Monday, March 17, 2014

Did John Williams Just Predict The Next Recession??

by Lance Roberts

There are three things that are often spotted, widely believed, and actively sought after with little evidence they actually exist:  Big Foot, Ghosts and Economic "Soft Landings."  If you are interested in the first two, you can catch weekly episodes of Animal Planet's "Search For Bigfoot" and SyFy's "Ghost Hunters."   The funny thing is that both of these shows remind me of "Get Smart" because when it comes to actually finding any real evidence it is always "missed it by this much."

When it comes to "economic soft landings" the story line is really changed that much.  By definition an economic soft landing is:

"The process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession."

The chart below is the annual change in economic growth from 1854 to present with recessions identified.


Over the past 159 years, there is not much evidence that an economic "soft landing" has ever occurred.  However, it is not without precedent that as the economy reaches the latter stage of the growth cycle that the words "soft landing" are uttered by economists and Federal Reserve members.

In 1999, according to the FOMC minutes, Ms. Johnson stated in her remarks:

"Provided foreign officials do not unnecessarily limit output growth from achieving its new potential, such a development could result in stronger demand for U.S. exports and more balanced growth in the global economy. Such a scenario is one version of a so-called soft landing."

In the August, 2000 FOMC press release Alan Greenspan stated:

"The incoming data seem to have convinced participants in the financial markets that the odds of a soft landing have risen."

Then again following the September 2000 FOMC Meeting:

"Financial market participants seem to be reading the recent economic data as further confirmation that a soft landing is in train."

Of course, as we know now, the recession soon followed in 2001.

One of the things you have to admire of those that hunt for ghosts, "Big Foot" or aliens is that they live by the "Jason Nesmith" motto of "Never give up...never surrender."

Apparently, the same holds true for the members of the Federal Reserve as during the December 12, 2006 FOMC meeting, the now Fed Chairwoman, Janet Yellen remarked:

"In summary, I continue to view a soft landing with moderating inflation as my best-guess forecast, conditional on maintaining the current stance of policy. But there are sizable risks on both sides to the outlook for growth, and the downside risks are now more palpable."

Followed by then Chairman Ben Bernanke:

"So like most people around the table, I think that a soft landing with growth a bit below potential in the short run looks like the most likely scenario."

Of course, it was just 12 months later that the US economy dipped into the worst recession since the great depression.

Why do I bring this up?  Bihnamin Appelbaum, via the New York Times, recently interviewed John Williams, the President of the Federal Reserve Bank of San Francisco, who stated:

"John Williams, president of the Federal Reserve Bank of San Francisco, is feeling pretty good about the economy. He is ready to continue the Fed’s retreat from bond-buying and forward guidance. And he says he’s optimistic that this time, the Fed will manage to produce a soft landing."

However, Bihnamin understands that "soft landings" are rare and gives John a chance to extract himself:

Q.  You've said several times during our conversation that we're returning to normalcy. A lot of people are uneasy about the Fed's ability to manage that return.

A.   I think we've got significant challenges ahead of us that are far greater than normal periods of monetary policy. Not only the communication around the taper but more generally that whole exit period of moving from zero interest rates after many, many years, and what happens to our balance sheet, these are clearly big issues that are ahead of us and getting the soft landing right is very difficult.

Q.  But the Fed almost never lands softly.

A.  Maybe this will be the one time we have a soft landing. We haven't had a lot of breaks in the last few years."

If history serves as any guide, John's prognostication started a 12-18 month countdown to the next recession.  Of course, as John suggests, "this time could certainly be different."   As I wrote previously:

"The next major market correction will very likely coincide with the next economic recession.  Of course, by simply writing the 'R' word this article will be summarily dismissed by the 'financial illuminati' who continue to marvel at the day to day levitations of the markets with the inherent belief 'trees can grow to the sky'.  Ultimately, all economic recoveries will eventually contract.  The chart below shows every post recession economic recovery from 1879 to present.


The statistics are quite interesting:

  • Number of economic recoveries = 29
  • Average number of months per recovery = 39
  • Current economic recovery = 57 months
  • Number of economic recoveries that lasted longer than current = 6
  • Percentage of economic recoveries lasting 53 months or longer = 24.14%

Think about this for a moment.  We are currently experiencing the 7th longest economic recovery in history with most analysts and economists giving no consideration for a recession in the near future."

While there is always the possibility that ghosts are real, "Big Foot" is alive and a "soft landing" will be achieved, there is just precious little historical evidence to support that claim.  Unfortunately, such claims of a "soft landing" have always come just prior to recessions as any claim different by a Federal Reserve member would likely spark a panic in the financial markets accelerating a recessionary event.

What it does suggest is that the Federal Reserve is far more worried about the current economic state than what they reveal.  For the Federal Reserve, "forward guidance" is their "Omega 13."  The hope of is that communication can put the markets, and economy, on a controllable "glide path."  The problem is that in order for forward guidance to work you have to make the assumption that the Federal Reserve, through monetary policy, can control, or potentially eliminate, real economic cycles.

Is that possible.  Sure.  Historical probabilities suggest something far different.  Regardless of the outcome, just remember to "Never Give Up, Never Surrender."

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