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The Fed Has Crossed The “Hard Landing” Rubicon So How High Will It Hike? One Bank Crunches The Numbers

The Fed Has Crossed The "Hard Landing" Rubicon So How High Will It Hike? One Bank Crunches The Numbers

One month ago, a SocGen strategist…

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The Fed Has Crossed The "Hard Landing" Rubicon So How High Will It Hike? One Bank Crunches The Numbers

One month ago, a SocGen strategist calculated something remarkable: at a time when the Fed is warning of multiple 50bps hikes in coming FOMC meetings and Powell is threatening to take fed funds above neutral - somewhere in the great unknown zone between 2.0% and 4.5% - and even the gradually fading market consensus still expects just under 8 hikes this cycle...

... quant Solomon Tadesse calculated that according to his analysis, if the Fed i focused on preserving growth (at the expense of higher inflation), then Fed Funds will peak at just around 1.0%, which combined with a QT programme to the tune of about $1.8tn, means the Fed will very soon be forced to reverse.

Furthermore, as Tadesse has since pointed out, with the Fed’s recent bold 50bp hike, "there does not seem much room left for manoeuvring for the desired soft-landing." He then echoes what we have been saying in recent weeks, namely that the "type of week-long market meltdown witnessed since the recent hike often precedes a policy about-face in line with our projection."

Ok but what if having decided to push the US into a recession, growth be damned, the Fed is now focusing only and entirely on inflation?  After all, current rates are far, far below the prevailing CPI which is around 8%, and while many argue whether CPI has peaked, there is a significant possibility CPI could hit double digits in the coming months.

This is the question that Tadesse addresses in his latest must-read note (available to pro subs in the usual place), in which he writes that "an inflation-fighting impulse is currently in the air, begging the question of what it could take to stamp out the current trend for good, even at the cost of a hard landing."

According to the SocGen quant, given the rising inflation prints and accompanying political pressure, if the pro-growth tightening threshold is breached - which it likely will be as soon as the next FOMC meeting, making a hard landing inevitable, and unleashing the Fed in favor of a single-minded inflation-fighting policy stance, Tadesse's analysis suggests that it "could take overall monetary tightening of as much as 9.25% to arrest inflation, with the policy rate going up to 4.5% and the balance coming from QT of about $3.9tn, which would slash the current Fed balance sheet by about half."

Here is some more detail from the SocGen quant on this potential "alternative" in which the Fed single-mindedly pursues inflation containment, going Volcker-style with accelerated rate hikes reminiscent of the 1970s and early 1980s, when the average MTE (tightening to easing) ratio was about 1.5x (left-hand chart below).:

Such aggressive monetary tightening with a focus solely on inflation containment, even at the cost of inducing recession, according to our analysis, would require overall monetary tightening of about 11.6%. Given that rates have already been tightened by 2.5%, another 9.25% of monetary tightening might be expected via policy rate hikes and an aggressive QT program. The policy rate could go up by as much as 4.5%, with the remainder coming from QT (right-hand chart above). These projections are all before the 4 May rate hike of 50bp, which lowers the balance proportionately.

At a rate of 12bp per $100bn of QT, this also amounts to a QT program of about $3.9tn, roughly equivalent to the net growth in the Fed’s balance sheet during the pandemic. An important caveat in the analysis is the presumption that current inflation levels resemble those of the late 1970s through the 1980s. As recent inflation prints are the highest in 40 years, this might be a reasonable assumption, particularly in reference to the rates seen in the early 1980s. In addition, in interpretating the results, there is an implicit assumption that the current inflation prints are persistent and demand driven. However, as our earlier analysis shows, the current inflation dynamics are driven both by transitory supply-related disruptions and demand-driven price pressures. Should the supply bottlenecks ease over time, the degree of monetary tightening needed to contain inflation through demand destruction could turn out to be lower.

The above-left chart shows monetary policy frontiers (MPF). These are all the policy-rate hike and QT combinations that could generate the inflation-containing overall tightening of upwards of 9pp and the growth-conscious overall tightening discussed earlier, with the most likely outcomes of policy combinations identified with stars. Thus, our analysis suggests that while it might only take another 25-50bp for growth-conscious tightening to peak before a hard landing, an aggressive inflation-containing policy could mean additional policy rate hikes of up to 4.0pp.

As noted earlier, the above analysis assumes that the Fed is resigned to a hard-landing. Does it mean that a soft-landing is now inevitable? Pretty much. Here is Tadasse again:

In an earlier research note, we argued that if current monetary policy follows a pro-growth impulse, as has been the case over the past four decades, the current tightening phase could peak with only 0.75-1pp of rate hikes, combined with a QT program to the tune of about $1.8tn. After the Fed’s recent bold 50bp hike, there now does not seem to be much room left for manoeuvring toward a soft landing. Moreover, the type of week-long market meltdown witnessed since the hike has often preceded a policy about-face, which is what we expect.

Summarizing the above, the SocGen quant writes that "monetary policy is thus at a crossroads, with a stark choice between a ‘growth’ conscious, albeit inflationary, rate-hike cycle, peaking after 300bp of tightening (with a mix of QT and FFR) or an inflation-containing, albeit recessionary, rate-hike cycle, peaking at about a 925bp of overall tightening (with a mix of 450bp in policy rate and the balance from QT)."

And while there could be possibilities in between these two extremes, the middle ground may not, in general, be an admissible rational strategy. Such an intermediate path, plausible due to political pressure or a mid-course reversal in policy priorities between price stability and full employment, would likely fail to accomplish either mandate and could damage central bank credibility.

What does this mean for traders? Nothing good - as Tadesse concludes, equity strategies do not fare well in scenarios of high inflation and declining growth (i.e. stagflation), as companies struggle with falling revenues and rising costs, lower growth causes lower earnings, and higher rates combined with an increase in the equity-risk premium negatively impact valuations. And while SocGen notes, that "cash flow and balance-sheet strength would matter for relative performance here", we would add that the real question is how fast does the market expect inflation to shrink back to the 2-3% range. The answer to that question will determine most investing strategies for the next year or so.

For those unable or unwilling to answer, a simple heuristic is that strategies that pay high dividends at cheap valuations (such as quality income) should do well in this environment. So should equity strategies dominated by firms with pricing power, such as those in the upstream of the production chain, as should defensive equity strategies with stable cash flows and relative pricing power (such as utilities, the quality and quality income factors). Pair trades can use these as the long legs, offset with shorts among cyclical and aggressive growth strategies.

The full note quantifying how high Powell will raise rates is available to pro subs.

Tyler Durden Thu, 05/19/2022 - 22:00

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Government

Federal Food Stamps Program Hits Record Costs In 2022

Federal Food Stamps Program Hits Record Costs In 2022

In early January, The Wall Street Journal Editorial Board warned that one peril of a…

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Federal Food Stamps Program Hits Record Costs In 2022

In early January, The Wall Street Journal Editorial Board warned that one peril of a large administrative state is the mischief agencies can get up to when no one is watching.

Specifically, they highlight the overreach of the Agriculture Department, which expanded food-stamp benefits by evading the process for determining benefits and end-running Congressional review.

Exhibit A in the over-reach is the fact that the cost of the federal food stamps program known as the Supplemental Nutrition Assistance Program (SNAP) increased to a record $119.5 billion in 2022, according to data released by the U.S. Department of Agriculture...

Food Stamp costs have literally exploded from $60.3 billion in 2019, the last year before the pandemic, to the record-setting $119.5 billion in 2022.

In 2019, the average monthly per person benefit was $129.83 in 2019, according to the U.S. Department of Agriculture. That increased by 78 percent to $230.88 in 2022.

Even more intriguing is the fact that the number of participants had increased from 35.7 million in 2019 to 41.2 million in 2022...

All of which is a little odd - the number of people on food stamps remains at record highs while the post-COVID-lockdown employment picture has improved dramatically...

Source: Bloomberg

If any of this surprises you, it really shouldn't given that 'you, the people' voted for the welfare state. However, as WSJ chided: "abuse of process doesn’t get much clearer than that."

In its first review of USDA, the GAO skewered Agriculture’s process for having violated the Congressional Review Act, noting that the “2021 [Thrifty Food Plan] meets the definition of a rule under the [Congressional Review Act] and no CRA exception applies. Therefore, the 2021 TFP is subject to the requirement that it be submitted to Congress.” GAO’s second report says “officials made this update without key project management and quality assurance practices in place.”

Abuse of process doesn’t get much clearer than that. The GAO review won’t unwind the increase, which requires action by the USDA. But the GAO report should resonate with taxpayers who don’t like to see the politicization of a process meant to provide nutrition to those in need, not act as a vehicle for partisan agency staffers to impose their agenda without Congressional approval.

All of this undermines transparency and accountability for a program that provided food stamps to some 41 million people in 2021. The Biden Administration is using the cover of the pandemic to expand the entitlement state beyond what Congress authorized.

The question now is, will House Republicans draw attention to this lawlessness and use their power of the purse to stop it to the extent possible with a Democratic Senate.

And don't forget, the US economy is "strong as hell."

Tyler Durden Sat, 01/28/2023 - 09:55

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Spread & Containment

A Royal Caribbean Cruise Line Adult Favorite Has Not Come Back

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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Spread & Containment

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.

Published

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. 

Read More

Continue Reading

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