“Immaculate Acceleration”
Wall Street expects an “immaculate acceleration.”
by Brian Maher
"Bloomberg’s Mr. Simon White: "The economy is signaling a more volatile, potentially recessionary period. Markets, however, aren’t paying attention. Not only are the twin tail risks of a downturn or resurgent inflation being ignored, but a near-impossible “immaculate acceleration” of boomy growth and benign price appreciation is becoming the base case.
It’s not the first time that markets and the economy have been at odds, but this is one of the most egregious. Just as the economic mood music becomes more somber and underlying signs of persistent price pressures continue to fester, the market has virtually eliminated the tail risks of a recession or an inflationary shock…
Immaculate acceleration is the quintessential two impossible things before breakfast. Yet that is exactly what the market is intending to digest…In conclusion: Immaculate acceleration is like trying to thread a needle while shaking from an adrenaline rush. In other words, it’s unlikely to go according to plan."
We are with this Simon fellow. We hazard immaculate acceleration will endure a maculate deceleration.
Immaculate Acceleration? Really? We first note a wobbling in retail sales. Consumer spending (on a year-over-year basis) has run negative for 12 out of the past 17 months. Real retail sales - that is, adjusted for inflation - have run negative 12 out of the last 15 months. This, again, is on the year-over-year gauge. Meantime, Americans’ average credit card balance has jumped 8.5% this past year. Many Americans are falling into arrears. Is this the indicator of immaculate acceleration? Next we come to the yield curve, so-called…
Bad Omen: The yield curve is simply the spread between short-term interest rates and long-term interest rates. Long-term rates normally run higher than short-term rates. For the reasons, we needn’t look far. Investors, for example, demand greater compensation to hold a 10-year Treasury than a 2-year Treasury. Compensation, that is, for laying off the sparrow at hand… in exchange for the promise of two sparrows in the distant bush. They are, after all, locking away their money for 10 years - as opposed to two years. Would you not demand greater compensation under the 10-year option? Else you hold in your hand a sawdust asset.
And the further the future, the greater the uncertainty you confront. Thus the 10-year yield should therefore run substantially higher than the 2-year yield. Yet when the 2-year yield and the 10-year yield begin to converge, the yield curve is said to flatten. And a flattening yield curve is a possible omen of lean days - and lean nights. Is a flattening yield curve an immediate menace, a thundercloud overhead? Not necessarily, say the experts. Not necessarily. The yield curve can remain good and flat for a while - with no ill effects.
Alarm! Only when the yield curve inverts do the Klaxons sound. In the careening confusion, future and past run right past one another… and end up switching slots. Thus, an inverted yield curve wrecks the market structure of time. It rewards pursuit of the sparrow at hand greater than two future sparrows. That is, the short-term bondholder is compensated more than the long-term bondholder. That is, the short-term bondholder is paid more to sacrifice less… and the long-term bondholder paid less to sacrifice more. That is, something is dreadfully off.
Inverted yield curves precede recessions nearly as reliably as days precede nights, horses precede carts… lies precede elections. Today the 2-year Treasury note yields 4.79%. The 10-year Treasury note yields 4.37%. That is, the yield curve is inverted.
It Gets Worse: Some market crystal gazers believe the gap between the 3-month Treasury bill and the 10-year Treasury note puts out a greater recessionary signal. The 3-month Treasury bill currently yields 5.45%. Again, the 10-year Treasury note yields. 4.37%. Here - again - the yield curve inverts.
The 10-year Treasury yield has dropped beneath the 3-month Treasury yield on six occasions spanning over 50 years. Recession was the invariable consequence - a perfect 1.000 batter’s average. History reveals the catastrophic effects of an inverted yield curve only manifest an average 18 months post-onset. The 2-year/10-year yield curve inverted 22 months in the past. The 3-month/10-year yield curve inverted 19 months in the past. In words that are other, recession is overdue.
Might the ocean waves of recent government spending have postponed the scheduling? We concede the possibility that they have. Government spending can put on a gaudy short-term show. Yet at what price? A heavy long-term price is the answer.
It’s a Ponzi Scheme: Mr. Michael Lebovitz of Real Investment Advice: "The repercussions of relying on stimulus for economic growth and growing debt faster than the ability to pay for it have significant economic consequences. The recent surge in debt will only further handicap our economy and prosperity in the future…"
Growing debt faster than one’s income is a Ponzi scheme. No matter how politicians sugarcoat fiscal stimulus, there are no two ways around such a characterization. Individuals and corporations that run such a scheme ultimately end up bankrupt. The same holds for governments, but they tend to have much longer runways…"Not only is the growing ratio of debt to income problematic, but it is also a sure sign that the debt in aggregate is used for unproductive purposes. In other words, the debt costs more than the financial benefits it provides. If it were productive debt, income or GDP would rise more than the debt."
In the long run, unproductive debt reduces a nation’s productivity, aka economic potential. Yet under our democratic system of government the long run yields unswervingly to the short run - the election cycle. How can a congressman or president purchase votes if he sits upon the nation’s strongbox? He cannot. The sitting president has it open wide in hope of electoral jackpot this November.
The Cost of Every Pleasure: Yet what has the “stimulus” of the past years truly gifted us? Let’s consider the two rounds of stimulus checks sent to the public during the pandemic. Consumers and businesses spent a large percentage of the funds on goods or services that no longer provide economic benefit. The initial result of the direct stimulus was a massive boost to economic activity. Three to four years later, the economic growth spurt is finished, and the debt and its annual interest costs remain. The interest on the debt is capital that will not be put to productive use.
In conclusion: Nothing is free, it’s just a question of how it’s paid for. While the government spends like there is no tomorrow and the Fed does everything in its power to help them, we must understand that the longer-term consequences of their actions are weaker economic growth and growing wealth disparity…
As we are fond to say - and as the great Buddha never ever said: “The cost of every pleasure is the pain that succeeds it.” The United States has enjoyed the pleasure. Can it absorb the cost?"
