90% Chance of Recession?

Deutsche Bank’s crackerjacks give 90% odds of recession over the next 12 months. Goldman’s own crackerjacks give merely 25% odds of the same.

Which divination has more justice in it?

Here is the rock of the Deutsche Bank pessimism, set forth by its own Jim Reid:

Most (but not all) big hiking cycles bring recessions with a lag…[and those that do] “tend to be when the Fed is furthest away from its dual mandate…”

We would remind you that the Federal Reserve has been undertaking a “big hiking cycle.” Its pace is, in fact, the greatest in over three decades.

And as we have noted before: Monetary policy generally runs to a lagging schedule.

It often takes effect nine–12 months after cycle’s onset.

The present hiking cycle commenced last March — 12 months ago.

Thus it is reasonable to keep the recession warnings posted.

Inflation and the Fed’s “Dual Mandate”

Meantime, this Reid fellow argues that… in reminder… a hiking cycle is most likely to birth recession “when the Fed is furthest away from its dual mandate.”

The Federal Reserve’s so-called dual mandate demands price stability and maximum employment.

How far distant is the Federal Reserve from its cherished objectives of price stability and maximum employment?

The latest inflation data reveal that consumer prices rise 6.4% higher than last January’s.

“Core” inflation — stripped of more variable components such as food and energy — runs 5.6% above last January’s.

The Federal Reserve sets great store by the core inflation gauge.

Yet at 5.6%, this inflation rate races far beyond the Federal Reserve’s desired 2% inflation rate.

Under no reasonable interpretation does “price stability” prevail.

If Mr. Reid’s telling is accurate, this tremendous gap fortifies the case for recession.

What about the Federal Reserve’s twin mandate — maximum employment?


The latest official report informs us that the unemployment rate gutters at a 54-year low… at 3.4%.

By any fair standard, maximum employment.

Yet as we have maintained before, we trust government statistics no further than we would trust a dog with our dinner.

Depending on the dish… we may trust the dog far more than the government, in fact.

The government’s statistical inquisitors will stretch the numbers upon the torture rack and proceed against them in truly barbarous fashion until the numbers confess.

If the government inquisitors demand a vastly exaggerated GDP reading, they will torment the numbers into compliance.

If the government inquisitors demand a vastly reduced inflation reading, they will torment the numbers into compliance.

And if the government inquisitors demand a vastly reduced unemployment reading… they will torment the numbers into compliance.

This they accomplish through the aggressive use of “seasonal adjustments” and other such implements of numerical torture.

Exposing Government Fictions

The Wall Street Journal’s Jon Hilsenrath:

Demand for U.S. workers shows signs of slowing, a long-anticipated development that is showing up in private-sector job postings even while official government reports indicate the labor market keeps running hot.

Here is affirmation from a certain Ian Siegel of online job recruiter ZipRecruiter:

Clearly, we’re in a macroeconomic slowdown, and online recruiting has effectively cooled across the country.

Concludes the pseudonymous Tyler Durden of Zero Hedge:

Of course, it’s not just job openings where the Labor Department is dead wrong: in fact, virtually every labor market metric, from unemployment to payrolls, has been skewed to represent a stronger economy. Whether this is due to flawed seasonal adjustment metrics, or recurring taps on the shoulder from the Biden admin which is unwilling to admit the true state of the labor market, it has gotten so bad that last week even “JPMorgan lashed out at ridiculous seasonal adjustments in key U.S. data,” with the simple implication: The real jobs data is far weaker than what the Biden admin is representing.

The Perfect Recipe for Recession

Let us assume the foregoing is grounded very deeply in fact. The true unemployment runs substantially higher than the official 3.4%. The economy is far from maximum employment.

Now let us recall the Deutsche Bank prophecy:

Most (but not all) big hiking cycles bring recessions with a lag…(and those that do) “tend to be when the Fed is furthest away from its dual mandate…”

The Federal Reserve is very deep into a “big hiking cycle.” At the going inflation rate, it deviates widely from “price stability.”

And if the official unemployment data has been tortured and distorted out of all semblance… the Federal Reserve deviates widely from “maximum employment.”

Take the three ingredients in hand. Now combine them and mix them together. Do you not have the nearly perfect recipe for recession?

Biden’s on the Hooks of a Dilemma

And why — Mr. Durden — does the foregoing matter?

This matters because as Hilsenrath notes, upwardly manipulated government data on job openings and hiring “are among the reasons Federal Reserve officials believe the U.S. economy is overheated, fueling high inflation. Fed officials are raising interest rates in an attempt to slow growth and reduce price pressures. If government reports move in line with the recruitment business, Fed officials could feel less pressure to move aggressively.”

In other words, the BLS is faced with a dilemma: Admit how bad the U.S. labor market is and stop the stock market bleeding, or keep pushing the lie of economic growth and add a market crash to Biden’s list of all too real woes.

If true, the president indeed hangs from the hooks of a lovely dilemma.

Yet we are certain he will confront this dilemma with the identical pluck and determination with which he confronted Russian aerial bombardment in Kyiv.

Not even a wailing air raid klaxon would shake him! Did you see it? But to proceed…

The Case for Optimism

To this point we have given ear to the Deutsche Bank We have neglected Goldman’s far sunnier economic forecast. Recall, they give mere 25% odds of recession within the following 12 months.

What weather reports is Goldman reading? Those issuing from the Bureau of Labor Statistics. Goldman takes the numbers as BLS presents them.

Mr. Jan Hatzius, Goldman’s chief economist:

We have cut our subjective probability that the U.S. economy will enter a recession in the next 12 months from 35% to 25%.

Continued strength in the labor market and early signs of improvement in the business surveys suggest that the risk of a near-term slump has diminished notably.

Just so. We of course cannot determine if the Deutsche Bank forecast or the Goldman Sachs forecast will prove accurate.

Yet we concede it readily; we incline toward the Deutsche Bank position. We believe we have revealed our bias by giving it a far greater airing.

It is nonetheless critical to mull both positions.

“Both optimists and pessimists contribute to society,” argued George Bernard Shaw, concluding that:

“The optimist invents the aeroplane, the pessimist the parachute.”

We are presently strapped to a parachute…

The Daily Reckoning