Fact Check: A February Recession Was Predicted Here, Correctly

The current recession began in February according to the National Bureau of Economic Research.  Since COVID-19 was not in play in February, the Fed and Jerome Powell caused this recession exactly as I predicted in May, 2019.  Below is the piece that correctly called it:

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Fact Check: The Truth About Recessions from 5/19/2019

"ANOTHER BUSH, ANOTHER RECESSION" - That was the bumper sticker that appeared on my despondent friend's car right after the election of George W Bush.  Haha, I thought, that's not how recessions happen!

You see, I'd been to business school and was taught that there was something called "the business cycle" that determined when recessions happen.  The theory was that economies inevitably grow too fast, peak, and then shrink. It was just what happened, we were told.

Except that's not what happens.

It turns out The Federal Reserve (Fed) causes recessions.  At least every one in modern times. They decide if, when, and how a recession occurs. They can turn elections. They can drive markets.  In many ways the Federal Reserve is the most powerful government institution in the U.S.  They have more power over our day to day lives than any other branch of government.  And they are unelected.

Here's the proof:  There have been nine recessions since 1954.  Each one followed two specific Fed caused conditions:

• A marked increase in the Federal Funds rate
• A negative spread between the 10-Year Treasury Bond, and either the Federal Funds rate or the 1-Year Treasury.  Also known as an inverted yield curve.

There were no exceptions.  You would think that  in sixty five years at least one recession would be strictly tied to economic issues.  But not a single one occurred independent of those two deliberate Fed caused conditions.

Click on the graphs below to see them in greater detail.  Grey bars are recessions.  Or use these links to see the interactive originals:  10-Year Treasury minus Fed Funds  ,  Fed Funds Rate  (The first two recessions on these graphs had inversions in the 10-Year minus the 1-Year.)

10-Year Treasury minus Fed Funds (Yield Curve) 1954-2019

Fed Funds Rate 1954-2019

There were two times when those two conditions did not result in a recession and there were two cases when only one condition was present.

1. 1966 had both an inverted yield curve and a Fed Funds hike, but no recession ensued.  1966 immediately followed the Kennedy/Johnson tax cuts which stimulated the economy enough to overcome the Fed caused weakness.
2. 1995 had a flat yield curve and a rate increase, but again no recession followed. 1995 also came on the heels of anticipated tax cuts promised by the congressional election of 1994 and The Contract With America.    
3. 1998 had an inverted yield curve, but no Fed Funds hike or recession.  1998 also followed the 1997 signing of the tax cuts first passed by the House in 1995. 
4. 1984 had an increase in the Fed Funds rate, but no change in the yield curve.  1984 also followed the Reagan tax cuts of 1981, and preceded the promised tax cuts of 1986.

CAVEAT: The only times recessions did not occur there were recent or anticipated tax cuts.  Hopefully, 2020 will prove similarly resistant following the tax cuts of 2017.

Curiously, of those nine recessions, all but one coincided with Republican presidents.  None occurred while the GOP held both houses of congress.  All tax laws originate in congress.  All interest rate policy originates at the Fed.  Presidents originate neither. 





This is all worth noting now that the Fed has initiated both conditions following eight years of ~ 0% rates under Obama.  The tightening from .12% to the current 2.41% amounts to an increase of 1900%,  the largest ever in percentage terms.  And in May 2019 the yield curve predictably inverted.  (The graphs above only go to March, 2019 when the yield curve was still slightly positive. )

It looks like the next recession is scheduled to begin precisely as we head into the next election. It will likely begin sometime between February and September of 2020 based on past timelines.  (See CAVEAT above.)

Maybe my Al Gore supporting friend was right after all... though for all the wrong reasons!

[UPDATE 7/30/19]
The Fed is expected to cut rates at their next meeting a day from now,  but it will have no impact on the scheduled recession which is already baked into the economy.  The only thing the president can do at this point is pray his 2017 tax cuts and ongoing deregulations overcome the Fed caused weakness and avoid a recession. My money is on the Fed, only because they are experts at causing recessions, and they have way more power and experience than Trump in these matters.

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Footnote 1:  Here's why these particular Fed actions cause recessions:  The essential raw material for economic vitality, aside from humans, is credit.  When the Fed raises its Fed Funds rate, banks and lenders pay more for their own credit which ripples through the economy raising borrowing costs.  If the increase is too fast and too much, the yield curve inverts which temporarily misaligns lenders and borrowers.  Lenders want to lend at the higher short rates and borrowers want to borrow at the lower long term rates. Credit slows, and a recession follows.


Footnote 2:  Of course the Fed does not operate in a vacuum.  They would argue they are acting on economic conditions.  Still, the timing and predictability of recessions following those two Fed actions cannot be denied.


Footnote 3:  The reason this analysis only goes back to 1954 is because that is the extent of available Fed data for the 10-Year minus Fed Funds.  The 10-Year minus 1-Year does not exist as a single graph but both can be plotted on the same graph by visiting the FRED site.

Here's the result:

Fact Check: The Truth About Recessions [UPDATED]

"ANOTHER BUSH, ANOTHER RECESSION" - That was the bumper sticker that appeared on my despondent friend's car right after the election of George W Bush.  Haha, I thought, that's not how recessions happen!

You see, I'd been to business school and was taught that there was something called "the business cycle" that determined when recessions happen.  The theory was that economies inevitably grow too fast, peak, and then shrink. It was just what happened, we were told.

Except that's not what happens.

It turns out The Federal Reserve (Fed) causes recessions.  At least every one in modern times. They decide if, when, and how a recession occurs. They can turn elections. They can drive markets.  In many ways the Federal Reserve is the most powerful government institution in the U.S.  They have more power over our day to day lives than any other branch of government.  And they are unelected.

Here's the proof:  There have been nine recessions since 1954.  Each one followed two specific Fed caused conditions:

• A marked increase in the Federal Funds rate
• A negative spread between the 10-Year Treasury Bond, and either the Federal Funds rate or the 1-Year Treasury.  Also known as an inverted yield curve.

There were no exceptions.  You would think that  in sixty five years at least one recession would be strictly tied to economic issues.  But not a single one occurred independent of those two deliberate Fed caused conditions.
 
Click on the graphs below to see them in greater detail.  Grey bars are recessions.  Or use these links to see the interactive originals:  10-Year Treasury minus Fed Funds  ,  Fed Funds Rate  (The first two recessions on these graphs had inversions in the 10-Year minus the 1-Year.)

10-Year Treasury minus Fed Funds (Yield Curve) 1954-2019

Fed Funds Rate 1954-2019

There were two times when those two conditions did not result in a recession and there were two cases when only one condition was present.

1. 1966 had both an inverted yield curve and a Fed Funds hike, but no recession ensued.  1966 immediately followed the Kennedy/Johnson tax cuts which stimulated the economy enough to overcome the Fed caused weakness.
2. 1995 had a flat yield curve and a rate increase, but again no recession followed. 1995 also came on the heels of anticipated tax cuts promised by the congressional election of 1994 and The Contract With America.    
3. 1998 had an inverted yield curve, but no Fed Funds hike or recession.  1998 also followed the 1997 signing of the tax cuts first passed by the House in 1995. 
4. 1984 had an increase in the Fed Funds rate, but no change in the yield curve.  1984 also followed the Reagan tax cuts of 1981, and preceded the promised tax cuts of 1986.

CAVEAT: The only times recessions did not occur there were recent or anticipated tax cuts.  Hopefully, 2020 will prove similarly resistant following the tax cuts of 2017.

Curiously, of those nine recessions, all but one coincided with Republican presidents.  None occurred while the GOP held both houses of congress.  All tax laws originate in congress.  All interest rate policy originates at the Fed.  Presidents originate neither.     





This is all worth noting now that the Fed has initiated both conditions following eight years of ~ 0% rates under Obama.  The tightening from .12% to the current 2.41% amounts to an increase of 1900%,  the largest ever in percentage terms.  And in May 2019 the yield curve predictably inverted.  (The graphs above only go to March, 2019 when the yield curve was still slightly positive. )

It looks like the next recession is scheduled to begin precisely as we head into the next election. It will likely begin sometime between February and September of 2020 based on past timelines.  (See CAVEAT above.)

Maybe my Al Gore supporting friend was right after all... though for all the wrong reasons!

[UPDATE 7/30/19]
The Fed is expected to cut rates at their next meeting a day from now,  but it will have no impact on the scheduled recession which is already baked into the economy.  The only thing the president can do at this point is pray his 2017 tax cuts and ongoing deregulations overcome the Fed caused weakness and avoid a recession. My money is on the Fed, only because they are experts at causing recessions, and they have way more power and experience than Trump in these matters.   

___________________________________________________________

Footnote 1:  Here's why these particular Fed actions cause recessions:  The essential raw material for economic vitality, aside from humans, is credit.  When the Fed raises its Fed Funds rate, banks and lenders pay more for their own credit which ripples through the economy raising borrowing costs.  If the increase is too fast and too much, the yield curve inverts which temporarily misaligns lenders and borrowers.  Lenders want to lend at the higher short rates and borrowers want to borrow at the lower long term rates. Credit slows, and a recession follows.


Footnote 2:  Of course the Fed does not operate in a vacuum.  They would argue they are acting on economic conditions.  Still, the timing and predictability of recessions following those two Fed actions cannot be denied.


Footnote 3:  The reason this analysis only goes back to 1954 is because that is the extent of available Fed data for the 10-Year minus Fed Funds.  The 10-Year minus 1-Year does not exist as a single graph but both can be plotted on the same graph by visiting the FRED site.

Here's the result:

The Immaculate Recession

Two days ago, on June 25^th 2014, the third update to GDP numbers was released for the first quarter of the year, and the latest numbers show a GDP change of -2.9%.  This is pretty amazing since the consensus opinion going into the quarter was for +2.5%, the advanced estimate in April was for +0.1%, the first revision in May was for -1%, and now the second revision in June is a whopping -2.9%!

Even in a business like economic forecasting and reporting, which is known for being particularly dodgy, this discrepancy is unusual.  But there may be a simple, though not comforting, explanation for this wild swing. 

Consider that the official definition of a recession is two consecutive quarters of negative GDP growth.  Therefore, the lower the first quarter, the easier it will be to avoid the “R” word when the second quarter is reported.  For example:  if the first quarter had actually been -1.5% and the second quarter comes in again at -1.5%, that would ring the recession bell and the overall 2014 GDP would be -1.5%.  But if the GDP really is -1.5% after two quarters, and the first quarter is reported as -2.9%, then the second quarter can be reported as +1.4%, and no recession will have officially occurred!  Call it the immaculate recession. 

Now you might be saying, “that’s ridiculous , the Bureau of Economic Analysis (BEA) is a highly respected non-partisan government agency which would never manipulate official numbers to benefit incumbents during an election year!”  Yeah, tell that to the victims of the IRS, FDA, FBI, INS, DOJ, NLRB, NTSB, Fish and Wildlife, etc, etc, etc. 

Update: Oh, and remember this?  Census "faked" election 2012 jobs report.

Obamaball

In light of the recent celebration surrounding the drop to 8.3% unemployment, I am reposting "Obamaball" which first appeared 12/21/11.   

Have you seen the movie “Moneyball” or read the Michael Lewis book by the same name?  To make a long story short, it is a true story about winning baseball games without superstars by taking a deeper look at the statistics and analyzing them in a better way.  Baseball and economics share a fondness for statistics so the question arises, could economic statistics reveal a similarly undiscovered strategy for the economy like what Oakland General Manager Billy Beane did in “Moneyball”?  Moreover, could the President's economic plan, “Obamaball”, be that strategy?  

Baseball stats and economic stats are not all that comparable.  In baseball there have always been nine members on a team, ninety feet has always been the distance between bases, sixty feet six inches has always been the distance from the mound to the plate, the bat is always wood, there are three outs, three strikes, four balls, nine innings, and so forth.  Therefore, an ERA has always been an ERA, an AVG has always been an AVG, and R, H, and E have always been R, H, and E.   

If only things were as simple in economic statistics, especially since the big ones all come from the government.  Unlike baseball, the government is always changing how they measure and what they measure.  Sometimes the statistics change because of an unintended consequence from a change in a law.   Sometimes it is for practical reasons.  And sometimes it just seems political.   After all, government economic stats come from the very government they sit in judgment of!

Here are four key statistics which form the basis for much of the economic rhetoric heard today.  In all four cases these statistics fail the baseball test.   

•       Inflation (CPI)– Not only has the Bureau of Labor Statistics changed the way it measures inflation over the years, notably in 1980 and 1990, but they cannot avoid relying on prices for manufactured imported goods which tell us more about foreign labor markets and regulations than they do about our own currency.  When these changes are backed-out, the actual inflation rate is about 2.5% higher than what is reported.  What makes inflation so problematic is that all other measures of economic performance are “inflation adjusted” and thus dependent on an accurate inflation number to start with.  Even corporate earnings must be weighed against an accurate inflation measure.

•       Economic Growth and Recession  (GDP) – GDP numbers are all adjusted for inflation too and thus suffer the effect of any inflation inaccuracies.  That is why a 2.0% annual growth rate based on a “GDP Deflator” which is under-measured by 2.5% feels exactly like, well, a -.5% growth rate.  That is how GDP can be reportedly rising by 2% yet polls can show most people believe we are still in recession.  The people are probably right.

•       Unemployment (U3) – You’d think that “unemployment” would be a cut-and-dried statistic:  “The number of people not employed as a percent of the labor force”.  But that’s not how the government does it.  In fact, if every single person in the US was collecting unemployment, disability, welfare, food stamps, or some other form of assistance but not actively seeking a job, the official unemployment rate in the US would be…0%!  The way we measure, we could have no one working and still have zero unemployment.  If we corrected for just this issue and undid the error back to Barack Obama’s inauguration, the real unemployment rate would be 11%.  If all the nonsense is removed, the actual number is close to 23%.    

•       Income Inequality (1% vs. 99%) – Much of the recent rhetoric about the 1% vs. the 99% is based on a CBO report from October of this year, which has numerous issues.  In order to measure income inequality, the CBO used a government measure based on income tax returns from 1979 to 2007.  Not 2010, which should have been available, but 2007, right before the financial meltdown in the midst of a bubble!  Second, many returns in the top brackets include corporate pass-through income, which is a recent phenomenon and makes income tax returns meaningless for measuring changes in personal wealth.  Moreover, tax rates changed constantly from 1979 to 2007 making any trends difficult to discern.  These are just a few of the problems making this CBO report useless for analyzing trends.

And then there’s the economic analysis.  Here are four big economic issues and the current administrations analysis along with some questions.    

•       Arguably the biggest economic issue of our time is the financial crisis of 2008 and its aftermath.  According to President Obama’s analysis, greedy fat-cat bankers largely caused the whole thing.   Isn’t that like blaming a plane crash on gravity?  Aren’t gravity and greed constants?  Are bankers today greedier than they were, say, in the 1950s?  Were there any sub-prime loans back then?  Where did sub-prime loans come from?  Wasn’t the President part of the chorus demanding sub-prime mortgages in the 90’s and didn’t he then protect and subsidize the dangerous practice through his support of Fannie Mae and Freddie Mac as a US Senator?

•       Once the analysis points to greedy bankers, it’s a short leap to blaming the continued malaise on the same class, which the President has made the theme of his re-election campaign.  So what has prevented Obama from stopping the greedy and the rich from continuing the malaise?  Didn’t he have two solid years of filibuster-proof control of the entire federal government?  Didn’t they pass Dodd-Frank?  How then can he explain MF Global and Jon Corzine (D-NJ), the newest example of greedy fat-cat banking failure?  Why did Obama and the Democrats keep the Bush tax cuts “for the rich” back in 2010 when they were set to expire?  How does this all add-up?  

•       If greedy bankers caused a financial crisis, what better way to fix it than to go on a 5 Trillion dollar spending and borrowing binge, right?   Who will pay for the extra 5 trillion in borrowing? Does that even matter as long as the inevitable collapse is timed to occur after the Obama reign?  Can “the rich” possibly make-up the difference if the top 10% of the country earn 40% of the income and pay 70% of the income taxes already?

•       If the financial crisis was due to greedy rich bankers, then the healthcare crisis must also be caused by greedy rich insurance companies and greedy rich doctors, right?   What better way to fix it all then to put the federal government in-charge of the whole thing?  Aren’t Medicare and Medicaid both disasters from a sustainability standpoint?  How can putting the same government in-charge of the entire industry be a good thing?  How can Obama claim the “free market” has failed in healthcare when it hasn’t been involved in healthcare since WWII when employers got to deduct premiums but individuals did not?      

So this is it in a nutshell:  President Obama, the General Manager of our team, has looked at the statistics, done his analysis, and believes he has saved us from a Great Depression, free markets don’t work, greedy rich people caused all the problems in the first place, the government’s job is to re-distribute wealth, and borrowing 5 trillion is OK as long as it blows-up on someone else’s watch.  

Welcome to “Obamaball” where all the stats are rigged and all the analysis is wrong.

Yeah, Me Neither...Pass It On.

This is a response to this nugget of nonsense going around facebook.

Wall Street Should Read This!

"Wall Street Baffled by Slowing Economy" ?   Maybe they should read this: The Irony of Keynes!
*This headline should have read, "Sycophantic Media Blindsided by Bad Economic Policies Blames Wall Street Myopia"! 

Best Thing I've Read on the Financial Meltdown

This is the best thing I've read on the financial meltdown, (Thanks Cato) and if you are brave enough to read it, I'd ask you to consider a similar line of thought on healthcare.  Start by going back to WWII and the freeze on wages when companies figured out they could add insurance, write it off, and still dodge the freeze, which eventually led to Medicare, which eventually led to rising rates, which eventually led to...

Hat Tip: Instapundit

Cato: Perfect Storm of Ignorance

Ouch...

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." -Ludwig Von Mises
Why do I think we are going to get both? 

(Nod - I lifted the Mises quote from a comment on a Bruce Bartlett Forbes piece.)
http://rate.forbes.com/comments/CommentServlet?op=cpage&sourcename=story&StoryURI=2009/10/29/depression-recession-gdp-imf-milton-friedman-opinions-columnists-bruce-bartlett.html&com=92267