Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Monetary Lags and the Acute Recession of 2023

Economics / Recession 2023 Jan 04, 2023 - 08:20 PM GMT

By: Michael_Pento


Fed Chair Jerome Powell remains unimpressed with the reduction of the rate of inflation; down to 7.1% in November, from 9.1% June. The Summary of Economic Projections shows a desire of the Fed to increase their forecast for the Fed Funds Rate to 5% in 2023, up from the 4.6% projection made in the last SEP that was released in September.

And yet, the Deep State of Wall Street is busy telling investors that the Fed is almost done raising rates, hence, and a new bull market is right around the corner. But history proves this premise to be false. For example, during the preamble to the Great Recession, the Fed Funds Rate reached its apex in June of 2006 at 5.25%. It took 3 years for it to ascend to that level, up from the 1% starting level back in June of 2003. Ben Bernanke then began to cut rates in September of 2007; but the Great Recession began anyway in December of that same year. And, exactly one year from that first rate cut, the stock market went into freefall. This is another clear example of many throughout history that shows rate hikes work with a long lag.

The situation today is much worse. The Fed will have raised rates from 0% in March of 2022, to 5% by March of 2023. That is 500bps of rate hikes in just one year this time around, as opposed to 425 bps of rate hikes over the course of 3 years leading up to the Great Recession. And, today we have QT occurring as well, which involves the burning of $1 trillion per year out of the base money supply--whereas, during the period between 2003-2006, there was no such reduction in the balance sheet happening.

By the way, Mr. Bernanke cut interest rates to 0% by the end of 2008; but the stock market still didn't bottom until March of 2009. Again, this proves that monetary policies work with a long lag; as the cutting of rates by 525bps over the course of 15 months still did not bring the bear market to an end.

Hence, these lagged monetary effects are the same reasons why the insidious ramifications of this record-setting tightening regime have only just begun to be felt in the economy and markets. After all, it is only 9 months old and the M2 money supply is already shrinking.

The complete reversal of the massive monetary impulses that produced record asset bubbles in equity, real estate and the fixed income markets should lead to one of the most acute recessions in history. What other outcome would you expect, given the fact that near zero percent interest rates, which have existed for 10 of the last 14 years, will have surged to 5% in just one year’s timeframe. For reemphasize the point, it took a one percent Fed Funds Rate for the duration of just one year to engender the housing bubble and Great Recession. And even though interest rates were gradually raised by 425 bps over three years, the results were still disastrous.

That grand reconciliation of asset prices and the economy has yet to fully materialize; but it is indelibly on the schedule for 2023.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”


Michael Pento

Pento Portfolio Strategies

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in