What Do Obama and Trump Have in Common?

Last week, we took one step closer to a full-blown financial crisis.

But with all the brouhaha surrounding the Kavanaugh hearing, nobody noticed a darn thing… except for financial expert Jim Rickards.

Jim has no time for the media circus. He only cares about the facts. And the facts say look straight down the barrel of a recession.

Jim reveals all in today’s Money & Crisis.

All the best,

Owen Sullivan
Editor, Money & Crisis

P.S. After 15 years of secrecy, Jim is finally able to reveal this sensitive information on camera. It has everything to do with a powerful tool he developed while working with the U.S. government… that can predict surprising political and economic events before they happen. Click here for Jim’s shocking confession.

As you probably know by now, the Federal Reserve raised interests again last week — the eighth such increase since the rate hike cycle began in 2015.

In his post-announcement press conference, Chairman of the Federal Reserve Jerome Powell cited a strong economy, low unemployment and solid growth. And went on to say that “it’s a particularly bright moment” for the economy.

On the surface it might look like everything is great. But if you take a hard look behind the numbers, a different picture emerges.

A lot of the cheerleaders say Trump’s programs of tax cuts and deregulation will produce persistent trend growth of 3–4% or higher.

Such growth would break decisively with the weak growth of the Obama years. It would also make the U.S. debt burden, currently at 105% of GDP, more sustainable if GDP were to grow faster than the national debt.

But there’s one problem with the happy talk about 3–4% growth.

We’ve seen it all before.

Green Shoots and Wishful Thinking

In 2009, almost every economic forecaster and commentator was talking about “green shoots.”

In 2010, then-Secretary of the Treasury Tim Geithner forecast the “recovery summer.”

In 2017, the global monetary elites were praising the arrival (at last) of “synchronized global growth.”

None of this wishful thinking panned out.

The green shoots turned brown, the recovery summer never came and the synchronized global growth was over almost as soon as it began.

Any signs of trend growth have been strictly temporary (basically moving growth from one quarter to another through inventory and accounting quirks) and are quickly followed by weaker growth.

In the first quarter of 2015, growth was 3.2%, but by the fourth quarter that year growth had fallen to a near-recession level of 0.5%.

In the third quarter of 2016 growth was 2.8%, but it fell quickly to 1.2% by the first quarter of 2017.

In the third quarter of 2017 growth was 3.2% but then returned to 2.0% by the first quarter of 2018, about the average for the past nine years.

This pattern of temporarily strong growth followed by weak growth has been characteristic of the entire recovery that began in June 2009 and entered its 10th year a few months ago.

Strong quarters have been followed by much weaker quarters within six months on six separate occasions in the past nine years. And there’s no reason to believe this trend will end now.

The longer-term view of the entire recovery is more revealing.

The Wealth Gap

The recovery is currently 109 months old, the second-longest since the end of the Second World War. The average recovery since 1980 (a period of longer-than-average expansions) is 83 months.

So this expansion has been extraordinarily long — far longer than average — indicating that a recession should be expected sooner rather than later.

But the current expansion has also been the weakest recovery on record. Average annual growth during this expansion is 2.14%, compared with average annual growth for all expansions since 1980 of 3.21%. That 3.21% figure is what economists mean by “trend” growth.

Even with the latest GDP numbers, the current expansion does not even come close to that trend.

The “wealth gap” (the difference between 3.2% trend growth and 2.1% actual growth) is now over $4 trillion. That’s how much poorer the U.S. economy is due to its inability to achieve sustainable trend growth.

As for the Trump bump, growth in the first quarter of 2018 was 2.0%, slightly below the average since June 2009.

Growth for all of 2017, Trump’s first year in office, was 2.6%, slightly above the 2.14% average in this recovery but not close to the 3.5% growth proclaimed by Trump’s supporters.

In short, growth under Trump looks a lot like growth under Obama, with no reason to expect that to change anytime soon. In fact, the head winds caused by the strong dollar, the trade wars and out-of-control deficit spending may slow the economy and bring future growth down below the average of the Obama years.

The Fed is Eating Its Own Tail

I’ve said repeatedly that the Fed is tightening into weakness. But it’s more than the rate hikes. The Fed is also winding down its balance sheet, and the pace is scheduled to accelerate next year.

Far from printing money, the Fed is destroying base money at a rapid pace. The Fed is basically burning money. They’re doing this by not rolling over maturing Treasury and mortgage securities they hold on their balance sheet. That’s a “double whammy” of tightening.

When a security held by the Fed matures and the issuer pays it off, the money sent to the Fed just disappears. It’s called quantitative tightening, or QT.

When the Fed started QT in late 2017, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment.

It’s fine for the Fed to say that, but markets have another view. Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes.

Bearing in mind that monetary policy works with a 12–18-month lag, this extraordinary tightening policy in a weak economy is almost certainly a recipe for a recession.

And expected results are beginning to show up in the markets. Mortgage interest rates are up, mortgage refinances are sinking like a stone and housing affordability is suffering.

This will eventually result in fewer new home purchases, slower household formation and a weakening economy. The Fed will have to reverse course and cut rates, or at least “pause” in raising rates much sooner than they think.

The Fed knows a recession will happen sooner rather than later and is desperate to acquire some dry powder (in the form of higher rates and a reduced balance sheet) so it can use it when the time comes.

The problem, of course, is that by pursuing these policies, the Fed will cause the recession it is preparing to cure.

The single most important factor in my analysis is that when the Fed realizes its mistake of tightening into economic weakness, it will have to turn on a dime and shift to an easing policy.

Easing will come first through forward guidance and pauses in the rate hike tempo, then possibly actual rate cuts back to zero and finally reversing their balance sheet reductions by expanding the balance sheet through QE4 if needed.

Jay Powell seems determined to continue rate hikes on an aggressive path and possibly to accelerate the hikes. But he might be in for a severe case of whiplash when he has to make a hard pivot to easing.

But by then, the damage will have been done.

Regards,

Jim Rickards

P.S. This could be my most important message of 2018.

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