Stocks are falling all across the field.
Markets are only just beginning to wake up to the idea that even the US Federal Reserve may be targeting too low as to the end rate for the most aggressive tightening cycle in history.
The repercussions will continue to be severe. Negative economic series releases are becoming the norm, and deteriorating rapidly as we go into the holiday season.
Some Fed members are now beginning to suggest that the end rate for Fed Funds may be even higher than their own previous projections of somewhere in the 5.00/5.10% area.
I have long forecasted an end rate in the 5.75% to 6.5% range with risk to as high as 7.5%.
This is after all a faster-tightening cycle than the US has ever experienced before. It is a very steep trajectory indeed. This is why some have been talking about a pivot at some point.
I make no apologies for having always been flippant in response to this scenario. It was always premature, never going to happen, and completely mis-understands the nature of the current inflation animal. It is unlike anything we have seen before.
Over the past 20 years, inflation has morphed from a wild tomcat to a meek and mild house kitten and now leaped to being more of the kind of a full-grown hungry panther. It will strike ravenously wherever it can, repeatedly, and keep doing so until something catastrophic happens.
That catastrophic event is going to be a deep recession. Even that other D word, Depression.
A serious prolonged economic slowdown dipping in and out of recession over the next 1-3 years is what lay ahead of the US economy. This is inescapable as a consequence of the natural hangover effect of massive stimulus and extreme and low for too long prior interest rate settings. The US partied because of Covid measures. Now for the hangover.
This hangover scenario was already getting underway before the Ukraine War. The war brought yet another price shock across many markets and is absorbing enormous amounts of western economic capital and debt. There is a very real drain occurring on western government finances, while their economies head for recession, and their central banks are one big group-think of we are good central bankers if we solely fight inflation. No matter the consequences.
This is why Depression is a very real risk and is a word likely to be heard increasingly often as 2023 progresses.
What everybody still seems to be missing, however, is that this economic ‘deterioration’, for it is of a greater quantum than previous economic ‘slowdowns’, will last through 2023, 2024, and even into 2025.
This is a multi-year economic drought. We have only just stepped onto the fringe of the economic desert sands.
The US dollar will continue to strengthen on the back of safe-haven flows and an ever-higher yield. When this particular currency bubble bursts, likely in late 2023/ early 2024, we are likely to witness one of the world’s greatest-ever gold rushes. The ultimate crisis safe haven.
It will get worse before it gets better.
These are slightly dire forecasts, but it is better to be warned and ready than not.
Everything will eventually turn around, but such lavish indulgence by consumers and businesses alike on an artificial wave of government and central bank largesse, was never going to end well.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
