Is it too extreme to say an annualized GDP growth number of minus 1.4% this quarter puts us in recession in this quarter, and is it too extreme to call that a “crash?” No, it is not in the least extreme, and I’ll tell you why, even though the standard definition of a recession is two consecutive quarters of negative GDP change.
How grizzly is this bear?
Just a few days ago, Goldman Sachs was regarded as becoming the most bearish bank out there by forecasting — rather daintily now I think — we have a 35% chance of eventually seeing a recession in about a year! Deutsche Bank — the second-most bearish bank in the US right now — showed great boldness by prognosticating the US could go into recession in late 2023 — well over a year away!
These were the roughest guys on the block. Way to call it, guys! You only missed by a year or more. My only thought when I first heard each of these was, “You guys optimists!” I have felt like the lone voice (or very nearly so), saying over and over last quarter and this that we are already in a recession.
Take for example, this article in March: “Seeing It All Come Together: Months of Predictions Closing in on Quick Collapse” in which I reiterated my strong belief that recession was already happening.
I would put the probability of a recession starting in this quarter at 95% because the yield curve is inverting now. As I’ve already stated several times, we could expect the yield curve inversion to be the late arriver to the party this time, entering after recession already began
And you can see that in this article from back in early February: “The Next Recession is Here!” And there were other points during the winter quarter where I mentioned all along the way we were already in a recession. I have been neither shy nor hesitant to keep saying that, even after fourth-quarter GDP last year came in hot:
The next recession is smoking right outside your window. You’re lying in your bed at night. You can’t see the intruder, and you don’t think he’s in the house yet, but you know he’s there because you can smell his cigarette smoke through your bedroom window. That’s where we are right now. Fourth quarter GDP for 2021 is trying to make a fool out of me by coming in with a stellar glow at 6.9% growth….
Don’t believe it, I warned you, even though 4th quarter GDP said otherwise. Wake up and smell the smoke. The intruder is already on your doorstep. With less than two weeks of winter in by the end of the quarter being reported, recession was already, in my opinion, right on our doorstep, exactly as I had predicted in October:
What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.… The descent in GDP toward actual recession is happening quickly. The shortages talked about in my recent posts are spreading like a flood tide across a wide, shallow beach. People are not returning back to work in near the numbers some predicted they would (not I) when enhanced unemployment ended for the reasons I laid out months ago. Soaring inflation will now curtail spending and result in more businesses closing and rising unemployment. This is stagflation
I laid out for you the key to understanding how and why a cloaked recession would hit before anyone saw it coming: no one seemed to be realizing the Fed had the yield curve locked right where it wanted by the massive amounts of bonds it was purchasing. So, the yield curve could not price in a recession in advance. It was locked! However, it would, I said, price one in as soon as the Fed unlocked it by tapering out of QE. That was the key, and now we see that we were, in fact, already in a recession last quarter before the yield curve was freed to show a recession coming. The yield curve did, indeed, arrive late to the party.
(And how many pundits do you suppose still won’t get it because they cannot think for themselves, so they will parrot their old-school learning and claim we cannot possibly be in a true recession because the yield curve is supposed to invert, at least, nine months before the recession begins? Well, it couldn’t! The Fed had it locked down tight. As I kept saying, there was zero TRUE price discovery in the yield curve so long as the Fed was hosing up 50% of all new government bond issuances. That is why, in thinking it through, I said the yield curve would invert as quickly as the Fed took its fat foot of the curve’s throat, but it would only be showing investors what it would have shown months prior if not fully suppressed from doing so by the Fed. Too many supposedly smart people don’t think; they parrot. They stay with saying what all their smart colleagues are saying. They repeat the formulas they’ve learned without thinking through the current parameters. Even the Fed didn’t seem to realize it was shunting its own recession meter.)
I gave all my readers a key for understanding the events that would come at the start of 2022 (Patrons first, of course): realize that the Fed would inevitably be relinquishing all of that control over bond yields when it stopped its QE bond purchases, which would allow the bond vigilantes to price in the inflation that the yield curve had been incapable of showing for the past two years…. The key for you to see what was coming was to understand why the Fed’s favorite meter was broken, what it would take to fix it, and how quickly it would respond once fixed.
I constantly held that course when the most bearish voices out there were claiming a more distant horizon at the earliest and when some were saying I was a moron to think this way because Father Fed knows best. Most of the “bearish” voices out there sounded like permabulls compared to me, because I did’t say “this year.” I said “right now! We’re already in it!” while these others assured everyone they could relax for another full year.
It turns out the economy was already in recession while they were saying that. That is why it is not in the least bit extreme to say this 1.4% drop in GDP was certainly a “crash” compared to the 1% growth that was the averaged expectation. Not only is it 2.4 percentage points worse than what was expected, but it’s 8.3 points below the previous quarter!
With the exception of when we did the Pandemic Plunge, we have almost never seen a cliff-dive this steep in GDP.
Ironically, I even stated in that October article,
I foresee a winter at some times and places where you’ll feel for the first time in American life like you have slid down the rabbit hole and ended in a version of the USA that looks and feels more upside-down than the old USSR.
Now, even I didn’t think the winter quarter of 2022 would come in this bad nor did I see the present war coming, so this GDP report is also a crash by my “doom and gloom” perspective, which was just based in realism, rather than blind optimism because I like to see what is coming at me, not live in pretend. I thought we’d just get a little nippy, just clinging to the bottom edge of zero. Almost all economists thought we’d only settle to a refreshingly crip levels somewhere above 1% positive growth. So, these sub-zero temps are even a bit worse than I thought. The number floating around in my head was -0.4% real GDP change, not -1.4%.
Not a grizzly bear, but a polar bear!
So, even this polar bear of yours is a bit surprised at how suddenly cold it got — like the late snow that just blew through the midwest. However, we had the sudden worsening of those shortages I described brought about by both the war and the sanctions in late February and March (each having their separate-yet-related impacts). So, that black swan knocked us deeper than I could have foreseen back in October.
However, due to certainty about those shortages getting worse and inflation getting worse even back then, I also warned you to start laying in extra supplies of all the things you actually buy because, even if the shortages didn’t get too bad in your neck of the woods, you’d save money by purchasing ahead of the worst inflation you’ve likely ever experienced. I’ve never recommended that kind of prepping to my readers before, and I’ve never needed to (as it has turned out). That is because I’m not a gloom-and-doomer; I’m a realist.
I don’t advocate prepping year after year — but only when it is actually likely to be needed. I don’t try to get people stirred up with needless fear. I don’t predict crashes every year. So, that tells you how certain I was, even back in October, that the limited shortages we were seeing back then would get worse based on how things were clogging up in the economic background of our daily lives. I believed you couldn’t go wrong by stocking up so long as you stayed with buying extra amounts of those things with long shelf lives that you regularly consume and use them before their use-by dates.
You see, unlike other bears, polar bears don’t hibernate in the cold, even though they are in the coldest of cold environments. They just grow longer fur to get ready for it.
I also warned you in February not to be beguiled as most people were by the stellar GDP numbers that had just come out for the 4th quarter of 2021. I warned of how deceptive the headline number was on the basis that almost all the growth supporting that number was due to inventory buildups, which happened because people were buying and businesses were stocking up in the same manner I had suggested in anticipation of shortages. There was a flurry of economic activity like people pulling together necessary supplies from around their home before going down into the storm cellar when they get a tornado warning:
Last quarter’s stocking [Q4 2021] is likely to reduce this quarter’s buying [Q1 2022]. Since GDP growth in this report lies almost entirely in inventory builds and consumer retail, there is a strong likelihood the entire GDP jump was driven by shortage scares to where everyone’s prepping last quarter will result in a slump this quarter.
In that same article, I quoted Zero Hedge to back that up because they saw all of this the same way:
In other words, the inventory restocking process is now running red hot – even if many won’t notice it on the shelves of their favorite retailer – and in future quarters will likely lead to further declines in GDP.
Sure enough, the first quarter of 2022 has now come in, showing a reversal in all that inventory leading the pack of causes of the overall GDP reversal:
According to the BEA, the first quarter decrease in real GDP reflected decreases in inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased…. The change in private inventories was a huge hit to GDP (just as we warned last month it would be) subtracting -0.84% from GDP, vs adding 5.32% in Q4
Much of that inventory growth in Q4 that made such a big print in GDP proved to be, as I warned, just business brought forward … likely in anticipation of shortages to come. So, here we are, and now even the president agrees with me as his administration admits we are now in a recession: Zero Hedge summarizes:
In our view the US economy is already in a stagflationary recession, and the sooner the Biden admin admits this the better, which is precisely why it just did so.
The Polar Bear Express
This train has not only left the station; it has already run off the rails. Recession is now a fact that is going to get a lot worse before it gets better. But train wrecks take time to play out, so you still have some time to maneuver. If you didn’t lay in stores, they’re going to cost you more now, but they’re still available. If you kept your money in stocks or bond funds, you’ve already seen some big losses but you can spare yourself more. The bumpiest part of this ride hasn’t even begun. That’s why so many could not even see we were already in recession and still didn’t see it today as they bid stocks up in denial of how bad it will get.
It came as no surprise to me that stupid investors today see this as good news for stocks because, still living in the la-la-land of their empty heads, they see this as insurance that the Fed will not tighten so quickly. While the Fed may not tighten as much as it would have, it is incredibly naive to think that will save the stock market because we are already in a rapidly plunging recession that will tear everything apart. But those who refuse to see reality, say, “Ah, but now the Fed won’t tighten so fast.” I expected the market would glibly soar when the GDP report came out today based on that obtuse, glib hope that now the Fed will go straight back to money printing.
However, the importance of this unseen-by-most decline into recession, I noted back in October, was
That means the Fed will be, as I’ve said, hiking into a recession, but the Fed doesn’t seem to know that.
That means the Fed is really going to mess this one up bad.
I have no doubt the Fed will be more hesitant to tighten and may not tighten as much over the long run, but it still has face-ripping inflation to contend with, and it will be take more time for this recession to pull down inflation than the Fed has time politically to wait it out. The Fed knows it has to be seen as fighting inflation. Even if it cannot solve this kind of inflation, based in part as it is on shortages, it certainly cannot be seen fueling inflation even higher by dumping coal into the firebox. The Fed has deep-seated body memories of how hard inflation is to tame when it gets out of control — and that includes stagflation, which is what this is (inflation in a stagnant or falling economy) and what I have always said this would turn into since I started predicting this inflation would keep rising way back in the summer of 2020.
So, the stock market’s bounce today is likely to be short-lived because it is all false hope (false sentiment) that is going to get the belly ripped out of it by reality (again). I don’t think it will take long for the hangover from the market’s drunken revelry today to set in. Stocks have already entered the bear’s polar climate I predicted this inflation and the Fed’s tightening would take them into. The stock leaders of the market have fallen off a cliff, and most stocks are deeply in their own bear markets, even the FAANG stocks, as I showed in my last article, while there are a lot of shortages and a lot of recession left to come, and we still have Fed tightening to begin at a time when the economy can no longer withstand any tightening.
So, the market is ready to celebrate Fed relief is coming, but Fed relief is not coming that quickly, so the Fed will certainly be tightening into recession, since we are already in one, while a lot more bad news is already lined up to continually come. You see, the Fed hasn’t even begun to tighten yet:
In fact, right now, the Fed’s balance sheet is still slowly expanding as it rolls over the interest on all those bonds it owns and refinances everything as it matures. Can you believe that? All this, and the Fed is so far behind the game that it is actually still letting its balance sheet grow a little higher!… The Fed, fast as its talk is ratcheting up, hasn’t done anything more than almost stop QE and throw out a token quarter-of-a-percent hike.
Anyone who tells you this GDP report is just an anomaly is as much a liar or self-deceived as the same person was when he or she told you (as Janet Yellen and Jay Powell recently did) the economy was “strong” or that there was “no recession in site.” Less than a week ago, I noted,
The Grand Matriarch of the Fed, Grandma Yellen … made another one of her brilliant proclamations on Friday, harmonizing with the claim she made when she was retiring from the Fed, when she said that we had seen the last financial crisis in her lifetime. Having apparently outlived herself, she is now entering the second financial crisis since she made that proclamation, and yet she doesn’t see this one coming either, even as she’s riding in the locomotive that is already going over the cliff. “Whoopee!” Yellen yelled again, “There is no recession in sight!” Good times are right ahead, I guess.
And here we are. We got news today that the locomotive has gone over the edge. It is amazing to think the people who run our central bank and our treasury can be this stupid or blind. In fact, it would be impossible to believe if not for the fact that almost everyone who writes on the economy and analyzes it was saying the same thing because they just parrot what the Fed feeds them. As I just said, Deutsche Bank and GS were the grizzliest bears out there in the world of mega-finance, viewed as being a bit on the gloomy side for saying the economy would enter recession sometime next year.
True, recessions are never called recessions until they have already been running for two full quarters, then they are declared and backdated to the start of the first quarter that went negative (as we will eventually see here). The fact that I am declaring it a recession before that, having already declared all of last quarter that we were in a recession in Q1, doesn’t make my declaration wrong. It makes it, as yet, not fully proven; but I am as certain that it will prove out that way as I was when I said last October that it was coming. When the fulness of time comes in, we’ll all look back and say, we were in a recession that started January 2022. We just have to wait for the bean counters to catch up and make their official declaration. They will.
Who are you going to trust?
If you are inclined to listen to the people who have constantly misguided you like Jerome Powell and Janet Yellen and the “bearish” Deutsche bank or Goldman with all their Sachs of gold and all the far more sanguine banks when they tell you this recession is “transitory,” just remember they also all told you inflation was transitory when I kept calling them liars or fools for thinking so. So, you can believe in them because of their credentials, but you do so believing people who have been steering you wrong on all of this for two years. As the facts are now in, there is no excuse for believing anything more they have to say.
Bloomberg already began the transitory nonsense prior to the release of the GDP report:
Bloomberg said that “a slowdown in the first quarter will prove temporary, a consequence of omicron and the drag from volatile inventories and trade.” Maybe, but what if it’s not temporary?
If you are inclined to believe the transitory narrative now that it is being shifted over from explaining inflation to explaining moribund GDP growth, consider the following:
How is GDP not going to get worse this quarter (when it is reported next quarter) with China practically out of production, more ships backed up around Chinese ports than ever before due to extreme Covid responses, rising energy prices going into every product made, people’s savings depleted all over the world by rising inflation while the cost of consumer credit that they might use to maintain their spending is already way higher due to the current bond vigilantes’ action in pushing up yields to where I said for half a year they would go and will rise even higher due to the Fed pushing up the shortest-term yields that relate most directly to credit cards with its soon-to-be accelerated rate hikes in May? Consumers are going to battle all of that uphill and still buy more stuff? I don’t think so! (Remember we’re talking real GDP here, as in inflation-adjusted.)
With the sanctions of war set to last for months, the crop shortages from fields not even yet planted set to show up in the summer, and everything else that besets the entire global economy as the stock market continues crashing and the bond market continues what has been its worst decline in decades and Covid lockdowns continue in parts of the world, how is it even remotely possible that this quarter (already one month over) is going to climb back out of this recessionary hole?
It isn’t. And anyone who tells you it is cannot even be mistaken at this point. They are simply liars. If nothing else, they are lying to themselves — are self-deceived by some delirious belief that being blindly optimistic is better than having the foresight of being realistic. Charles Huge Smith just wrote a good article about that, and I encourage you to read it after you finish this one. He describes why “doom and gloom” is not pessimism if it is simply right, and why optimism is terribly harmful if it is dead wrong. (You can find that article here.)
Don’t walk blindly into holes just because someone wearing a government suit with lots of credentials tells you there is no hole ahead. I’m telling you there is a hole, and its deep.
The problem with being ahead of the pack, is everyone thinks you’re out to lunch all the way. Then, somehow (and this is the part I don’t get) when it all happens just as you said, they only listen to the people who misinformed them all along as those people finally start saying how bad it is when the facts become inescapable. They remain the ones everyone listens to because they are still the ones with the credentials and fame, so if they say it is bad, then you can finally believe it must be bad.
So, they still get all quotes. And, if they tell you a week before the next GDP report that the recession is here, they will be praised for their foresight even though they should have been able to tell you last year it was coming by the start of 2022 due to hot inflation not being transitory, shortages all over the world, continued Covid lockdowns in many part of the world, especially China, continued backlogged ports, and certain Fed tightening.
And the voice of the lone wolf (or nearly lone) howling in the arctic back in October, who warned about inflation for a year prior to that, will be lost amid the roar of professionals rushing in to announce what has become a clear fact.
ZH had also said in February we might find we were already in recession:
The take home here is that between MS [Morgan Stanley] and now Goldman, the reality of a much faster economic slowdown than virtually anyone had penciled is starting to emerge, and with it the cognitive dissonance that will now sweep across both Wall Street and the Fed, which will now have to scramble to reassess the central bank’s tightening intentions, especially if the US may be facing a recession (as soon as the second half of 2022 according to BofA’s Michael Hartnett) when the Fed is still at zero and still buying bonds!
Well, “much faster” by “the second half of this year” turned out to be “already here,” which is why I call this an all-out crash into a recession that no one in the mainstream saw coming.
I noted ZH‘s report back in February, which also said,
The runaway inflation crisis … will only get worse until we finally reach a breaking point where the Fed will lose all control over inflation expectations, sparking what may become hyperinflation, currency debasement and collapse … and the end of the Fed itself which will no longer be relevant in a world where a 2% inflation target is no longer applicable.
Which I have named “the Epocalypse.”
Having not predicted high inflation for years in writing this blog, intense inflation became my mantra during the second half of 2020, saying it would build for months until it got so hot it forced the Fed to tighten hard. You will now get to see that. In spite of the stock market’s delusion today that the Fed can now go back to money printing in order to drive stocks up, inflation will do exactly as I have said — burn so hot up the Fed’s backside that it will force them forward into tightening even as we are now in a recession. That will make this the roughest “tightening into a recession” any of us have ever seen.
That means the Fed, too, may look at the present report and say things like “It is an anomaly. It shows signs of weakness, but the economy remains resilient and will soon recover.” They will likely have to create some narrative like that to justify why they are tightening into a recession. It will be amusing to watch them try to talk it both ways as they tighten to stop inflation and claim they must because the economy is strong and must be cooled.
Even the Fed’s own guru said,
“We need a Volcker moment… a Volcker moment, where Vol stands for “vol” – as in volatility.” In other words, Pozsar writes that the Fed needs to crash the market to contain stocks…. As Rabobank’s Michael Every writes today summarizing the Fed’s predicament, “more worrying is that [the FOMC] were non-committal about what the Fed will do at its March meeting because the Fed has no idea what to do. All its choices are bad. There is no oasis ahead, as markets like to believe. There is no Fed ‘masterplan’ to stop inflation without stopping … the asset-price appreciation we’ve built markets on for decades….”
Rabobank’s Fed-watcher Philip Marey expands on this…. “Is this rational monetary policy or are the lunatics running the asylum?… The Fed’s groupthink has produced another failed strategy that should be terminated immediately.”
Do you want doom and gloom or sparkling lies wrapped up in pretty vapors of optimism?
That’s right. There is no end game here that works. You can believe the lunatics at the Fed if you want to when they tell you they have this under control or that the GDP report is an anomaly, but they also told you inflation was transitory and so were shortages. They told you these things merely resulted from an explosion of demand when we reopened from the self-containment of the Covid panicdemic, not from serious economic breakdowns in labor and transportation due to the government’s imposed lockdowns.
You can believe the people who constantly misinformed you (but I’m reasonably confident you won’t or you wouldn’t be reading this far in the first place), or you can spread these words of hard truth to others so the misinformers don’t keep getting away with their deceit. Because only when we truly see what we are facing can we change it.
I lay these things out in advance, not just to warn you, but so that, when they come, you will know the Fed and all who go along with it are either enormously ignorant about the area of their own expertise because they are hugely misguided by wrong philosophies, or they are crooks and liars. Let them be the first to confess what they truly are — all-out stupid or cunning and crooked. Neither one is particularly pleasant to admit And the stock investors who follow them are simply hearing and sharing whatever will fuel the rise they want to create. It’s all lies and testosterone, many of which are the lies people tell themselves. that is why they so readily believe others who tell them what they want to believe.
As ZH concluded in its article,
The Fed will continue to swagger arrogantly around as if it knows best, and things will get thrown and broken. But it’s Pozsar who summarizes the dilemma facing Powell best: “The FOMC has one big problem: inflation…. The Fed aiming to slow inflation via a recession is unimaginable. Hikes today then are meant to slow inflation without a recession … which is not something that the Fed has ever managed to achieved before.…”
Well, what Pozsar saw as unimaginable just happened! If the Fed’s plan was to just slow inflation without a recession — TOO LATE! You may recall me recently writing about the Fed’s plan to pull off a soft landing and how that would end up inverted. Well, here were are, already truly upside-down in recession, and they haven’t even started to carry out their flight plan yet.
The articles referenced above present a clear path as to how we got here without any of the experts seeing it coming even though it was in plain sight all along, and don’t forget that article by Charles Hugh Smith about when doom and gloom is not pessimism but an “investment in self-reliance.” You cannot prepare for what you won’t see coming.
Of course, the deniers are already out in force, making up total baloney today to hide what they don’t want to see or don’t want you to see or both: (They’re nothing if not predictable … and disgusting.)
“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
CNBC’s own writer, however, says GDP “fell off a cliff” — in other words, “crashed.”
But, of course, CNBC’s consultant, Crazy Cramer, was still claiming today that Jerome Powell can still bring his 747 in for a soft landing. We’re a little past that, Jimbo! The plane is already in an upside-down pile on the tarmac with its wheels still spinning and wobbling with inflation burning all round it.
Believe the rosy-eyed, flakey optimists if you want. Here you get only the hard truth. You will find no softness for Democrats and none for Republicans either! I’m an equal-opportunity critic of all parties. You won’t get bogged down in impenetrable conspiracy theories, though you are welcome to entertain them if they entertain you, and you may even be right. I just don’t find that I need them, and they take more time to assess than I have to give. I am about seeing reality straight on by looking squarely at what IS. I’m a steely-eyed optimist because I believe I can make it through this — even in good humor — and I believe you can, too; but I don’t believe it will be easy, and I do believe you have to be mentally resolved for what is coming.
As Charles Hugh Smith says in his article,
America has lost the ability to discern the difference between the empty optimism of magical thinking and grounded-in-reality optimism which focuses on assessing the resources at hand and making tough choices about how best to maximize the value of those resources.
Times are tough, but I hope you will support (or continue supporting) the person who doesn’t give you what you want but what you need even if it is so unpopular almost no one else will say it and few will believe it even as it is happening all around them. Or you can plug your head into a Meta virtual-reality headset in the near future and pretend the world is what someone else has programmed into your vision. Today is a day when the numbers confirmed what is real but which very few would warn you was even coming, much less already all around you. Keep the headset off; you’ll need to see where you are going. The headset is programmed not to show you the hole in the ground so that you walk right into it or to make you believe you can fly right over it. But whatever you’re shown in the goggles … ain’t necessarily so.
Liked it? Take a second to support David Haggith on Patreon!