Is the Economy Facing a Bigger Crisis Than Recession?

TL;DR

The economy may face more severe risks than a recession, driven by a sharp slowdown in M2 growth and the Federal Reserve's aggressive inflation measures. Weak links in pensions, auto credit, and corporate debt are emerging alongside deflationary pressures, signaling potential financial crises ahead.

Transcript

most people are not aware of it or haven't thought very carefully about it because it doesn't seem to matter to us this is getting to be so serious that we are reaching a cathartic moment and I do think it's started let's just look at the numbers first M2 growth peaked at 27% in 2020 and has been slowing ever since we believe it is closing in or mi... Read More

Key Insights

• 👨‍💼 M2 growth has slowed down, indicating cautious spending behavior by individuals and businesses.
• 🫢 The Fed's approach to inflation may not be suitable for the current 15-month problem caused by shocks and supply chain disruptions.
• 😨 Weak links in the U.S. economy include pensions, auto credit, and corporate debt, which face challenges due to inventory build-up, declining used car prices, and high debt levels.
• 😨 Deflationary signals, such as declining commodity prices and used car prices, suggest potential financial crises and deflationary pressures in the economy.
• 🪡 The Fed's need for unanimity may stifle productive debate and prevent appropriate responses to data-driven signals.
• ❓ The pivot in the Fed's policy may be imminent, as the potential for financial crises and deflation becomes more evident.
• 🥡 The impacts of Fed policy and inflation concerns are felt internationally, with countries like China and Japan taking actions to support their currencies and provide liquidity.

Questions & Answers

Q: How has M2 growth impacted the potential for growth and inflation?

The M2 growth has slowed down to below 3% on a year-over-year basis, indicating limited room for growth and inflation unless velocity significantly picks up. However, the current environment suggests that individuals and businesses are becoming more cautious, leading to reduced spending.

Q: What is the Fed's approach to tackling inflation, and why might it not be suitable for the current situation?

The Fed is taking a similar approach to Chairman Volcker, aiming to combat inflation aggressively. However, this strategy worked well for a 15-year inflation problem in the past, while the current 15-month inflation issue is caused by unprecedented shocks and supply chain disruptions, not embedded expectations.

Q: Why might pensions, auto credit, and corporate debt be considered weak links in the U.S. economy?

Pensions could face challenges due to liability-driven investing (LDI) strategies and a potential collapse if interest rates increase sharply. Auto credit may be at risk as used car prices decline, impacting the value of inventories held by dealers. Corporate debt levels are a concern, especially for sectors experiencing disruption, such as retail, as inventory build-up and declining prices may lead to losses for businesses.

Q: What deflationary signals are present in the economy, despite the Fed's focus on inflation?

Commodity prices, such as gold, copper, lumber, and oil, have declined significantly. Other indicators, including used car prices and container board prices, show deflationary pressures. However, the Fed's policy may not be aligned with these signals, leading to potential financial crises and deflationary impacts.

Summary & Key Takeaways

• M2 growth has slowed significantly, leaving little room for growth or inflation, as individuals and businesses become more cautious with their spending.

• The Federal Reserve's approach to tackling inflation, similar to that of Chairman Volcker in the 1980s, may not be appropriate for the current 15-month inflation problem caused by global shocks and supply chain disruptions.

• Potential weak links in the U.S. economy include pensions, auto credit, and corporate debt, which could face significant challenges due to inventory build-up, declining used car prices, and high levels of debt.