{"id":41768,"date":"2023-04-28T07:49:52","date_gmt":"2023-04-28T07:49:52","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=41768"},"modified":"2023-04-29T05:18:03","modified_gmt":"2023-04-29T05:18:03","slug":"hard-or-soft-landing","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2023\/04\/28\/hard-or-soft-landing\/","title":{"rendered":"Hard or Soft Landing?"},"content":{"rendered":"

Almost every recession in history has been preceded by speculation that the economy is in for a “soft landing.” After the early warning signs, nothing much happens. The stock market keeps climbing despite rising interest rates, raising hopes of a “lucky escape”.<\/p>\n

The four most expensive words in the English language are: “This time it’s different.” ~ Sir John Templeton<\/p><\/blockquote>\n

The economy takes time to adjust to changed circumstances and there can be a lag of two years or more between the first rate hikes and the inevitable rise in unemployment. Plenty of time for self-delusion as stocks keep rising and unemployment stays low.<\/p>\n

The difference between a hard and soft landing is best measured by unemployment. At 3.5%, the March reading shows no sign yet of an approaching recession.<\/p>\n

\"Unemployment\"<\/p>\n

The lag between an inverted yield curve — caused by Fed rate hikes — and unemployment can vary quite widely between recessions, depending on other influences. The chart below shows how an inverted yield curve in July 2000 was followed by the first sign of rising unemployment in January 2001, and shortly afterwards by a recession in March. The next yield curve inversion started in February 2006, the first sign of rising unemployment in July 2007, and the recession only in December of that year. Red bars below represent the lag between yield curve inversion and the first sign of rising unemployment.<\/p>\n

\"Treasury<\/p>\n

The current yield curve inversion (10-Year minus 3-Month Treasury yield) started in November 2022, so the earliest we are likely to see a rise in unemployment is late-2023.<\/p>\n

\"Treasury<\/p>\n

Why is unemployment expected to rise?<\/strong><\/p>\n

Every yield curve inversion (10-Year minus 3-Month above) since 1960 has been followed by the NBER declaring a recession within two years.<\/p>\n

Every time the Conference Board Leading Economic Index declined below the red line at -5.0% has signaled recession.<\/p>\n

\"Conference<\/p>\n

Why do we expect a hard landing?<\/strong><\/p>\n

Every economy runs on credit and the US is no different. The severity of a recession is determined by the extent of the contraction in credit growth, as shown by the red circles below. Note how late the contraction generally is, often occurring after the official recession (gray bar) has ended.<\/p>\n

\"Bank<\/p>\n

What determines the size of the credit contraction?<\/strong><\/p>\n

Firstly, bank net interest margins.<\/p>\n

Banks tend to borrow short-term and lend long, enhancing their net interest margins in good times. But an inverted yield curve pulls the rug from under them, with short-term rates spiking upwards.<\/p>\n

The more that net interest margins of commercial banks are squeezed, the more they avoid risk, restricting lending to only their best clients.<\/p>\n

The percentage of domestic banks tightening lending standards on C&I loans climbed to 44.8% in March 2023.<\/p>\n

\"Commercial<\/p>\n

Second, is the level of uncertainty facing banks.<\/p>\n

The S&P 1500 Regional Banks index plunged after the collapse of Silicon Valley Bank (SVB), Silvergate Bank and Signature Bank.<\/p>\n

\"Bank<\/p>\n

Shocks in the financial system tend to occur in waves. Latest is the threatened collapse of First Republic Bank (FRC) which has lost almost 100% of value in the past few months**.<\/p>\n

\"First<\/p>\n

The CSBS Community Bank Index of Business Conditions is lower than at the height of the pandemic.<\/p>\n

\"CSBS<\/p>\n

Third is liquidity.<\/p>\n

A strong surge in money market assets, warns that money (+\/- $450 bn) has flowed out of the banking system and into the relative safety of money market funds.<\/p>\n

\"Money<\/p>\n

Money market funds are primarily invested in Fed reverse repo and Agency and Treasury securities, bypassing the banking system.<\/p>\n

\"Money<\/p>\n

Conclusion<\/h2>\n

Bank net interest margins are being squeezed, uncertainty is rising following the Silicon Valley Bank collapse, liquidity is being squeezed, and banks are tightening lending margins. The only party who can prevent a severe credit crunch is the Fed. By reversing course and injecting liquidity (QE) into financial markets, the Fed could attempt to create a soft landing for the economy.<\/p>\n

But the Fed is bent on taming inflation and restoring their lost credibility after their earlier “transitory” error. The cavalry is likely to arrive late and low on ammunition.<\/p>\n

We expect a hard landing.<\/p>\n

Latest News**<\/h4>\n

\"Reuters:<\/p>\n

Acknowledgements<\/h4>\n

EPB Research for the Conference Board LEI chart.<\/p>\n","protected":false},"excerpt":{"rendered":"

Almost every recession in history has been preceded by speculation that the economy is in for a “soft landing.” After the early warning signs, nothing much happens. The stock market keeps climbing despite rising interest rates, raising hopes of a “lucky escape”. The four most expensive words in the English language are: “This time it’s … <\/p>\n

Continue reading “Hard or Soft Landing?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,46,3761,34],"tags":[5469,5858,873,875,5895,1353,5894,2354,5893,5820,3531,3725],"class_list":["post-41768","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-deficit-spending-employment","category-gdp-and-activity","category-us-canada-countries-regions","tag-bank-loans-leases","tag-conference-board-leading-economic-index","tag-credit-contraction","tag-credit-crunch","tag-csbs-community-bank-index-of-business-conditions","tag-fed-funds-rate","tag-first-republic-bank-frc","tag-money-market-funds","tag-sp-composite-1500-regional-banks-index","tag-silicon-valley-bank","tag-unemployment","tag-yield-curve"],"yoast_head":"\nHard or Soft Landing? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Hard or Soft Landing? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Almost every recession in history has been preceded by speculation that the economy is in for a “soft landing.” After the early warning signs, nothing much happens. 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The latest NY Fed survey of consumer expectations confirm\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Treasury Yields: 10-Year minus 3-Month","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-11-10y3m.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-11-10y3m.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-11-10y3m.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":43217,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/07\/30\/soft-landing-or-no-landing\/","url_meta":{"origin":41768,"position":2},"title":"Soft landing or no landing?","author":"Colin Twiggs","date":"July 30, 2023","format":false,"excerpt":"The S&P 500 advance continues and a test of the January high at 4800 is now likely. Conflicting signals from our two most reliable indicators -- positive annual rate of change (below) and a negative 10-Year\/3-Month Treasury yield spread -- warn that these are exceptional times. The Russell 2000 Small\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-28-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-28-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-28-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":43671,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/08\/27\/rising-long-term-yields-impact-on-financial-markets\/","url_meta":{"origin":41768,"position":3},"title":"Rising long-term yields impact on financial markets","author":"Colin Twiggs","date":"August 27, 2023","format":false,"excerpt":"It is uncertain whether we are going to see a soft landing or a hard landing in the next 12 months. Some investors are even betting on no landing at all. While outcomes may be uncertain, there are two things we can count on. First, is that the Fed will\u2026","rel":"","context":"In "Active Investing"","block_context":{"text":"Active Investing","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/active-investing\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-08-25-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-08-25-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-08-25-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":24060,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/02\/11\/more-1970s-style-inflation\/","url_meta":{"origin":41768,"position":4},"title":"More 1970s-style inflation","author":"Colin Twiggs","date":"February 11, 2021","format":false,"excerpt":"Yesterday we showed how a sharp rise in bank credit tended to lead a similar spike in the producer price index (PPI) by one to two years. The reason why inflation got out of control was because the Fed only hiked interest rates in response to the rise in inflation.\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":41438,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/04\/01\/sp-500-bull-trap\/","url_meta":{"origin":41768,"position":5},"title":"S&P 500 Bull Trap","author":"Colin Twiggs","date":"April 1, 2023","format":false,"excerpt":"Higher troughs on the S&P 500 in recent months warn of another test of the band of resistance between 4200 and 4300 -- a bullish sign. Annual rate of change (250-day) remains negative, however, warning of a possible bull trap. The Regional Banks index ($XPBC) shows markets are still unsettled\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-31-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-31-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-03-31-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/41768","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=41768"}],"version-history":[{"count":8,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/41768\/revisions"}],"predecessor-version":[{"id":41838,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/41768\/revisions\/41838"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=41768"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=41768"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=41768"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}