Progress For Jerome Powell, But What About Everyone Else?
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The inability to learn from mistakes, including the most enormous and consequential errors, is the stuff of long-term decay. And while it is nothing new, there’s no comfort in such stark human reality. While we think of scientific progress as a steady rise in the tide of knowledge, the truth is far messier and more frustrating. Backsliding into ignorance relatively commonplace.

How long we’re made to stay there determines the level of violence and upset which frees up the next, inevitable non-linear step forward; the fifties followed the forties set in motion by the gross mismanagement marking the thirties.

Whereas the peak of the preceding era could be dated right at the end of the twenties, the peak of what had been our own transpired fifteen Octobers ago. The stock market (S&P 500) had just set a new record high, surpassing the elevations of the dot-coms. Yet, it did so against the darkening backdrop of “subprime mortgages.”

At the time, it was widely believed this was nothing more than a housing issue, in raw economic terms no more than an annoyance which might trim a few percentage points off GDP growth in 2008. It was, as the man said, contained.

No one can honestly say what happened after was unexpected, though that’s just what everyone says anyway. Outside the equity echo-chamber, markets had been consistently projecting – with growing alarm and certainty – trouble wasn’t in danger of spilling over, it already had. Curve inversions and major ones at that.

From the detached perspective of policymakers, however, inversion seemed irrational, even silly. Those inversions had steadily and increasingly projected massive hedging across a wide expanse of the financial universe. As FOMC staff Economist Dave Stockton remarked at the end of October 2007, “Financial market participants seem to have reacted to the news of the past six weeks by marking down the expected path for the fed funds rate, whereas our forecast and policy assumptions are nearly unchanged.”

This was the raw essence of inversion; so much hedging which would only pay off – as insurance – if or rather when rates fell lower regardless of how officials viewed the situations and risks. The markets were seeing what authorities wouldn’t.

That’s the great benefit of having deep and sophisticated financial systems. Covering a wide area, no stone gets left unturned in the pursuit of additional information which could be further turned into profit (or survival). Such motivation combined with this exhaustive reach creates the kind of Big Data usefulness which should make the Googles and tech giants burst with envy.

Mr. Stockton even asked the right question. “Is it possible that we are missing signs of an impending downturn in aggregate activity?”

You should already be shaking your head in anger, knowing or easily guessing how this Economist would flippantly answer his own reasonable doubt.

The data, he continued, didn’t look anything like the growing disaster being priced. Certainly nothing which would cause disinclined Fed members to more aggressively cut rates. They had done it once, in September 2007, what really cheered up the NYSE, and were in no mood to do any more beyond that day’s wrap up.

Not with their view of the economy being so resilient.

“MR. STOCKTON. There can be little denying that, almost across the board, the readings on economic activity have been stronger than our expectations in September [2007]. In terms of domestic spending, the largest upside surprises have been in consumer spending, and much of the upward revision reflects data on activity after the financial turbulence had already begun.”

The confidence many like Chairman Ben Bernanke displayed in public wasn’t only an act. Some of it had been to try to soothe market (including stocks) nerves, to address very real and increasingly ugly conditions (August 9, 2007). When it came to the macro situation, however, the data indicated little spillover – subprime did appear, to them, contained.

If it hadn’t been, they reasoned, the immediate impact would be felt by consumers. Should the housing bubble burst turn out to be a big deal, it seemed reasonable a major pullback in consumer spending would confirm as much. None had materialized and policymakers accepted this as a sound approach; definitive, even.

In fact, as Dave Stockton continued to report, looking beyond consumers there was little direct evidence for anything worse than a modest slowdown.

“MR. STOCKTON. At present, it is difficult to find evidence in high-frequency indicators that the economy is in the process of turning down. Initial claims for unemployment insurance have remained relatively low, motor vehicle sales are reported to have been well maintained at least through mid-October, commodity prices are firm, reports from purchasing managers continue to suggest modest expansion, and few anecdotes outside the housing sector sound as though we’ve moved past a tipping point.”

The FOMC was fully satisfied this was the case, any doubts set aside. Having voted to reduce the fed funds target by 50 bps at the prior meeting, policymakers opted for just 25 bps at this October meeting. They had, the majority believed, sent enough of a message, needing only some modest reinforcement as an end to the matter.

“MR. MISHKIN. What is key is that the response to our actions on September 18 was almost textbook perfect in the sense that the markets really got the message that we were not going to be asleep at the wheel. As a result, the macro risk was taken out of these markets, and we achieved exactly the kind of signaling that we intended.”

Case closed. Officials had no intention of lowering the fed funds target any further, curves be damned.

What if it wasn’t really about subprime or even the housing market?

This conventional overview of the economy is also flawed in another crucial respect. We’re led to believe any system is either expanding or contracting, no middle ground. That’s what a softening is thought to be, a modest slowing for an economy still in expansion.

Even the way recessions and business cycles are treated reinforces this binary notion. The NBER, for example, declares a peak and only from that point forward do we recognize contraction as if everything that happened before could only have been expansion.

That’s not what really happens, though. Instead, expansion gives way to a transition – one that can last longer than you might think - which immediately precedes recession. This transitional phase may look like a slowdown but is far more severe and completely changes the future trajectory.

If only there was a way to tell the difference, a distributed method devised by millions of unappreciated economic and financial occupants frequently and closely observing in minute detail all the relevant factors, whose competing opinions are ruthlessly scrutinized and labored to then very conveniently even straightforwardly deliver the majority’s interpretation and determination in real-time to everyone and not just the priestly FOMC/Economist class.

Given the close proximity of monetary system participants to the real situation on the ground, you’d think such a verdict would easily and immediately override the detached modeling of Economists and central bankers. The top-down world of the Federal Reserve versus the bottom-up in the real world.

The vast majority of deterioration hidden from the narrow gaze of those at the Federal Reserve didn’t escape the notice of many in the marketplace. It couldn’t; survival depended more and more on being usefully informed. Accountability among policymakers doesn’t exist.

There is no falsifying their forecasts, those are easily changed by “incoming data” which just so happens to eventually, much later (far too late to do anything about it) follow the path laid out by that same marketplace. Then they say it is “unexpected” when it is anything but.

The Great “Recession” was a small four weeks from when those wildly inaccurate, yet well-received and generally accepted conclusions were drawn at the end of October 2007. The economy had, in fact, been transitioning from expansion to contraction all along, increasingly plagued by what was far greater therefore worse than subprime mortgages or even the drag on consumers from the housing bubble burst.

What market participants had seen and priced was the major global monetary shortfall policymakers refused to consider even a possibility. A few rate cuts and “markets really got the message that we were not going to be asleep at the wheel” summed up the disaster.

And it would take the NBER another year, not until December 2008, to finally “declare” the business cycle’s “peak” curves had predicted in advance.

The parallels to 2022 are, of course, numerous only starting with inversion. Policymakers today are, in public, convinced the US economy is in good spirits, suffering no worse than a planned slowdown while remaining firmly in expansion. Just a few points off annual GDP and no worse.

Meanwhile, markets more strenuously priced for near-term scenarios more like late 2007 than anything. Even the aggregate economic data is conspicuously parallel, what may look like that slowdown but in actuality is being actively treated as the unfortunately familiar transition far away from general expansion.

Underlying it all, another rage of global dollar destruction. No subprime mortgages this time, but the same tinge of collateral scarcity and several other unmistakable (to anyone outside Economics) signs of all the same disease. For one, not just last month’s fiasco of Swiss dollar auctions, more so why Switzerland’s national reserves have plummeted by $211 billion this year alone.

The list of countries facing the same isn’t just long, it is exhaustive. For that and so much more, markets other than stocks are viscerally spooked; policymakers are not. The economy is uncertain only with respect to the latter.

We saw from November 2007 what happens when transition to contraction is amplified by major monetary disorder. Seemingly one month everything is fine, literally the next all Hell has broken loose.

Just don’t call it unexpected.

It has been fifteen years and the consequences, if you haven’t noticed, are far broader than a few percentage points off GDP – even though, compounding, subtracting a few percent over that length of time quickly becomes a disaster of its own.

The real issue is why authorities never learn from these clearcut mistakes, or why they’re never made to. They aren’t doomed to repeat them but doom us when inevitably they do. The real issue isn’t actually recession. Never was.

Now that we’ve got another one and more, what are we going to do about it? Since hardly anyone is asking that question, or even knows the real history of what’s happened, the predictable sequence will continue to play out in both the short and long runs – until that long-sought break.

Jerome Powell is already safe and secure in his second term as Chairman. Progress for him, sure, but what about everyone else?

Jeff Snider is Chief Strategist for Atlas Financial and co-host of the popular Eurodollar University podcast. 

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