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A Soft Landing Scenario – Another Fed Myth?

A Soft Landing Scenario – Another Fed Myth?

Authored by Lance Roberts via The Epoch Times,

Optimism is increasing on Wall Street, with investors…

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A Soft Landing Scenario - Another Fed Myth?

Authored by Lance Roberts via The Epoch Times,

Optimism is increasing on Wall Street, with investors hoping for a “soft landing” in the economy.

“David Kelly, the chief global strategist at JPMorgan Asset Management, is betting that inflation will continue to ease in 2023, helping the U.S. economy to narrowly escape a recession. Ed Yardeni, the longtime stock strategist and founder of his namesake research firm, is putting the odds of a soft landing at 60 percent based on strong economic data, resilient consumers, and signs of tumbling price pressures,” reported Bloomberg.

The hope is that despite the Federal Reserve hiking rates at the most aggressive pace since 1980, reducing its balance sheet via quantitative tightening, and inflation running at the highest levels since the 1970s, the economy will continue to power forward.

Is this a possibility, or is the “soft landing” scenario another Fed myth?

To answer that question, we need a definition of a “soft landing” scenario, economically speaking.

According to a definition by Investopedia, “A soft landing, in economics, is a cyclical slowdown in economic growth that avoids a recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation without causing a severe downturn.”

The term “soft landing” came to the forefront of Wall Street jargon during the tenure (1987–2006) of former Fed chair Alan Greenspan. He was widely credited with engineering a soft landing in 1994–95. The media has also pointed to the Federal Reserve engineering soft landings economically in both 1984 and 2018.

The chart below shows the Fed rate-hiking cycle with soft landings notated by orange shading. I have also noted the events that preceded the “hard landings.”

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

There is another crucial point regarding the possibility of a soft landing. A recession, or “hard landing,” followed the last instances when inflation peaked above 5 percent. Those periods were 1948, 1951, 1970, 1974, 1980, 1990, and 2008. Currently, inflation is well above 5 percent throughout 2022.

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

Could this time be different? Absolutely, but there is a lot of history that suggests otherwise.

Furthermore, while the technical definition of a soft landing is “no recession,” if we include crisis events caused by the Federal Reserve’s actions, the track record becomes worse.

No Soft Landings—Ever

Since the Federal Reserve became active in the late 1970s under chairman Paul Volcker, the Federal Reserve has become responsible for repeated boom-and-bust cycles in the financial markets and the economy.

As noted above, there were three periods where the Federal Reserve hiked rates and achieved a soft landing, economically speaking. However, the reality was that those periods were not pain-free events for the financial markets. The chart below adds the “crisis events” that occurred as the Fed hiked rates.

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

The failure of Continental Illinois National Bank and Trust Company in 1984, the largest in U.S. history at the time, and its subsequent rescue, gave rise to the term “too big to fail.”

The Chicago-based bank was the seventh-largest bank in the United States and the largest in the Midwest, with approximately $40 billion in assets. Its failure raised important questions about whether large banks should receive differential treatment in the event of failure.

The bank took action to stabilize its balance sheet in 1982 and 1983. But in 1984, the bank posted that its nonperforming loans had suddenly increased by $400 million, to a total of $2.3 billion. On May 10, 1984, rumors of the bank’s insolvency sparked a huge run by its depositors.

Many factors preceded the crisis, but as the Fed hiked rates, higher borrowing costs and interest service led to debt defaults and, eventually, the bank’s failure.

Fast forward to 1994, and we find another crisis event brewing as the Fed hiked rates.

The 1994 bond market crisis, or “Great Bond Massacre,” was a sudden drop in bond market prices across the developed world. It started in Japan, spread through the United States, and then the world. The build-up to the event began after the 1991 recession, as the Fed had dropped interest rates to historically low levels. During 1994, a rise in rates and the relatively quick spread of bond market volatility across borders resulted in a mass sell-off of bonds and debt funds as yields rose beyond expectations. The plummet in bond prices was triggered by the Federal Reserve’s decision to raise rates to counter inflationary pressures. The result was a global loss of roughly $1.5 trillion in value, and was one of the worst financial events for bond investors since 1927.

The year 2018 was also not a pain-free rate hiking cycle. In September of that year, Fed chair Jerome Powell stated the Federal Reserve was “nowhere near the ‘neutral rate'” and was committed to continuing hiking rates. Of course, a 20 percent meltdown in the market into December changed that tone, but the hike in interest rates had already done damage. By July 2019, the Fed was cutting rates to zero and launching a massive monetary intervention to bail out hedge funds. (The chart only shows positive weekly changes to the Fed’s balance sheet.)

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

At the same time, the yield curve inverted, and recessionary alarm bells were ringing by September. By March 2022, the onset of the pandemic triggered the recession.

The problem with rate hikes, as always, is the lag effect. Just because Fed rate hikes have not immediately broken something doesn’t mean they won’t. The resistance to higher rates may last longer than expected, depending on the economy or financial market’s strength. However, eventually, the strain will become too great, and something breaks.

It is unlikely this time will be different.

The idea of a soft landing is only a reality if you exclude, in most cases, rather devastating financial consequences.

The Fed Will Break Something

It’s only a question of what.

So far, the economy seems to be holding up well, despite an aggressive rate-hiking campaign providing the cover for the soft landing scenario. This is due to the massive surge in stimulus sent directly to households, resulting in an unprecedented spike in “savings,” creating artificial demand as represented by retail sales. Over the next two years, that bulge of excess liquidity will revert to the previous growth trend, which is a disinflationary risk. As a result, economic growth will lag the reversion in savings by about 12 months. This lag effect is critical to monetary policy outcomes.

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

As the Fed aggressively hikes rates, the monetary influx has already reverted. This likely will result in inflation falling rapidly over the ensuing 12 months, and an economic downturn increases the risk of something breaking.

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

The slower rate of growth, combined with tighter monetary accommodation, will challenge the Fed as disinflation risk becomes the next monetary policy challenge.

The Federal Reserve is in a race against time. The challenge will be a reversion of demand leading to a supply gut that runs up the supply chain. A recession is often the byproduct of the rebalancing of supply and demand.

While Powell states he is committed to combatting inflationary pressures, inflation will eventually cure itself. The inflation chart above shows that the “cure for high prices is high prices.

Chairman Powell understands that inflation is always transitory. However, he also understands rates cannot be at the “zero bound” when a recession begins. As stated, the Fed is racing to hike interest rates as much as possible before the economy falters. The Fed’s only fundamental tool to combat an economic recession is cutting interest rates to spark economic activity.

Powell’s recent statement during a speech at the Brookings Institution was full of warnings about the lag effect of monetary policy changes. It was also clear that there is no pivot in policy coming anytime soon.

When that lag effect catches up with the Fed, a pivot in policy may not be as bullish as many investors currently hope.

We doubt a soft landing is coming.

Tyler Durden Mon, 01/23/2023 - 13:42

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What’s Still Missing on Royal Caribbean Cruises Post Covid

The cruise line has almost fully returned to normal after the covid pandemic, but one very popular activity hasn’t been brought back.

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The cruise line has almost fully returned to normal after the covid pandemic, but one very popular activity hasn't been brought back.

In the early days of Royal Caribbean Group's (RCL) - Get Free Report return from its 15-month covid pandemic shutdown, cruising looked a lot different. Ships sailed with limited capacities, masks were required in most indoor areas, and social distancing was a thing.

Keeping people six feet apart made certain aspects of taking a cruise impossible. Some were made easier by the lower passenger counts. For example, all Royal Caribbean Windjammer buffets required reservations to keep the crowds down, but in practice that system was generally not needed because capacities were never reached.

Dance parties and nightclub-style events had to be held on the pool decks or in larger spaces, and shows in the big theaters left open seats between parties traveling together. In most cases, accommodations were made and events more or less happened in a sort of normal fashion.

A few very popular events were not possible, however, in an environment where keeping six feet between passengers was a goal. Two of those events -- the first night balloon drop and the adult "Crazy Quest" game show -- simply did not work with social-distancing requirements.

One of those popular events has now made its comeback while the second appears to still be missing (aside from a few one-off appearances).

TheStreet

The Quest Is Still Mostly Missing

In late November, Royal Caribbean's adult scavenger hunt, "The Quest," (sometimes known as "Crazy Quest") began appearing on select sailings. And at the time it appeared like it was coming back across the fleet: A number of people posted about the return of the interactive adult game show in an unofficial Royal Caribbean Facebook group.

It first appeared during a Wonder of the Seas transatlantic sailing.

Since, then its appearances continue to be spotty and it has not returned on a fleetwide basis. This might not be due to any covid-related issues directly, but covid may play a role.

On some ships, Studio B, which hosts "The Quest," has been used for show rehearsals. That has been more of an issue with the trouble Royal Caribbean has had in getting new crew members onboard. And while that staffing issue has been improving, some shows may not have had full complements of performers, so using the space for rehearsal has been a continuing need.

In addition, while covid rules have gone away, covid has not, and ill cast members may force the need for more rehearsals.

Royal Caribbean has not publicly commented on when (or whether) "The Quest" will make a full comeback

Royal Caribbean Balloon Drops Are Back   

Before the pandemic, Royal Caribbean kicked off many of its cruises with a balloon drop on the Royal Promenade. That went away because it forced people to cluster as music was performed and, at midnight, balloons fell from the ceiling.

Now, the cruise line has brought back the balloon drop, albeit with a twist. The drop itself is appearing on activity schedules for upcoming Royal Caribbean cruises. Immediately after it, however, the cruise line has added something new: "The Big Recycle Balloon Pickup."

Most of the dropped balloons get popped during the drop. Previously, crewmembers picked up the used balloons. Now, the cruise line has made it a "fun" passenger activity.

"Get environmentally friendly as you help us gather our 100% biodegradable balloons in recycle baskets," the cruise line shared in its app. 

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Royal Caribbean Brings Back Popular Event; Adult Favorite Still Missing

The cruise line has almost fully returned to normal after the covid pandemic, but one very popular activity hasn’t been brought back.

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on

The cruise line has almost fully returned to normal after the covid pandemic, but one very popular activity hasn't been brought back.

In the early days of Royal Caribbean Group's (RCL) - Get Free Report return from its 15-month covid pandemic shutdown, cruising looked a lot different. Ships sailed with limited capacities, masks were required in most indoor areas, and social distancing was a thing.

Keeping people six feet apart made certain aspects of taking a cruise impossible. Some were made easier by the lower passenger counts. For example, all Royal Caribbean Windjammer buffets required reservations to keep the crowds down, but in practice that system was generally not needed because capacities were never reached.

Dance parties and nightclub-style events had to be held on the pool decks or in larger spaces, and shows in the big theaters left open seats between parties traveling together. In most cases, accommodations were made and events more or less happened in a sort of normal fashion.

A few very popular events were not possible, however, in an environment where keeping six feet between passengers was a goal. Two of those events -- the first night balloon drop and the adult "Crazy Quest" game show -- simply did not work with social-distancing requirements.

One of those popular events has now made its comeback while the second appears to still be missing (aside from a few one-off appearances).

TheStreet

The Quest Is Still Mostly Missing

In late November, Royal Caribbean's adult scavenger hunt, "The Quest," (sometimes known as "Crazy Quest") began appearing on select sailings. And at the time it appeared like it was coming back across the fleet: A number of people posted about the return of the interactive adult game show in an unofficial Royal Caribbean Facebook group.

It first appeared during a Wonder of the Seas transatlantic sailing.

Since, then its appearances continue to be spotty and it has not returned on a fleetwide basis. This might not be due to any covid-related issues directly, but covid may play a role.

On some ships, Studio B, which hosts "The Quest," has been used for show rehearsals. That has been more of an issue with the trouble Royal Caribbean has had in getting new crew members onboard. And while that staffing issue has been improving, some shows may not have had full complements of performers, so using the space for rehearsal has been a continuing need.

In addition, while covid rules have gone away, covid has not, and ill cast members may force the need for more rehearsals.

Royal Caribbean has not publicly commented on when (or whether) "The Quest" will make a full comeback

Royal Caribbean Balloon Drops Are Back   

Before the pandemic, Royal Caribbean kicked off many of its cruises with a balloon drop on the Royal Promenade. That went away because it forced people to cluster as music was performed and, at midnight, balloons fell from the ceiling.

Now, the cruise line has brought back the balloon drop, albeit with a twist. The drop itself is appearing on activity schedules for upcoming Royal Caribbean cruises. Immediately after it, however, the cruise line has added something new: "The Big Recycle Balloon Pickup."

Most of the dropped balloons get popped during the drop. Previously, crewmembers picked up the used balloons. Now, the cruise line has made it a "fun" passenger activity.

"Get environmentally friendly as you help us gather our 100% biodegradable balloons in recycle baskets," the cruise line shared in its app. 

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International

How far could UK property prices drop and should investors be concerned?

The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years.…
The post How far could UK property…

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The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years. Property prices leapt alongside most other asset classes over the long bull market that ran relatively uninterrupted over the 13 year period from the start of the recovery from the international financial crisis in 2009 and last year.

Average prices across the country almost doubled from £154,500 in March 2009 to just under £296,000 in October last year, when the market hit its most recent record high. Global stock markets had been in a downward spiral for almost a year while property prices kept climbing.

Source: PropertyData

However, a combination of rising interest rates, up from 0.1% in late 2021 to 3.5% in January 2023 and further hikes expected this year, soaring inflation putting pressure on household budgets and nerves around a recession has seen house prices ease. There still not far off their record highs of late 2022 but the trend is downward.

chart

Source: BankofEngland

The big question for homeowners and property investors is just how far could UK residential property prices drop over the next couple of years? How long prices might take to recover from a drop is another important unknown.

First time buyers struggling to get onto the property ladder may welcome a significant drop in UK house prices. Even if higher interest rates mean monthly mortgage costs don’t change much, lower sales prices should reduce the minimum deposits required to secure a mortgage.

However, for anyone who currently owns a home, especially if purchased in the past couple of years towards the top of the market, a significant drop in valuation would be extremely unwelcome. That is particularly the case for home owners at risk of falling into negative equity, which means the market value of their property is lower than the outstanding sum due on the mortgage.

Falling house prices, if the decline is steep, could also create a wider economic crisis and spill over into other parts of the economy and financial markets.

But not everyone agrees UK house prices will drop by anywhere near 30%. Let’s explore the factors that would affect the residential property market over 2023 and beyond and different opinions on how serious a market slump could be. As well as the wider potential consequences that could result if the dive in home valuations turns out to be in line with more negative forecasts.

How much will UK house prices fall by?

The short answer to that question is that we don’t know but the most pessimistic outlook is for drops of up to 30% over the next couple of years. However, there are a number of factors that mean there is a high chance valuations will slide by less. But let’s look at the negative scenario first.

A 30% drop in home valuations sounds like a lot and it is. However, against the backdrop of the last couple of years that kind of fall looks a little less extreme. Prices are up 28% since April 2019 and a 30% fall would take the average price of a home in the UK to around £210,000, where it was in 2016. A less severe 20% drop in prices would see the average price settle at around £235,000, where it was just before the onset of the Covid-19 pandemic and the Bank of England dropping interest rates to just 0.1%.

Mid-term interest rates are likely to have the biggest influence on house prices. At the BoE’s current 3.5% base rate, the best mortgage deals available are 2 years fixed at 4.8% compared to 1% deals available until recently. At an LTV of 60% on a £400,000 mortgage, that would push the monthly rate up to £2300 a month from £1500 a month.

For some borrowers, that is likely to prove problematic. It is also likely to mean lower demand for properties from buyers who might have otherwise decided to move up the property ladder and first time buyers. A drop in demand at higher price brackets due to affordability thresholds being passed will see property prices fall.

Will demand drop enough to lead to a 30% fall? That depends on factors that are currently unknown. How high interest rates go will have a huge influence and that will depend on inflation. There are signs inflation is easing and today the Fed’s preferred gauge for inflation, the personal consumption expenditures (PCE) price index, rose 5.0% in December from a year earlier. That was slower than the 5.5% 12-month gain as of November and the lowest level since September 2021.

In the UK, inflation has also eased from 11.1% year-on-year in October to 10.5% in December. It’s still much higher than in the USA but will hopefully now maintain a consistent downward trend helped by easing energy prices.

There are hopes the Fed will pull back on further interest rate rises from March and that would set a tone that the Bank of England may well follow with a slight delay. The Fed’s base rate is also already higher than in the UK at 4.25% to 4.5%.

If interest rates and, more importantly, mortgage rates do not rise by more than 1% from where they are today it is unlikely valuation drops of as much as 30% eventuate. But if they did what would the consequences be?

What happens if UK house prices fall 30%?

The good news is that even a house price fall as extreme as 30% would be unlikely to lead to systematic issues in the UK’s financial services sector. More people own their homes outright than have a mortgage – 8.8 million to 6.8 million homes. Lloyds Bank, one of the UK’s biggest mortgage lenders recently reported the average LTV of its mortgage portfolio is just 40%.

Even if average LTV is a little higher for other banks, a wave of defaults is unlikely to threaten their stability and infect other areas of financial markets or the wider economy. Mortgage lenders are also reluctant to repossess homes they’ve lent against as it’s an expensive process for them. They will do as much as they can to work with borrowers who are struggling to meet increased mortgage payments.

What does falling property prices mean for investors?

For property investors, it’s really a case of if rental income will continue to cover mortgage payments, or get close enough to mean the investment still adds up. If mortgage payments are likely to exceed realistic rental income over the next few years investors may consider selling up. Unless the property was purchased in the last 2-3 years, that could still mean walking away with a reasonable return.

For investors in the wider financial markets, it seems unlikely that falling property prices, even if up to 30% is knocked off valuations, will see serious contagion spread and spark a crisis.

It’s not impossible that UK property prices could fall by as much as 30% over the next couple of years as a result of higher interest rates and tighter household budgets but the likelihood is the average drop will be less. And in the worst case scenario, wider fallout should be limited. A repeat of the systemic crash that led to the 2008 financial crisis does not seem like a real prospect. Lenders are well capitalised and the system looks strong enough to cope.

The post How far could UK property prices drop and should investors be concerned? first appeared on Trading and Investment News.

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