Mission Accomplished: Yellen Says Fed's Battle is Over!

Janet Yellen coos that the Fed has landed so softly we didn’t even feel the wheels touch the tarmac. It’s “mission accomplished,” according to Jesse Felder’s take on Yellen’s praise for the Powell landing. Apparently, inflation has been tamed now with no significant damage to labor and no recession. Time to stop worrying about the economy or inflation. Oh, and she probably added another, “There will never be another financial crisis in my lifetime” for good measure as she is want to do.

Global freight, however, didn’t get Yellen’s memo, surging 60% last week with more freight-rate hikes to be delivered this week. So, likely more inflation coming down the road.

And, while GDP supports Yammering Yellen, the Druckenmiller Recession Proxy keeps screaming recession:

Which is an odd place for stocks to be priced to perfection, but investors probably prefer to listen to Yellen than Druck.

For a time with no recession, these days sure are turning in record business bankruptcies:

Private U.S. companies are seeing their earnings and profit margins collapse after the Federal Reserve’s rate hikes have lifted financing costs, and are increasingly going broke, according to a new report. 

And that can actually increase inflation, too:

Larger companies have been mostly insulated from the pain so far. But these corporations often use mid-sized private firms as suppliers, and the failure of smaller businesses could disrupt supply chains and boost costs for bigger enterprises, according to the report from Marblegate Asset Management and Rapid Ratings on Monday. 

Now, you might think bankruptcies aren’t that far above normal so far, but most companies, especially if they are not publicly traded companies, are hiding their pain, so you don’t know how many more are coming until the arrive:

“The water looks fine from the shore but what’s happening underneath the surface is a very very troubled environment that is very dangerous,” said Andrew Milgram, managing partner and chief investment officer at Marblegate….

The private companies saw a measure of their income, earnings before interest, taxes, depreciation and amortization, fall more than 20 per cent between 2019 and 2022. At larger public corporations, Ebitda grew nearly 20 per cent on average. Profit margins contracted among the smaller companies, and expanded at the bigger firms. 

That profit pressure has resulted in more companies collapsing. Bankruptcy filings rose by more than 250 per cent in 2023 from the year before, driven mainly by smaller companies, according to the report. 

These kinds of measures are why I am not predicting a recession for 2024. I’m saying we are already in one!

As Yellen smiles with glee over the sound shape we are in, she might consider that the commercial real estate market is already a disaster, even if it hasn’t taken down any more banks.

America’s offices are emptier than at any point in at least four decades, reflecting years of overbuilding and shifting work habits that were accelerated by the pandemic.

Their plight has been made impossible by the Fed’s rate hikes, and the Fed has made clear there are no cuts on the near horizon.

A staggering 19.6% of office space in major U.S. cities wasn’t leased as of the fourth quarter, according to Moody’s Analytics, up from 18.8% a year earlier. That is slightly above the previous records of 19.3% set in 1986 and 1991 and the highest number since at least 1979, which is as far back as Moody’s data goes.

And it is not like we’ve mostly weathered through this now. Even if the Fed were to start lowering rates this summer, the lag time for the economy to feel the benefit from that loosening of credit is another year or more beyond that point. So, how many of these landlords can survive that long?

This time, most analysts expect offices to stay emptier for longer because vacancies have less to do with economic cycles and more to do with the growing popularity of working from home.

So, we have a lot more dead wood to burn up in bankruptcies for many months ahead. It might be a little soon and cavalier for the glee team to be singing about soft landings.

If the battle is behind us, and the landing has been stuck—softly stuck—why are so many banks back to running to the Fed’s latest bailout program for funding?

Over the last two months, the balance in the Fed Bank Term Funding Program (BTFP) has surged, and the pace of borrowing appears to be increasing.

Since Nov. 19, the amount of outstanding loans in the BTFP has increased by $27.3 billion. The balance in the bailout program grew by nearly $5.4 billion in just the last week.

As of Jan. 3, the balance in the BTFP stood at just over $141.2 billion. It’s the largest balance since the program was created in March.

Looks like trouble beneath the surface to me. When I see a lot of smoke curling out from under a door, I assume trouble. Could just be, of course, Janet and Jerome are in their smoking Cubans.

Let’s just hope it’s not due to banks carrying a lot of commercial real-estate loans or dealing with those business bankruptcies. Better hope it’s just J&J enjoying the soft landing up in the pilot’s airport lounge.

Lots of time left, though, for the growing economic and financial strains to keep popping and cracking until the breaks become visible—sort of like a 737 that has had a depressurization light flickering on and off once in awhile for a few months, which no one could figure out, then suddenly it just blows a panel out the side of the plane.

As Janet relaxes about inflation, I am maintaining my own prediction that inflation rises (and has already shown glints of that). Here is a little realization just in from the sudden “unexpected” rise in European year-on-year inflation that backs that prediction up:

Furthermore, the December inflation figures in the eurozone proved that the base effect was an uncomfortably large driver of the consumer price index annual decline in November. In fact, all the components published by Eurostat in the December advance came significantly above the European Central Bank target.

This is something I’ve tried to point out several times – that we need to keep our eyes on month-on-month inflation where small rises have been seen because the base effect on year-on-year inflation is giving those long-term numbers a lot of help in continuing to decline due to months more than half a year ago when inflation was coming down quickly. The base effect will be disappearing about now, so we may start to see YoY inflation rise. Then the fantasy-chasing markets will have a lot of reconciliation to reality to do.

We need to be careful with excessive optimism about inflation and even more aware of the perils of expecting disinflation with no economic harm. Many market participants are suddenly surprised that January has started with a negative trend, but this is explained by the excessive expectations of aggressive and immediate rate cuts.

Yeah, those were out of line. So, expect realignment to reality, even if Janet and Jerome are smoking up a storm in the lounge as Janet congratulates him on a great fight.

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