary policy is too tight and the slightest shock will tip the US into recession,” said Lars Christensen, from Markets and Money Advisory.
If allowed to happen, it will be a deeply frightening experience, rocking the global system to its foundations. The Bank for International Settlements estimates that 60pc of the world economy is locked into the US currency system, and that debts denominated in dollars outside US jurisdiction have ballooned to $9.8 trillion.
The world has never before been so leveraged to dollar borrowing costs. BIS data show that debt ratios in both rich countries and emerging markets are roughly 35 percentage points of GDP higher than they were at the onset of the Lehman crisis.
This time China cannot come to the rescue. Beijing has already pushed credit beyond safe limits to almost $30 trillion. Fitch Ratings suspects that bad loans in the Chinese banking system are ten times the official claim.
The current arguments over Brexit would seem irrelevant in such circumstances, both because the City would be drawn into the flames and because the eurozone would face its own a shattering ordeal. Even a hint of coming trauma would detonate a crisis in Italy.
To be clear, the eight-year old US cycle has not yet rolled over definitively. The picture remains fluid, hard to read in a world where key signals have been distorted by central bank repression. The third quarter will almost certainly look a little better.
“We are getting closer and closer to a recession, but we are not quite there yet, looking at our forward-indicators,” said Lakshman Achuthan from the Economic Cycle Research Institute in New York.
“I can understand why people are getting worried. We have been seeing a ‘growth-rate’ cyclical downturn for the last two years. The longer this goes on, the less wiggle room there is,” he said.
“We are sure there will be no recession this year or into the first two months of 2017, but beyond that there are worrying signs. The deterioration of our leading labour market index is very clear,” he said.
Mr Achuthan thinks it is still possible that US growth will pick up again for another short burst – lifted by a global industrial rebound of sorts – before the storm finally hits.
That was broadly my view earlier this year as the global money supply surged and a string of governments seized on Brexit to crank up stimulus, but what is striking is how little traction it has achieved.
The velocity of M1 money in the US has continued to slow, hitting 40-year low of 5.75 over the summer, and markets are only just awakening to the unsettling thought that China’s latest boomlet has already topped out. Beijing is having to hit the brakes again.
Crossborder said new rules for money market funds that came into force this month have complicated the picture, causing the stock of US commercial paper to shrivel by $200bn. Yet there are ways to filter out some of these effects.
The plain fact is that 3-month lending rates in the off-shore ‘eurodollar’ markets in London have tripled since July to 0.93pc, sharply tightening conditions for global finance. Investors may have been too complacent in discounting these gyrations as part of a regulatory hiccup when something more sinister is emerging.
CrossBorder’s liquidity measure for the US is now at levels comparable to the inflection point a few months before the US recessions of 1990 and 2001, and before the recession starting in November 2007 – and a whole year before Lehman Bank collapsed, nota bene.
Albert Edwards from Societe Generale says gross domestic income (GDI) was the most accurate gauge of the economy as the pre-Lehman crisis unfolded, and this measure has been flat for the last two quarters.
“The pronounced weakness of GDI relative to GDP might be an ominous omen, for it may well be indicating that a US recession is already underway – just as it was in 2007,” he said.
It is certainly odd that the Fed should tighten into these conditions. The unemployment rate has risen to 5pc after bottoming at 4.7pc in May, and small business (NFIB) hiring plans have been flashing soft warnings for months.
“The Fed wants to get ahead of the recovery, and unless this is checked, it will lead to recession,” said David Beckworth, a monetary economist at George Mason University.
Prof Beckwith said the US economy is still reeling from the shock of a 20pc rise in dollar’s trade-weighted index since mid-2014. This in turn is squeezing the world’s ‘shadow-dollar’ nexus.
The Fed faces horrible choices, of course. The longer it delays rate rises, the longer it perpetuates the deformed asset-bubble economy that so disfigures modern polities, and the louder the rebukes from Congress.
Critics are quick to note that price pressures are building, or at least appear to be. The Atlanta Fed’s index of 12-month ‘sticky price‘ inflation has reached 2.6pc, higher than nominal GDP growth itself. Call it ‘stagflation’ or the misery mix.
Yet you can pick your inflation measure to tell any story. The Dallas Fed’s trimmed-mean PCE – supposed to eliminate noise – actually peaked in June and has since been slowing on a six-month basis.
And it is – or should be – a cardinal rule of central banking that you never raise rates in response to rising energy costs. Oil spikes are not in themselves inflationary. They are neutral.
The truth is that nobody knows whether this is the start of a sustained reflation cycle, or just the last feeble flicker before America, Europe, and East Asia are swallowed into a deflationary vortex, the frozen circle from which there is no easy exit – ‘lasciate ogni speranza, voi ch’entrate’.
What we do know is that the Fed cannot afford to get this wrong, as it did with such calamitous consequences from March to August 2008, when it talked tough on an inflationary danger that had already peaked and passed, tightening policy into the hurricane.
As we now know – and some warned at the time – the US economy had already buckled. The result of Fed sabre-rattling in those crucial months was the collapse of Fannie Mae, Freddie, Lehman, and the Western banking system.
Stanley Fischer, the Fed’s vice-chairman, conceded in a grim speech this week that the Fed has now run out of ammunition and that this “could therefore lead to longer and deeper recessions when the economy is hit by negative shocks.”
His prescription is to try sneak in a few rate hikes while it is still possible to create a buffer. Market monetarists say this is profoundly ill-advised, and may instead bring about exactly what he fears.
A President Hillary Clinton could and certainly would flood the economy with fiscal stimulus if need be. Yet this takes time. There are few ‘shovel-ready’ projects, and Washington is a fractious place. She may face a hostile House. The monetary crunch would have crystallized long before anything fiscal could be done.
The world will not end if premature tightening pushes the US into recession next year. But why court fate?
Massachusetts launched a new (modest) fee within the transportation industry with the stated attempt at modernization. But this isn’t that at all. It is a nickel taken for every transaction from one group of companies, and the proceeds will benefit another group of companies — their own competitors.
This new fee is imposed on “transportation network companies, or TNCs, such as Uber, Lyft, and Fasten. When Governor Charlie Baker signed a law earlier this month regulating TNCs, it included a little-discussed component. For every trip, the TNCs will have to contribute a nickel to a new fund to support modernization, training, and improvement of the taxi and livery industry. The 5-cent fee will stay in effect until the final day of 2021.”
Imagine having to involuntarily contribute to a fund whose stated purpose is the very companies/industry with whom you compete! That’s exactly what is happening here. It’s estimated that the nickel fee will generate about $15 million in revenue over the next few years, collected by Mass Development, the state economic development agency.
What’s worse is that there is no actual plan on how the money will be spent support modernize, train, and improve the taxi and livery industry — it’s still up in the air. But since the fee is now a given, this article here gives a wealth of interesting suggestions for the agency; it simultaneously exposes the fact that the Massachusetts bureaucrats are engaging in crony capitalism at its finest. Why is the government in the business of picking winners and losers among businesses?
With the insurance enrollment period ending in mid-December, Healthcare.gov announced that 8.2 million Americans selected plans for 2016 in 38 states. The Administration is touting the 8.2 figure as a “success” by comparing it to the 6 million plan selections by the same time last year. There was no mention, however, of how the 8.2 million number falls exceedingly short of the 21 million projected to be Obamacare users.
One amusing point is how the Administration parsed its words. “Plan selection” is an important phrase in Obamacare-speak. It means that many people chose these plans, filled out the forms, and submitted them — but did not necessarily pay for them. This is why they didn’t use the term “enroll” when describing the Obamacare figures. In order to be considered to be actually enrolled, one must pay the first month’s premium. Not everyone will actually go ahead and pay their premium, and the federal Obamacare numbers will inevitably be even smaller because of it.
The current figure excludes the state insurance exchanges. When these are added to the federal numbers, the Obama Administration is hoping that will get them over the 10 million mark for this year — half of what was touted when Obamacare was passed. If they do hit that number, it still means that only about a million people were added to Obamacare this year, as last year’s enrollment ended up being about 9.1 million users.
In the debates leading up to Obamacare, it was argued that Obamacare should be voted for because it would get eventually get 28 million of the uninsured 45 million Americans (15% of the 315 million population). At that projected target, the 28 million would only be covering 70% of the then-uninsured, which is decent but not excellent. It is clear now that NOBODY would have voted for Obamacare if they only expected to cover 10 million (or barely more than 20%) of the then-uninsured, which is where we currently are. That is the key, salient point that is now being lost in the discussions.
The ACA continues to be a disaster for all taxpayers.
A few days ago, UnitedHealthcare announced that the possibility of withdrawing from the Obamacare health insurance exchanges. This is a significant announcement, as UnitedHealthcare is one of the biggest insurers in the country. The impact of withdrawl would affect hundreds of thousands of people with regard to their healthplans; the timing — right before 2016 elections — would be critical.
HHS is predicting 10 million enrollees in 2016, which is half of what was originally projected when Obamacare was passed. It’s unlikely that enrollment will suddenly surge this year, which means that the financial instability of the entire model will continue.
If UnitedHealthcare decides to discontinue next year, those with their coverage will have to — yet again — choose another plan, but this time from a smaller list of coverage providers. Since Open Enrollment begins in the fall, right around Election time, such a move could wreak havoc on the final stretch.
One economist suggests that prices will increase even more.
“The year 2017 is significant for insurers, because that’s the year when several programs designed to mitigate risk for insurers through federal backstops go away. The hope was that those programs would act as training wheels for Obamacare in its first few years of implementation, but after that, the insurers were supposed to be able to thrive on their own. UnitedHealth’s statement suggests otherwise.
If UnitedHealth and other insurers decide to exit, remaining insurers will be forced to take on even more high-risk enrollees, prompting them to either raise rates further or exit themselves. That in turn would deprive individuals of choices and remove competition, a key purpose of the exchanges.”
So don’t expect United to suddenly see a reason to get back into the 2017 market, not without hefty risk-corridor subsidies — which under any other circumstances would be called “corporate welfare.” Given that Congress isn’t likely to reverse course and underwrite ObamaCare losses, the path to the exit remains the likely course for United, and perhaps some of its competitors, too.
United says it will remain committed to its Medicaid and Medicare businesses, and of course it will stick with its employer-based group coverage, where the issues of ObamaCare regulation have less impact.”
“But UnitedHealth and other insurers need more Americans to come into the public exchanges because the patients that are signing up for coverage are sicker, making a “higher overall risk pool,” insurance executives say. It’s a key reason many Americans are seeing rate increases of 10 percent or more across the country on public exchanges.
United has discovered that the trade-offs in mandates and forced coverage don’t pay off. It’s a bait-and-switch for insurers by the Obama administration, but it’s even worse of a bait-and-switch for consumers.
Subsidies do not mitigate the fact that consumers have to pay both the premium and then thousands of dollars for care out of their own pocket before insurance takes effect, except in rare and catastrophic circumstances.
Consumers used to have an option for that kind of health insurance – catastrophic coverage, used to indemnify against unforeseen major health events. Those policies featured low premiums and left routine care for consumers to negotiate directly with providers on a cash basis. Combined with health-savings accounts (HSAs), those plans offered a rational approach to balancing health and economic requirements, especially for younger consumers who rarely need more than one or two clinic visits a year, which would cost far less than either comprehensive-coverage premiums or deductibles even in the pre-ACA era.
Instead of “affordable care” promised by President Obama and Democrats, consumers have instead discovered they have effectively been forced to pay for catastrophic health insurance at comprehensive-plan prices. They have become victims of a bait-and-switch scheme that the government would vigorously prosecute – if it wasn’t masterminding the scheme itself.”