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 US 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% based on strong economic data, resilient consumers, and signs of tumbling price pressures.” – Bloomberg
The hope is that despite the Fed 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 70s, the economy will continue to power forward.
Is such 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.
“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.” – Investopedia
The term “soft landing” came to the forefront of Wall Street jargon during Alan Greenspan’s tenure as Fed Chairman. He was widely credited with engineering a “soft landing” in 1994-1995. 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.”
There is another crucial point regarding the possibility of a “soft landing.” A recession, or “hard landing,” followed the last five instances when inflation peaked above 5%. Those periods were 1948, 1951, 1970, 1974, 1980, 1990, and 2008. Currently, inflation is well above 5% throughout 2022.
Could this time be different? Absolutely, but there is a lot of history that suggests otherwise.
Furthermore, the technical definition of a “soft landing” is “no recession.“ The track record worsens if we include crisis events caused by the Federal Reserve’s actions.
No Such Thing
The Federal Reserve became active in the late 70s under Chairman Paul Volker. Since then, the Fed is responsible for repeated boom and bust cycles in the financial markets and 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.
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 U.S., 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.
2018 was also not a pain-free rate hiking cycle. In September of that year, Jerome Powell stated the Federal Reserve was “nowhere near the ‘neutral rate'” and was committed to continuing hiking rates. Of course, a 20% 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.)
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 devasting 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. Such 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.
As the Fed aggressively hikes rates, the monetary influx has already reverted. Such will see inflation fall rapidly over the ensuing 12 months, and an economic downturn increases the risk of something breaking.
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 Jerome 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.”
Mr. 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.
Jerome Powell’s recent statement from the Brookings Institution speech was full of warnings about the lag effect of monetary policy changes. It was also clear 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.
An economist digging below the surface of an IMF report has found something that should shock the Western bloc out of any false confidence in its unsurpassed global economic clout...
G7 leaders meeting on June 28, 2022, at Schloss Elmau in Krün, Germany. (White House/Adam Schultz)
Last summer, the Group of 7 (G7), a self-anointed forum of nations that view themselves as the most influential economies in the world, gathered at Schloss Elmau, near Garmisch-Partenkirchen, Germany, to hold their annual meeting. Their focus was punishing Russia through additional sanctions, further arming of Ukraine and the containment of China.
At the same time, China hosted, through video conference, a gathering of the BRICS economic forum. Comprised of Brazil, Russia, India, China and South Africa, this collection of nations relegated to the status of so-called developing economies focused on strengthening economic bonds, international economic development and how to address what they collectively deemed the counter-productive policies of the G7.
In early 2020, Russian Deputy Foreign Minister Sergei Ryabkov had predicted that, based upon purchasing power parity, or PPP, calculations projected by the International Monetary Fund, BRICS would overtake the G7 sometime later that year in terms of percentage of the global total.
(A nation’s gross domestic product at purchasing power parity, or PPP, exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States and is a more accurate reflection of comparative economic strength than simple GDP calculations.)
Then the pandemic hit and the global economic reset that followed made the IMF projections moot. The world became singularly focused on recovering from the pandemic and, later, managing the fallout from the West’s massive sanctioning of Russia following that nation’s invasion of Ukraine in February 2022.
The G7 failed to heed the economic challenge from BRICS, and instead focused on solidifying its defense of the “rules based international order” that had become the mantra of the administration of U.S. President Joe Biden.
Miscalculation
Since the Russian invasion of Ukraine, an ideological divide that has gripped the world, with one side (led by the G7) condemning the invasion and seeking to punish Russia economically, and the other (led by BRICS) taking a more nuanced stance by neither supporting the Russian action nor joining in on the sanctions. This has created a intellectual vacuum when it comes to assessing the true state of play in global economic affairs.
U.S. President Joe Biden in virtual call with G7 leaders and Ukrainian President Volodymyr Zelenskyy, Feb. 24. (White House/Adam Schultz)
It is now widely accepted that the U.S. and its G7 partners miscalculated both the impact sanctions would have on the Russian economy, as well as the blowback that would hit the West.
Angus King, the Independent senator from Maine, recently observed that he remembers
“when this started a year ago, all the talk was the sanctions are going to cripple Russia. They’re going to be just out of business and riots in the street absolutely hasn’t worked …[w]ere they the wrong sanctions? Were they not applied well? Did we underestimate the Russian capacity to circumvent them? Why have the sanctions regime not played a bigger part in this conflict?”
It should be noted that the IMF calculated that the Russian economy, as a result of these sanctions, would contract by at least 8 percent. The real number was 2 percent and the Russian economy — despite sanctions — is expected to grow in 2023 and beyond.
This kind of miscalculation has permeated Western thinking about the global economy and the respective roles played by the G7 and BRICS. In October 2022, the IMF published its annual World Economic Outlook (WEO), with a focus on traditional GDP calculations. Mainstream economic analysts, accordingly, were comforted that — despite the political challenge put forward by BRICS in the summer of 2022 — the IMF was calculating that the G7 still held strong as the leading global economic bloc.
In January 2023 the IMF published an update to the October 2022 WEO, reinforcing the strong position of the G7. According to Pierre-Olivier Gourinchas, the IMF’s chief economist, the “balance of risks to the outlook remains tilted to the downside but is less skewed toward adverse outcomes than in the October WEO.”
This positive hint prevented mainstream Western economic analysts from digging deeper into the data contained in the update. I can personally attest to the reluctance of conservative editors trying to draw current relevance from “old data.”
Fortunately, there are other economic analysts, such as Richard Dias of Acorn Macro Consulting, a self-described “boutique macroeconomic research firm employing a top-down approach to the analysis of the global economy and financial markets.”
Rather than accept the IMF’s rosy outlook as gospel, Dias did what analysts are supposed to do — dig through the data and extract relevant conclusions.
After rooting through the IMF’s World Economic Outlook Data Base, Dias conducted a comparative analysis of the percentage of global GDP adjusted for PPP between the G7 and BRICS, and made a surprising discovery: BRICS had surpassed the G7.
This was not a projection, but rather a statement of accomplished fact:
BRICS was responsible for 31.5 percent of the PPP-adjusted global GDP, while the G7 provided 30.7 percent.
Making matters worse for the G7, the trends projected showed that the gap between the two economic blocs would only widen going forward.
The reasons for this accelerated accumulation of global economic clout on the part of BRICS can be linked to three primary factors:
residual fallout from the Covid-19 pandemic,
blowback from the sanctioning of Russia by the G7 nations in the aftermath of the Russian invasion of Ukraine and a growing resentment among the developing economies of the world to G7 economic policies and
priorities which are perceived as being rooted more in post-colonial arrogance than a genuine desire to assist in helping nations grow their own economic potential.
Growth Disparities
It is true that BRICS and G7 economic clout is heavily influenced by the economies of China and the U.S., respectively. But one cannot discount the relative economic trajectories of the other member states of these economic forums. While the economic outlook for most of the BRICS countries points to strong growth in the coming years, the G7 nations, in a large part because of the self-inflicted wound that is the current sanctioning of Russia, are seeing slow growth or, in the case of the U.K., negative growth, with little prospect of reversing this trend.
Moreover, while G7 membership remains static, BRICS is growing, with Argentina and Iran having submitted applications, and other major regional economic powers, such as Saudi Arabia, Turkey and Egypt, expressing an interest in joining. Making this potential expansion even more explosive is the recent Chinese diplomatic achievement in normalizing relations between Iran and Saudia Arabia.
Diminishing prospects for the continued global domination by the U.S. dollar, combined with the economic potential of the trans-Eurasian economic union being promoted by Russia and China, put the G7 and BRICS on opposing trajectories. BRICS should overtake the G7 in terms of actual GDP, and not just PPP, in the coming years.
But don’t hold your breath waiting for mainstream economic analysts to reach this conclusion. Thankfully, there are outliers such as Richard Dias and Acorn Macro Consulting who seek to find new meaning from old data.
The U.S. Centers for Disease Control and Prevention (CDC) made at least 25 statistical or numerical errors during the COVID-19 pandemic, and the overwhelming majority exaggerated the severity of the pandemic, according to a new study.
Researchers who have been tracking CDC errors compiled 25 instances where the agency offered demonstrably false information. For each instance, they analyzed whether the error exaggerated or downplayed the severity of COVID-19.
Of the 25 instances, 20 exaggerated the severity, the researchers reported in the study, which was published ahead of peer review on March 23.
“The CDC has expressed significant concern about COVID-19 misinformation. In order for the CDC to be a credible source of information, they must improve the accuracy of the data they provide,” the authors wrote.
The CDC did not respond to a request for comment.
Most Errors Involved Children
Most of the errors were about COVID-19’s impact on children.
In mid-2021, for instance, the CDC claimed that 4 percent of the deaths attributed to COVID-19 were kids. The actual percentage was 0.04 percent. The CDC eventually corrected the misinformation, months after being alerted to the issue.
CDC Director Dr. Rochelle Walensky falsely told a White House press briefing in October 2021 that there had been 745 COVID-19 deaths in children, but the actual number, based on CDC death certificate analysis, was 558.
Walensky and other CDC officials also falsely said in 2022 that COVID-19 was a top five cause of death for children, citing a study that gathered CDC data instead of looking at the data directly. The officials have not corrected the false claims.
Other errors include the CDC claiming in 2022 that pediatric COVID-19 hospitalizations were “increasing again” when they’d actually peaked two weeks earlier; CDC officials in 2023 including deaths among infants younger than 6 months old when reporting COVID-19 deaths among children; and Walensky on Feb. 9, 2023, exaggerating the pediatric death toll before Congress.
“These errors suggest the CDC consistently exaggerates the impact of COVID-19 on children,” the authors of the study said.
WINSTON-SALEM, N.C. – March 24, 2023 – Researchers at Wake Forest University School of Medicine have been awarded a five-year, $7.5 million grant from the National Institutes of Health (NIH) Helping End Addiction Long-term (HEAL) initiative.
Credit: Wake Forest University School of Medicine
WINSTON-SALEM, N.C. – March 24, 2023 – Researchers at Wake Forest University School of Medicine have been awarded a five-year, $7.5 million grant from the National Institutes of Health (NIH) Helping End Addiction Long-term (HEAL) initiative.
The NIH HEAL initiative, which launched in 2018, was created to find scientific solutions to stem the national opioid and pain public health crises. The funding is part of the HEAL Data 2 Action (HD2A) program, designed to use real-time data to guide actions and change processes toward reducing overdoses and improving opioid use disorder treatment and pain management.
With the support of the grant, researchers will create a data infrastructure support center to assist HD2A innovation projects at other institutions across the country. These innovation projects are designed to address gaps in four areas—prevention, harm reduction, treatment of opioid use disorder and recovery support.
“Our center’s goal is to remove barriers so that solutions can be more streamlined and rapidly distributed,” said Meredith C.B. Adams, M.D., associate professor of anesthesiology, biomedical informatics, physiology and pharmacology, and public health sciences at Wake Forest University School of Medicine.
By monitoring opioid overdoses in real time, researchers will be able to identify trends and gaps in resources in local communities where services are most needed.
“We will collect and analyze data that will inform prevention and treatment services,” Adams said. “We’re shifting chronic pain and opioid care in communities to quickly offer solutions.”
The center will also develop data related resources, education and training related to substance use, pain management and the reduction of opioid overdoses.
According to the CDC, there was a 29% increase in drug overdose deaths in the U.S. in 2020, and nearly 75% of those deaths involved an opioid.
“Given the scope of the opioid crises, which was only exacerbated by the COVID-19 pandemic, it’s imperative that we improve and create new prevention strategies,” Adams said. “The funding will create the infrastructure for rapid intervention.”
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