The last time the phrase ’soft landing' was this popular on the internet was on the eve of the largest financial crisis the world has ever seen.
Commentary
The last time the phrase “soft landing” was this
popular on the internet was on the eve of the largest financial crisis the world has ever seen.
The idea behind an economic soft landing is that the central bank (for the United States, the Federal Reserve) is able to bring inflation from an overheated economy under control by increasing interest rates without producing a recession or a collapse of the financial markets. This is what markets desperately long for in early 2024 and are trying to manifest by simply repeating it as a mantra and believing in it hard enough.
The premise behind such a hope is the belief that the Fed will lower the fed funds target interest
rate from its current upper limit of 5.5 percent. The futures markets are
signaling multiple reductions of a total of 75 to 100 basis points over the next several months, bringing the target interest rate to 4.5 percent by mid-year.
The market believes this because it believes that the fight against inflation has been won. This is also a fantasy.
Inflation remains stubbornly high and will persist so as long as the United States continues to
deficit spend billions of dollars and tack on trillions of new debt each year to pay debt service costs and fund
massive defense spending. In short, the Fed won’t be able to reduce rates without restoking substantially higher inflation.
Finally, the U.S. economy isn’t
performing nearly as well as the statistics coming out of the federal government would like us to believe. Indeed, the disappointing
Jan. 31 Chicago Purchasing Managers Index results indicate that the economy is contracting.
The market is in a speculative bubble. The
S&P 500, after rising by nearly 21 percent in 2023, has broken through to an all-time high, surpassing the previously attained highs of two years ago (January 2022), and is now trading at 26 times estimated 2023 earnings. The market-weighted S&P 500’s success is based on the performance of its seven largest constituents, while effectively ignoring the disappointing performance and struggles of the vast majority.
This “Magnificent Seven,” which includes tech platform names such as
Microsoft, Google’s parent
Alphabet, Facebook’s parent
Meta,
Amazon, and
Apple, outperformed earnings expectations by 4 percent in the fourth quarter, while the other 493 stocks are now estimated to underperform previous estimates by 15 percent. Despite this broad-based decline in performance, the index has continued to rise through January on the back of this narrow but highly visible group of companies.
At the same time, the
VIX, the so-called “fear gauge” of equity investor sentiment, is near an all-time low, suggesting widespread complacency.
When bubbles inflate this rapidly and spectacularly, the end comes as quickly and as dramatically. Imagine the shape of a parabola whose downward slope is as steep as the ascent. Given the heights to which the markets have climbed since 2020, the bursting of the bubble may be as consequential as the global financial crisis of 2008–09. Or worse. Either way, there will be blood.
An equity market collapse will bleed over into other asset categories as liquidity dries up. This will then lead to a wider credit crisis as investors struggle to cover losses. As I
wrote at the end of the year, the banks, especially the regional and community banks, are not OK. In December 2023, these banks were borrowing more than $131 billion from the Bank Term Funding Program, the Fed’s emergency funding line established after the collapse of Silicon Valley Bank in March 2023. The program is set to expire in March 2024. What will the banks do then? Market liquidity isn’t robust enough to absorb this at a cost the banks can afford.
There are other signs that the banks will wobble again this year. On Jan. 31, shares of
NYCB, the New York bank that acquired the deposits of the failed Signature Bank, fell 40 percent after the bank
announced a surprise fourth-quarter loss of $252 million and that it would cut its dividend by 70 percent.
In the years leading up to the global financial crisis, the phrase “Goldilocks economy” was often used to describe the apparent health of the U.S. economy, conveying the idea that it was neither too hot nor too cold. Market investors and regulators blithely ignored—until it was too late—the massive speculative bubble that was growing in residential housing markets as a result of gross monetary policy mismanagement by the Federal Reserve.
As evidence of a looming catastrophe mounted to the point it could no longer be ignored, the term Goldilocks economy was replaced in internet searches by “soft landing.” Indeed, searches for soft landing hit an all-time high in the weeks following the collapse of Bear Stearns, while searches for Goldilocks economy fell to approximately zero. Today, with the collective hive mind of the internet invoking a soft landing, we’re again trying to will into existence something that can’t and won’t happen.
A soft landing is a fairy tale told by liars and believed by fools.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
