Are We in for a Soft Landing?

Andy Snyder|June 29, 2023

What happened to that recession?

Did the Fed quietly give us the soft landing it promised… and now nobody is giving it the credit it deserves?

The answer may surprise you.

We could be in worse shape now than before.

We’ve spent the last 12 months warning folks that inflation never moves in a straight line. It moves like a snake, slithering around the obstacles in its way.

Investors have cheered in recent months as Jay Powell and his team have turned dovish. Their aggressive rate hikes tanked a few big-name banks. And, scared by the sound of the implosion, the banksters backed off their aggressive moves.

The stock market went from biting its nails to pumping its fist… from fretting about a recession to bidding tickers to fresh highs. Despite surging borrowing costs, the interest rate-sensitive Nasdaq now sits within spitting distance of its all-time price record.

What the market is doing in response to the Fed’s dovish pivot is like adding more gunpowder to a weapon that failed to fire.

It won’t end well.

Consumer confidence is higher than it’s been in 18 months. Home prices – and the lineup of buyers begging to get in – continue to grow. Even retail sales are beating estimates.

Surely, there’s no recession in sight.

Indeed, it’s true. But inflation isn’t dying.

That’s the scary part.

A Painful Way Out

Remember how we got here, folks. We printed some $5 trillion in the span of just a few months. Too much money chased too few goods.

There are only two ways out of such a calamity.

Either we need to stop printing and let the growing economy absorb all of that money…

Or that money needs to disappear… in the form of bad loans, bankruptcies and Fed money burning.

The former is out of the question. GDP remains anemic, growing at a mere 1% to 2% over the last year. In a $23 trillion economy, it’ll take over a decade to erase $5 trillion worth of money supply growth at that rate.

The first option is out.

The second option, though, is the painful one.

Indeed, our prediction of booming bankruptcies in 2023 is proving to be accurate. But, as painful as these failures have been for tens of thousands of Americans, the amount of equity lost in them is nothing compared with the excess money that remains in the economy.

We’ve seen just six companies worth $1 billion or more go bankrupt so far this year. The loss of equity is a mere rounding error in the grander scheme of things.

The big moves must come from the Fed. If we want to absorb all the free money that remains in the economy, Jay Powell must shrink his agency’s balance sheet… by a lot.

So far this year, it’s gone down only a little…

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After adding cash back into the economy in March to quell the banking mess, the Fed has removed a mere $500 billion from its balance sheet from last year’s peak.

That means the vast majority of the extra cash it wrongly pushed into the economy remains there.

The outcome of it all is nonnegotiable. Either inflation will continue to destroy middle-class wealth through a surging cost of living… or we’ll enter a painful recession that cleanses the economy of this monetary cancer.

So pick your poison, dear reader.

The Fed is going to either change its inflation targets and be happy with prices that jump 4% to 6% each year (which would be an utter disaster for savers and fixed-income retirees) or do its job and push us into a less-than-comfortable recession.

The downturn hasn’t happened yet. But that’s nothing worth celebrating.