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April
20
2022

Forget About a Soft Landing, What's the Shape of the Hard Landing?
Michael "Mish" Shedlock

A recession and hard landing is on the way. What will it look like?

Hot Economy, Rising Inflation

In Hot Economy, Rising Inflation the WSJ notes The Fed Has Never Successfully Fixed a Problem Like This. That link is not paywalled for those who wish to read.

Key Points

• During the past 80 years, the Fed has never lowered inflation as much as it is setting out to do now—by four percentage points—without causing recession.
  
  
• “No one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context,” Fed Chairman Jerome Powell said last month. The central bank, he added, faces a “challenging task.”

• Goldman analysts estimate the Fed can achieve its goal of bringing down inflation and slowing upward wage pressures by reducing job openings by about 2.5 million.
  
  
• “There is plenty of room for businesses to reduce the number of job openings,” said Lael Brainard, a Fed governor awaiting Senate confirmation to become Fed vice chairwoman, in an interview with The Wall Street Journal last week. “I see that as being consistent both in bringing inflation down and sustaining the recovery.”

Forget About a Soft Landing 

I believe the soft landing proponents at the Fed and Goldman Sachs are in Fantasyland.

So does Danielle DiMartino Booth, founder of Quill Intelligence.

No Soft Landing Anywhere

Regarding stock and bond market action:

“You cannot even call it volatile anymore. You should call it violent. the types of swings we are seeing day to day. That’s because there is so much uncertainty about what the outcome of this is going to be. But I think that anybody who suggests the Fed can engineer a soft landing at this point, that any central bank right now can engineer a soft landing, Europe is going into recession quicker than the United states is. I think it’s just specious, just disingenuous.”

Shape of Things to Come

If we can rule out a soft landing, what will a hard landing look like? The WSJ models are so out of date.

We need some new economic thinking and Economic Modeler Extraordinaire (EME) Rudy Haverstein leads the way with three proposals.

First I have a note about amazing success.

Amazing Success!

The Fed had such amazing success in bring about inflation. Did it ever stop to take a bow?

I think not, and what a travesty to have such unglorified success. But what's next?

Domino Theory 

Spiral Out of Control Theory

Tipping Point Theory 

Competing Economic Theories

• Domino Theory: Proponents of this theory believe things will take a while to play out. Things things fall one by one, but the big decline comes after a long wait.  This scenario is very orderly until the final chaos. 
  
  
• Spiral Theory: In contrast to the Domino Theory, Spiral Theory proponents expect things to be very disorderly right from the start. And once a decline does start, no one will believe the Fed has anything under control.
  
  
• Tipping Point Theory: This scenario will happen fast. The Fed will appear to be in control until one rate hike too many and then the whole damn thing suddenly tips over. This will happen much faster than a Domino Theory collapse. 
  
  
• Fantasyland Theory: Soft landing

Poll 

Might We See a Minimal Job Loss Recession? 

There is one aspect of the Goldman Sachs thesis that may be correct. 

Before people start getting fired or laid off, hiring will slow. Then employers will cut hours. I do not expect to see the sustained mass firings and layoffs that we saw in 2008-2009. 

I discussed that idea in Might We See a Minimal Job Loss Recession? Why Not?

Outright Delusion

Those looking for outright delusion can find it in multiple places. For example, on April, James Bullard, St. Louis Fed President, won my Hoot of the Day award.

St. Louis Fed President Says "Fed is Not Far Behind the Curve"

Also in the delusional category, Chicago Fed President Charles Evans Resorts to Hope, Does Not Foresee a Recession

De-Globalization: New Supply Chains Are Inefficient and Will Drive Up Inflation

One of the many problems the Fed faces is de-globalization. The New Supply Chains Are Inefficient and Will Drive Up Inflation

Interest rate hikes are a very blunt instrument and the Fed is in a bad setup largely of its own making.

Bear Market Is Over Says Cramer

Meanwhile, please note Cramer's Call Bear Market is Over: "You Have Been Warned"

On March 25, Cramer touted the end of the bear market. Let's see how well that one ages. 

I strongly disagree with Cramer: Most People Have No Idea How Much Stocks are Likely to Crash

This post originated at MishTalk.Com.

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management.

Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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