The premier leading economic indicator in the U.S., the ECRI’s Weekly Leading Indicator (WLI), now stands at a level that foreshadowed the “past 7 downturns,” observes David Rosenberg, chief economist with Glushkin Sheff + Associates. He also notes that the spread in corporate-bond yields over government-bond yields is widening, which does not validate the one-month run-up in stocks.
So, we are likely heading for “a 2002-style growth relapse or an outright double-dip recession.” Either way, Rosenberg suggests, you might not want to be overly exposed, at this time, to risky assets like stocks.
The fear of inflation is often identified as one of the main contributors to the prolonged slump of the 1930s. That fear kept policy makers from meting out as much stimulus as they should have perhaps done.
There is a popular notion the Federal Reserve of today has gone wild with the printing press — thanks to buying up all the dodgy assets of the financial sector. True, but it has largely sterilized that massive stimulus.
It has done this by offering attractive interest rates on banks’ reserves held at the Fed, so the banks keep their excess funds there instead of lend them out to borrowers in the economy. This is one big reason why credit growth in the U.S. economy is still substantially negative.
In short, the Fed is paying attractive rates on the banks’ reserves because it is afraid of over-stimulating the economy and creating inflation. But now there are signs that the Fed’s fear of inflation is asphyxiating the U.S. economy.
The Fed will get over its fear and make interest rates on bank reserves less attractive. Then, the banks will have more incentive to lend out their reserves to businesses and individuals.
Of course, there will likely be lags in the impact on the economy. For one thing, demand for loans is not particularly robust these days. There are other issues, as well, but I’ll leave them for a future post.
