Lacy Hunt: Prepare For Recession, The Fed's Optimism Is Wrong
Feb 1, 2024
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Renowned economist Lacy Hunt discusses the current state of the global economy, challenges for central planning authorities, impact of work-from-home on commercial real estate, potential defaults on buy now, pay later plans, and the disproportionate impact of inflation on different socioeconomic classes. The importance of working with a professional financial advisor in navigating the complex economic environment is also highlighted.
High inflation can lead to a recession, posing challenges for the economy.
Consumer spending boom fueled by debt financing, increasing vulnerability for consumers.
Negative net national saving and declining standard of living raise concerns about the future trajectory of the economy.
Deep dives
Challenges and uncertainties remain in the economy
Despite a strong year in 2023 for the economy, challenges persist. The lesson of history suggests that high inflation can lead to a recession, and this process could play out for a long period. While the US economy has continued to grow, not all indicators are consistent. There are divergences in employment measures, and there is a record dispersion between GDP and GDI. While some indicators show strength, deeper analysis reveals underlying problems domestically.
Consumer spending is driven by debt finance
The consumer spending boom in the fourth quarter of 2023 was fueled by debt financing. Inducements like buy now, pay later programs and credit cards allowed consumers to spend, but at the expense of increasing debt. However, the interest rates and fees associated with these programs, along with high credit card interest rates, create a vulnerable situation for consumers. While the consumer has continued to spend, they have undermined the stability of their balance sheets, leading to a decrease in the personal saving rate and increased reliance on debt.
Economic challenges for corporate America
Corporate America is facing challenges as well. Negative net national saving, along with increasing interest rates and lower credit standings, poses a threat to corporate profitability and debt maturity. With a large volume of corporate debt maturing in 2024, companies may have to resort to cost-cutting measures, including layoffs and reduced work hours. The current narrative of limited economic success being enjoyed by a few large corporations is not translating to widespread prosperity. The labor market data is mixed, with conflicting indicators adding uncertainty to the corporate landscape.
Concerns about future trajectory and potential societal impact
The future trajectory of the economy is uncertain and raises concerns. With negative net national saving and a slowing rate of real per capita economic growth, the standard of living is likely to decrease over time. The monetary and fiscal policies in place are exacerbating income and wealth divides, leaving the majority of the working populace struggling. The potential impact on society includes a decline in faith in the social contract and increasing dispiritedness among the masses. Without significant changes in fiscal and monetary policies, the economy may continue on a downward trajectory.
Main Idea 1
Lacey, an economist, highlights several key points about the worldwide economy including: major economies in recession, weak gross domestic income compared to GDP growth, the impact of high inflation leading to recession, and the unequal impact of inflation on low and middle-income earners.
Main Idea 2
The financial advisors discuss the importance of considering economic data and valuations in investment decisions. They emphasize the need for caution due to the current overvaluation of financial assets. They also provide insights on managing portfolios defensively and the potential risks of investing heavily in stocks with high valuations.
The S&P and Nasdaq are back to all-time highs. And the recently-released Q4 GDP data beat analysts expectations, positively, by a long shot.
So are we in the clear? Is the soft landing camp being proven right?
Have we been able to side step the Lag Effects so many expected from the Fed's aggressive campaigns of rates hikes and Quantitative Tightening?
Is inflation indeed on its way to being tamed this year?
For answers, we have the great fortune to sit down today with one of the greatest living economists, Dr. Lacy Hunt, former Senior Economist to the Federal Reserve Bank of Dallas, as well as several of the world's largest global banks. He now serves as Executive Vice President and Chief Economist of Hoisington Investment Management Company.
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#recession #inflation #deflation
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