New Knowledge of Fiscal Policy Tactics Tables Recession Forecast
By Victor Sperandeo with the Curmudgeon
Disclaimer: The views expressed herein are those of Victor Sperandeo. The Curmudgeon has no comment or opinion on the topics covered in this post.
Recession Forecast Review:
As we’ve documented in many previous Curmudgeon blog posts, we strongly believed a recession was imminent or already in progress. Many historical reasons pointed to that outcome.
Our recession hypothesis was based on Fed tightening (e.g., raising interest rates at record amounts in one year, and decreasing the Fed’s Balance sheet), regional bank and commercial real estate problems, declines in leading economic indicators and commodity prices, steeply inverted yield curve, etc. These were all summarized in last week’s column.
A U.S. recession would cause corporate earnings to fall (they have not increased since Q2-2022) and thereby stock prices to decline. A recession would also cause unemployment to increase substantially, which would prompt the Fed to lower interest rates. A new bull market in stocks would likely begin within four to nine months after that.
So Where is the Recession?
Since June 1st, risk-on markets have rallied strongly. That action depicted a potential change in fundamentals which suggests that a recession is not at all likely in the near term. Such a revised economic forecast is consistent with the Fed’s recent year end projection of an INCREASE in GDP to 1% from +0.4%.
Note: A “low” GDP growth versus a “recession” is like the difference between night and day. The markets often appreciate greatly in low growth periods, as inflation is generally not a problem, interest rates are declining and going to relatively low levels.
In looking into this change in market perceived fundamentals, I believe I’ve discovered what is causing me to table my recession forecast (for now).
It’s due to FISCAL manipulation of “how” the money the U.S. federal government received is spent. And that has not been disclosed by the mainstream media or realized by the public. It would only be understood by reading the 1,000-to-2,000-page Acts/Bills (at a minimum).
Fiscal Spending Bills:
The four U.S. spending programs (bills) passed by Congress in the last few years are the following:
l The Cares Act March 2020: $2.2 trillion (under Trump);
l The American Rescue Act 2021: $1.9 trillion (under Biden);
l The Inflation Reduction Act 2022: $891 billion (under Biden) ; and
l The Infrastructure Investment Act and Jobs Act (under Biden) [aka The Bipartisan Infrastructure Bill: $1.2 trillion November 2021,or $6.2 trillion in new spending in 3.25 years]
So, What’s the NEW Hook?
-->U.S. GOVERNMENT MONEY FROM THOSE BILLS IS NOT SPENT ALL AT ONCE, BUT OVER TIME, IN INCREASING AMOUNTS!!!
This first came to my attention during the Biden-McCarthy negotiations to increase the U.S. Debt Limit.
The GOP wanted a “clawback” of the estimated $70+ billion not spent for COVID 19 relief funds. COVID is over so why not use the excess funds to reduce the federal budget deficit/national debt?
This NPR article states that Republican and White House negotiators agreed to claw back approximately $27 billion in funding to federal agencies intended to combat the coronavirus pandemic. Unused COVID funds will be redistributed by Congress during this year's budget process to other parts of the federal budget, reducing overall government spending.
The way the U.S. government now distributes the money it raised under the above bills is scheduled to be spent “over time.” That’s to make sure the economy is still positive in forthcoming elections (e.g., November 2024).
For example, one government program spent $300 million in 2022, and will spend $350 million in 2023, $400 million in 2024, $450 million in 2025, $500 million in 2026.
Another example …$350 billion to the States to be spent over time, but it must be spent, or they will lose the money.
Not only is the money spent over time, but in increasing amounts. As a result, U.S. government spending constantly grows and so does GDP. That, in turn, offsets the decline in manufacturing and other industries from rising rates.
In other words, strong fiscal policy has offset Fed tightening and will continue to do so till most of the funds are spent.
The knowledge needed to understand the federal government’s spending adjustments and its tactics to maintain power is a change from the way traditional programs were instituted. Of course, virtually no one reads the 2,000 pages of legal documents to understand this unscrupulous tactic!
Robert Kaplan Interview:
In a June 12th interview with “Forward Guidance,” Robert Kaplan (former FOMC voting member who was Head of the Dallas Fed) explains that a recession would not necessarily occur due the “remnants of fiscal policy” or the “fiscal tails.”
Kaplan outlines, in respectable detail, the way fiscal policy is being spent at 17, 22 ,and 50 minutes into the interview… So, although the federal government has raised new money, it did not spend it all. Rather, it “distributed” the money by passing it onto state and local governments to spend over time.
There’s also the “Employee Retention Credit” that the IRS estimates was $20.5 billion in April of this year.
U.S. Federal Government Mandatory Spending:
U.S government mandatory spending is mandated by existing laws passed by Congress. This type of spending includes funding for entitlement programs like Medicare and Social Security and other payments to people, businesses, and state and local governments.
Here’s a flow chart depicting U.S. federal government mandatory spending:
Source: U.S. Treasury Dept
In fiscal year 2022, the government spent $6.27 trillion. That works out to $17.178 billion a day.
IMHO, the U.S. economy (GDP) won’t decline without lower government spending, unless it’s hit with an unknown shock.
Fed Bail-Outs to Back-Stop Markets:
Market participants may also believe (for good reason) that the Fed will come to their rescue if a crisis occurs. The best example of that was the Fed’s violation of the Bail-in provision of the Dodd-Frank Law (passed in 2010) shortly after SVB depositors went bankrupt and depositors were going to lose money [1.]. Please read: Sperandeo/Curmudgeon: Powell and Yellen Conspire to Ignore Dodd-Frank Law to Bailout “Some” Depositors
Note 1: SECTION 13-3 of the Federal Reserve Act-Discounts for individuals, partnerships, and corporations (amended in 1934) allows for the Fed to change the rules and break the law legally.
Years ago, we asked if the Fed was a no risk hedge fund or PONZI scheme?
Cartoon of the Week:
I have puts on the S&P that go out in July 2023… I will not renew them and accept the loss humbly. I will keep the gold and silver longs and maintain the high yielding short term U.S. debt.
We can’t continue to deny the reality that markets are NOT discounting a recession at this time (the “no-landing” camp seems to have won). I believe that’s largely due to continued federal government spending (aka fiscal stimulus) which is built into past legislation passed by Congress.
Of course, a recession could still occur if strong fiscal policy fades or an unknown “shock event” occurs (e.g., China invades Taiwan).
We all look to the Fed for the future of the U.S. economy, but now it’s important to examine new bills or legislation, to whom and how the funds are distributed.
What is not known is called ignorance. Its only remedy is to continue to learn from mistakes, but that’s often not easy when the “powers that be” play the game of changing laws and affecting markets to suit their political objectives.
“One can never know enough. The unknown and its call lies even in what we know.”
“Man can learn nothing except by going from the known to the unknown.”
“You've got to bumble forward into the unknown.”
Please let us know what you think of our work. Till next time…………………….
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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