Morning Report: Goldman sees a 1 in 3 chance of a recession next year

Vital Statistics:

 LastChange
S&P futures4,28031.2
Oil (WTI)106.650.59
10 year government bond yield 2.01%
30 year fixed rate mortgage 4.28%

Stocks are higher this morning as investors adjust to a new normal with a war in Ukraine. Bonds and MBS are down small.

Goldman cut its estimate for US growth this year from 2% to 1.75%, and it estimates we have a 1 in 3 chance of a recession next year. They are basing this view on the shape of the yield curve. With the Fed reducing its purchases of Treasuries and MBS the shape of the yield curve (in other words the difference between longer-term rates and shorter term rates) is beginning to return to transmitting useful information. Long-term rates in the context of QE have a very low signal-to-noise ratio.

Despite the bearishness on the US economy, the Fed Funds futures have moved to the hawkish side again, with traders seeing a Fed funds rate of 1.75% as the most likely outcome at the end of the year. We will get a fresh dot plot and projections next week at the FOMC meeting, where the market has penciled in a 25 basis point rate hike. Given the war in Ukraine and inflationary pressures, the press conference will be closely watched by investors and journalists.

Robust asset price appreciation lifted household net worth by over $5 trillion in the fourth quarter of 2021. This is from Federal Reserve data. Separately, CoreLogic said that homeowner’s equity rose 29% in Q4. Negative equity fell to about 1.1 million homes. This home equity will probably bring back the “house as ATM” trade as investors tap home equity to refinance credit card debt or remodel.

One of the biggest surprises for me so far has been that some major hedge fund hasn’t blown up as a result of Russian debt bets. When Russia defaulted on its sovereign debt in the late 90s, we saw numerous blowups, including Long Term Capital Management.

So far, junk bond spreads (which is the difference between the yield on CCC and lower rated bonds and Treasuries) are behaving. The market seems relatively sanguine. If things start going sideways in the financial markets, this is going to be your canary in the coal mine. Note the spike at the beginning of COVID. This is when the market for non-QM disappeared almost overnight.

27 Responses

  1. I don’t think I’ve seen this put at $5 trillion before:

    “Where $5 Trillion in Pandemic Stimulus Money Went

    By Alicia Parlapiano, Deborah B. Solomon, Madeleine Ngo and Stacy Cowley
    March 11, 2022

    Stimulus bills approved by Congress beginning in 2020 unleashed the largest flood of federal money into the United States economy in recorded history. Roughly $5 trillion went to households, mom-and-pop shops, restaurants, airlines, hospitals, local governments, schools and other institutions around the country grappling with the blow inflicted by Covid-19.”

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    • And I bet that $1.7 trillion in aid to business was really just PPP loans to fund payroll.

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      • The piece showed this breakdown:

        Paycheck Protection Program
        $835 billion

        Economic Injury Disaster Loan program
        $349 bil.

        Loosen limits on business losses
        $193 bil.

        Delay of employer payroll tax
        $85 bil.

        Airlines
        $80 bil.

        Restaurants
        $29 bil.

        Economic Injury Disaster Loan advances
        $27 bil.

        Employee retention payroll tax credit
        $26 bil.

        Support for Federal Reserve loans
        $25 bil.

        Interest deductions
        $13 bil

        Venues
        $13 bil

        Paid leave credit
        $11 bil.

        Other
        $11 bil.

        Other tax breaks
        $9 bil.

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        • I wouldn’t count tax breaks and other failures to collect taxes.

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        • I was gonna say that including various tax stuff is pure horseshit.

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        • That’s got to be some pretty awful taxes to make the UK attractive. I would think. Scott should know how UK taxes and cost of living shake out in comparison.

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        • It is hard for me to say because I was tax equalized by my company, so I continued to pay taxes to my company as if I still lived in CT, and they managed whatever difference there was. But my impression was that for income taxes (CT state plus federal) it turned out to be roughly comparable to the UK. I imagine that California is higher, especially if you start to include property taxes.

          In the UK they have a VAT (Value Added Tax), which is pretty steep (I think it is 20%!), but it is largely invisible because the advertised price for goods and services is always the net price, not the pre-sales tax price as it is here in the US. (That drives them crazy when they visit the US.) So it is hard to distinguish between the cost of the good and the cost of the tax. A general rule of thumb that I noticed is that £1 in the UK will buy roughly the same goods and services that $1 will buy in the US. So since the £ is worth more than the US $, goods are generally more expensive in the UK.

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        • Consistent with their worldview. Any money you make that the government take is a subsidy to you, or a form of “welfare” … but not the good kind since experts aren’t managing the distribution of the funds.

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        • A general rule of thumb that I noticed is that £1 in the UK will buy roughly the same goods and services that $1 will buy in the US. So since the £ is worth more than the US $, goods are generally more expensive in the UK.

          That was my experience in London as well.

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    • “…grappling with the blow inflicted by Covid-19.”

      No, no no. They were grappling with the blow inflicted by the government’s response to Covid-19. I really, really hate this lie.

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      • Governments … cuz city and state governments did their own stupid stuff above and beyond federal stupid stuff. And of course other governments around the world. And the culture. And hospitals and the medical expert class. And fucking social media. Lot of things contributed to the COVID disaster. The least being COVID itself, tho.

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    • The more I look at this flood of money as a response to COVID, I think the best parallel is LBJ’s guns and butter expansion. I get the feeling we are in for a good old-fashioned commodities boom.

      The 70s were great if you were in the oil patch or a farmer. That ended with Paul Volcker, but it ran a good decade.

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  2. Delusions of grandeur:

    “Given the chance to address the court before the sentencing, Mr. Smollett declined. But after Judge Linn read his sentence, the actor defiantly stood up and declared, “I did not do this, and I am not suicidal,” adding that “if anything happens to me when I go in there, I did not do it to myself.” As he was taken into custody to begin his jail sentence, Mr. Smollett raised his right fist. His lawyers immediately said they planned to appeal.”

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  3. This is good:

    “Restaurants Now Requiring Proof Of Ukraine Support

    March 11th, 2022 – BabylonBee.com”

    https://babylonbee.com/news/nyc-restaurants-now-require-proof-of-ukraine-support

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  4. The official government line is a known lie.

    So what else is new?

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  5. Mitt Romney – the very definition of Restored Norms.

    Douche or just a douche nozzle?

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