Economic Disaster That Never Came+

Sun Mar 10 2024
Rajesh Sharma (2060 articles)
Economic Disaster That Never Came+

Jamie Dimon, CEO of JPMorgan Chase, issued a “hurricane” warning to the American public in the middle of 2022.

This might be “a minor one or superstorm Sandy,” Dimon said during a New York banking conference. “You had better be ready.”

After predicting a “perfect storm” of economic misery in the previous year, Ray Dalio, founder of Bridgewater Associates, projected a “debt crisis” last year.

Many prominent investors and economists shared this anxiety, with Jeffrey Gundlach of DoubleLine and David Rosenberg of Rosenberg Research both predicting a recession “in a few months” in March of last year. Recession in 2023 was forecast by economists 61% of the time in early 2018.

All wrong, said the experts. Both the government stimulus and the resiliency of companies and consumers were undervalued by them. On top of that, they had unrealistic expectations about the Federal Reserve’s capacity to reduce inflation without triggering a recession. A constant rate of expansion characterizes the economy. The stock market is at all-time highs, inflation is drawing near the Federal Reserve’s target of 2%, and the jobless rate is still at half a century low.

In an interview, Dalio expressed his pessimism about the economy. “I was mistaken.”
Because historical data shows that recessions occur just before interest rate hikes, many economists were worried about the Fed’s rate hikes.

“I would have thought some of the fiscal stimulus would have worn off by now,” Dimon said, quoting an interview.

Those pessimistic forecasts were spot on when they were made. With eleven rate hikes between March 2022 and last summer, the Federal Reserve reached a 23-year high in interest rates.

Prior to recessions in the past, rates have risen sharply. Additional indicators of a recession also surfaced. U.S. Treasury bond yields on shorter maturities are now higher than those on longer maturities, a phenomenon known as an inverted yield curve. Inflation spiked and GDP growth slowed. A “soft landing”—the desired reduction in inflation without triggering a recession in the United States—was even acknowledged by Federal Reserve Chair Jerome Powell.

Then what transpired? For many, the increased rates had little to no impact, such as homeowners who had secured low-interest mortgages prior to the Fed’s rate hike or those who had locked in low-interest rates before the hike.

Politicians in the United States also moved considerably more swiftly than in previous decades to help the economy. Many individuals and businesses were left with surplus funds after receiving many waves of spending programs and epidemic relief payments, which encouraged them to keep spending. Roughly 70% of the economy in the United States is fueled by consumer spending.

“I was mistaken because, typically, when interest rates are raised, private-sector demand and asset prices are reduced, which in turn slows down the economy. However, that did not occur,” Dalio stated. “A historic transfer of wealth occurred: The government’s balance sheet worsened significantly while the private sector’s improved significantly.”
Ray Dalio, founder of Bridgewater Associates, is concerned that the national debt would eventually overwhelm the economy.

A representative for Dimon stated that the chief executive officer of JPMorgan presents multiple scenarios, considers them, but refrains from making forecasts.

Meanwhile, the “wealth effect” has been encouraging consumers to spend rather than cut down, thanks to a resilient stock market and bonds with higher returns.

It’s also true that interest rates aren’t historically high; people only perceive them that way because to the long period of exceptionally low rates in the United States.

The too pessimistic outlook on future interest rates is partly to blame for the stars’ missteps, according to economist Ed Yardeni, who has been more optimistic than most in the previous two years. According to him, the current level of interest rates is perfectly appropriate for the economy.

The inverted yield curve was one of several indications that, looking back, did predict major issues like the regional banking crisis of last year. The Federal Reserve effectively contained the banking crisis, preventing it from spreading to other industries.
Still bogged down

With the Fed hinting at a readiness to lower rates this year, the chances of a gentle landing seem to have increased. Recession is less likely to occur within the next year, according to economists, who have reduced the probability from 61% to 39%.

However, some of those who foretold troubled times claim that they are not yet over. The S&P 500, which ended Friday at around 5100, was forecast by Gundlach to fall below 3200 and a recession this year. Attempts to reach Gundlach for comment were unanswered.

Rosenberg stated that GDP has remained stagnant over the past year when adjusted for inflation, that the employment situation is weaker than it seems, and that personal income isn’t keeping pace with consumption. Later this year, he promised, the economy’s problems will become crystal evident.

According to Dalio, important concerns include whether or not government debt and the subsequent debt payments would have a negative impact on the economy and whether or not productivity will keep rising as firms use AI. The most recent projections from the Congressional Budget Office indicate that during the next ten years, the United States government will be required to pay an extra $1.1 trillion in interest.

Inflation that is too high, geopolitical unrest, and increasing government expenditure and debt are some of the major concerns that Dimon says continue to worry him. He expresses worry about stagflation, which is defined as weak development with dangerous inflation.

Until then, Dimon advised against counting one’s eggs.

Rajesh Sharma

Rajesh Sharma

Rajesh Sharma is Correspondent for Stock Market of South East Asia based in Mumbai. He has been covering Asian markets for more than 5 years.