Central banks around the world are willing to risk recession to fight inflation — and early signs suggest widespread pain for everyone, everywhere


Ben Winck
Sat, September 24, 2022 



More than 80 central banks are aggressively raising interest rates to cool inflation.


Rate hikes are the best tool for easing price surges but bring with them the risk of recession.


The synchronized rate hikes could throw the world economy into a slump.

Countries around the world are rushing to crush inflation. The price? A global economic downturn.

In the US, the Federal Reserve chair, Jerome Powell, has warned that the fight against rising prices will "bring some pain" to Americans by slowing job growth, making mortgages and credit cards more expensive, and possibly prompting layoffs. He characterized the Fed's inflation target as "unconditional," offering a clear signal that the central bank will accept some economic discomfort — and even a recession — if it means ending the price surge.

He's not alone. Central banks in the UK, Europe, Canada, Switzerland, Indonesia — more than 80 countries in all — are similarly slamming the brakes on their economies to curb inflation, according to the World Bank. Monetary tightening is the broadest its been in five decades, and as inflation hovers at worrying highs around the globe, it's unlikely any central banks will ease up soon.

Policymakers' mission — to bring inflation to heel — has already caused downward revisions of forecasts for advanced economies' growth through 2023. Experts see job losses and weak wage growth on the horizon as economies shift into a lower gear. And businesses are already warning shareholders that things are only going to get tougher.
Corporate earnings offer the first signs of an impending downturn

Companies are already feeling the pain from the Fed's hiking cycle. On September 15, FedEx retracted its earnings forecast for the rest of the year and warned investors that the slowing economy will lead revenue to come up $500 million short of the firm's prior target.

When asked by CNBC's Jim Cramer if the global economy is entering a recession, FedEx's CEO, Raj Subramaniam, put it plainly. "I think so," he said.

Restoration Hardware's CEO, Gary Friedman, was more colorful when addressing recession worries in a September 8 earnings call.

"We're in a recession. Anybody who thinks we're not in a recession is crazy," he told analysts. "The housing market is in a recession, and it's just getting started."

Friedman and Subramaniam aren't alone. Of the companies included in the S&P 500, 240 brought up "recession" in their second-quarter-earnings calls, according to FactSet analysis. That's the highest share going back to 2010, when the firm started tracking such mentions. It also dwarfs the 212 "recession" citations seen at the start of the pandemic recession in early 2020.

Stocks' initial reaction to companies' slowing growth can pull the broad market dramatically lower, as it did on September 16, when FedEx's report amplified worries of economic weakness. That translates to less household wealth at a time when the S&P 500 is almost 20% below last year's highs.

Lower revenues and dampened profit forecasts can also lead to more immediate economic damage. Companies tend to cut costs to protect their margins when economic growth slows. That often shows up in the form of smaller raises, slimmed-down hiring plans, and, in the direst cases, widespread layoffs.

At some firms, job losses are already here. The Gap is set to cut 500 corporate jobs by laying off staff and shedding some roles entirely, according to a report from The Wall Street Journal published Tuesday. The move comes amid falling revenue and earnings and marks a major shift toward cost-cutting.

Tumbling sales have also prompted layoff plans at Walmart, Best Buy, and Bed Bath & Beyond in recent weeks. The former has also said it plans to hire fewer workers for the busy holiday season, further stoking concerns that waning demand will cut into the labor market's health.

Sales are expected to keep slowing, and "the current macro environment trends could be even more challenging and have a larger impact for the remainder of the year," Matthew Bilunas, the chief financial officer of Best Buy, said in an August 30 earnings call.

The Fed doesn't just expect some labor-market damage, it's betting on it. Powell has repeatedly highlighted the labor market's unusual tightness as a factor keeping inflation strong, with job openings still outpacing available workers two-to-one at the end of July. The US likely needs "softer labor market conditions" if it's to get over the inflation spell, the Fed chair said in a Wednesday press conference.

That softening is looking increasingly bleak, however. Projections published by the central bank on Wednesday show officials bracing for weaker growth, higher unemployment, and stickier-than-expected inflation through 2023. Those three factors are the key components of a growth recession.

If the Fed can get inflation lower with only a minor jump in unemployment, it's possible that the US can pivot to steady growth and a healthy economic expansion. Yet other central banks face the same predicament as the Fed, and as policymakers around the world rush to stifle inflation, the threat of a broader downturn looms large.
How a mild US slump becomes a deep global recession

More than 80 central banks are staring down the same problem. Inflation is well above their targets, but pulling it lower involves historically large rate hikes.

Such a hiking cycle comes with some unappealing trade-offs, but most have echoed the Fed's message: Some weakness today is worth it to make sure inflation doesn't get stuck at four-decade highs.

The Fed made its latest move on Wednesday, raising rates by another 0.75 percentage points to place its benchmark squarely in restrictive territory.

"If we want to set ourselves up and really, really light the way to another period of very strong labor market, we have got to get inflation behind us," Powell said Wednesday. "I wish there were a painless way to do that. There isn't."

That followed a hike of the same size by the European Central Bank on September 8. The ECB's 0.75-point hike was the first in its history and pushed its benchmark to the highest level since 2011. Officials noted that they expect to raise rates even higher to "guard against the risk of a persistent upward shift in inflation expectations," echoing the Fed's reasoning for such aggressive hiking.

The Bank of England, meanwhile, raised interest rates by half a percentage point on Thursday, saying it would continue to "respond forcefully, as necessary" to elevated inflation.

That so many central banks share the Fed's outlook could become a huge problem. The world's fight against inflation could spark recessions in several countries as policymakers dramatically tighten financial conditions and slow their economies to a halt.

Such a globally synchronized downturn would be worse for everybody. A new study from the World Bank forecasts that should inflation prove more persistent than expected, the global economy could enter a downturn in 2023 before recovering the following year. Jobs would be lost en masse, high rates would crush some borrowers, and the recovery from the pandemic would give way to a new crisis.

"Recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation," Ayhan Kose, the acting vice president for equitable growth, finance, and institutions at the World Bank, said. "But because they are highly synchronous across countries, they could be mutually compounding in tightening financial conditions and steepening the global growth slowdown."

Central banks could be mere months away from a lose-lose scenario. If inflation doesn't start to cool soon, the prevailing options policymakers have are to slam the brakes on their economies and throw the world into a recession — or usher in an era of cripplingly fast price growth.

Is the Fed’s Cure for Inflation Worse than the Disease?

By Benjamin Hart@realaxelfoley

Photo: Drew Angerer/Getty Images

After initially dismissing the threat of persistent inflation, the Federal Reserve is now fully committed to bringing it under control with a series of interest-rate hikes. But some worry that the central bank is overcompensating for its mistakes by doing unnecessary damage to the broader economy. I spoke with Ryan Sweet, a senior director of economic research at Moody’s Analytics, about whether Jerome Powell is making the right move, the risk of stagflation, and what a U.S. recession would look like compared to previous ones.

A few weeks ago, it seemed there was some optimism that the U.S. might escape the current era of high inflation without the sting of high unemployment and a full-scale traditional recession. Since then, the market has plummeted and the overall outlook appears gloomier. Why?
I think the trigger, at least initially, was the Core Consumer Price Index, which came in a little bit hotter than what people were anticipating. Some of the stickier components of inflation are picking up. Shelter, for example — shelter inflation hasn’t peaked yet, so that’s going to be a persistent issue. We needed a lot of goods disinflation, particularly in new and used vehicles, to offset some of the services inflation, and we didn’t get that.

And financial-market conditions have tightened noticeably since the Fed’s September meeting. Reading between the lines, the Fed is laser-focused on taming inflation, and they’ll stomach a recession to do it. And that’s essentially what they’re forecasting: They’re predicting a rise in the unemployment rate, which normally only occurs in a recession. They’re going to break inflation or they’re going to break the economy. And I think the risks are rising that we don’t have a “soft landing,” where inflation goes back down to the target rate and we skirt a recession.

For a long time last year and early this year, the Fed took a laissez-faire approach to inflation, thinking, as many analysts did, that it would be fairly transitory. Obviously that was incorrect, and Fed Chair Jerome Powell admitted his mistake. To what extent do you think his laser focus now is the correct course, based on what’s happening in the economy, and to what extent is it driven more by a need to not get this wrong a second time? Is it possible that the Fed is actually overreacting here?
I think the risk is that they are overreacting. What they want to do is have GDP growth well below potential, bring down job growth, and take some pressure off wages, which by extension cools inflation. But that’s for demand-side inflation. And most of our inflation problems are on the supply side. It’s higher energy prices because of Russia’s invasion of Ukraine; it’s supply-chain stress, which has driven up prices of new and used vehicles and children’s apparel, for example. Not all our inflation issues can be solved by the Fed raising interest rates. Rising interest rates will cool the demand side of the economy. We’re already seeing evidence that the interest-rate-sensitive parts of the economy, including housing, are weakening.

But unless the Fed starts going out and drilling wells or driving container ships, they’re not going to be able to affect the supply side, where we’re seeing a lot of inflation. And it seems like they kind of panicked when they raised rates by 75 basis points just when it looked like inflation may have peaked. If you look at global shipping rates, they’re coming down, and oil prices have come down. This is going to help over time — it’s not going to be next month or in the next two months, but going forward we’re going to see less inflationary pressures.

But haven’t we been hearing that same line — that we’re about to start seeing less inflationary pressure — for a year now?
I think economists were starting to sound like Chicago Cubs fans before they won The World Series: “Just wait till next year.” But there are reasons economists are making these forecasts. Global shipping rates for container traffic prices were continuing to rise, but now they’ve clearly rolled over. Now you can see it in oil, you see it in lumber, you’re seeing it in copper — it’s broad-based.

To what extent can the Biden administration cool the supply-side pressures you mentioned?
I think some of the steps they’ve taken, like releasing some oil from the strategic petroleum reserve, have helped a little bit on the margin. Their climate policies push against them opening up or adding more leases for natural-gas and oil production. The Biden administration has got to be careful because how we get into a stagflation scenario — where you have high inflation and high unemployment — is with policy mistakes. And you can go back and look at the late 1970s and early 1980s, when we had policy errors on both the monetary policy front and the fiscal policy front. For example, any chatter of price controls should be shot down immediately — they don’t work. But the odds of stagflation in the U.S. are pretty low, 10 or 15 percent.

Not that low! That seems uncomfortably high.
For perspective, in any year the odds of a recession are usually around 10 to 15 percent. So the stagflation risk isn’t zero, but it’s not 50-50, which is more likely the odds in, say, Europe or the U.K.

It doesn’t seem like any country is doing terrifically in this regard. Europe is in the midst of a deep energy crisis, and Germany and the U.K., which just instituted an oddly timed tax cut, look headed toward recession. China’s COVID Zero policy is a mess for the economy. The U.S. has been a relative bright spot so far. The expression goes that when America sneezes, the world catches a cold. But now it seems like the opposite might be happening.
I’ve always heard that expression — “the cleanest shirt in the dirty laundry.” Our economy is holding up reasonably well, particularly when compared to some of the other developed economies in the world. This could be potentially the first recession — and our baseline forecast is not for recession in the U.S., but it’s going to be close because the odds are uncomfortably high — but this could be the first recession in recent memory that the U.S. didn’t pull the rest of the world in. It’s vice versa. The world could pull us into a recession, because we’re not going to be able to skirt the side effects of Germany falling into a recession, or the U.K., or the broader Euro zone. And when the economy is vulnerable like we are today, anything else that goes wrong could be the difference between flirting with a recession and falling into one.

How would that work? Let’s say Germany does tip into recession. How would those side effects hurt the U.S.?
One would be through trade. Demand for our exports would decline, and that would negatively affect manufacturing in the U.S. Right now, if you look at the economy, housing is struggling, and the worst is not anywhere close behind us — it is going to continue to weaken. Throw manufacturing on top of it, and now the dominoes start to fall. But again, as the consumer goes, so goes too the U.S. economy. They’re crucial if we’re going to hang in there. This goes back to the labor market and as long as job growth is solid, the unemployment rate doesn’t rise too much, we could be okay. But the concern is that if more and more countries fall into a recession, manufacturing starts laying off workers, and layoffs in construction start to increase. And that could start to really take a toll on the labor market. And then once unemployment goes up, there’s a psychological effect where if you see your friends, family, neighbors getting laid off, then you run for the bunker, you pull back on spending because you’re worried about your own job security. And that’s how this negative reinforcement cycle starts to kick in.

For the most part, I watch what consumers and businesses do, not what they say. They can say, “Oh, I’m really down in the dumps.” And you can see that in different measures of consumer confidence right now. But they’re out there still spending, because we have a low unemployment rate. Nominal wage growth is pretty strong from what we saw pre-pandemic — there’s two and a half trillion dollars in excess savings. So consumers are still spending, even though their confidence would suggest otherwise.

I interviewed Larry Summers a while ago, and he predicted that there was no way of getting out of the situation without hitting 6 percent unemployment. What sectors of the economy would be hardest hit in terms of layoffs in that scenario?
With a 6 percent unemployment rate, I would assume that the Feds got interest rates higher than we are assuming in the baseline. You’d have layoffs in housing, you’d have layoffs in manufacturing. The consumer sector would be hit hard as well, because when unemployment goes up, people cut back on spending. They’re not going to go out to restaurants and bars or spend time on leisure travel.

Given that inflation is coming down in your view, would a downturn be on the milder side? Because the Fed might see that unemployment is rising and inflation is falling, and they could pump the brakes on this policy sooner rather than later.
If we do have a recession — and hopefully we don’t and the Fed is able to pull this rabbit out of their hat — it would be a mild one. Because what typically determines the severity and the duration of a recession is the catalyst. So what’s the reason we fall into a recession? The pandemic, for example, or a financial crisis, or a housing bubble. Those led to long or deep recessions in the pandemic’s case.

But there’s no glaring imbalance in the economy today. Household balance sheets are in really good shape. Nonfinancial corporate balances are not in as good shape as households, but they’re still pretty solid. State and local governments are flush with cash. The only balance sheet in the economy that has a problem is the federal government, and that’s not an issue for a recession or a deep downturn. So if we do have a recession, it should be mild, because the Fed will say, “All right, we overdid it, we can back off and start cutting interest rates” and that should help limit the severity and the duration of it.

This interview has been edited for length and clarity.

Don't Central Banks Get That They Are Making the Problem Worse?

Their moves threaten to make inflation a problem for years to come.

By MALEEHA BENGALI 

 Sep 30, 2022 | 

When you see a currency fall to the tune of 20% or more, you generally associate the decline with an emerging market or one that is mismanaged or run by corrupt ministers in a developing part of the world. But when that sort of move is seen in a currency such as the pound sterling, then it is an entirely different matter altogether.

Let's not forget this was the currency of one of the biggest empires of the world, one that colonized half the world less than a century ago. Its banking reforms and offshore banking protocols are some of the strongest and most pertinent as institutions and funds have built tons of assets around it given its "safety" and "security," or so one thought.

The sterling went through an abrupt correction post-Brexit, for logical reasons. Since then, just this year alone it has moved from 1.40 to the U.S. dollar down to 1.03 at one point this week. It has now rebounded off the lows. However, one also can assume such moves in the euro, which has seen its fair share of crisis over the past few years.

So, what is causing this slide in the sterling?

Inflation has been a truly global phenomenon since central banks embarked on this Modern Monetary Theory (MMT) journey, but Covid really made matters worse as the banks jumped to print so much money in such a short time. Consequently, inflation shot up north of 10% year over year in some places.

Long after the recovery, the Bank of England should have started raising rates and tightening liquidity, but it like the US Federal Reserve it also feared bursting the debt bubble or hurting consumers, who were getting more and more hooked on lower rates. Despite constant insisting of the non-transitory nature of inflation by their own bank, UK bonds just like US bonds have been signaling distress for some time. The bonds have been selling off all summer and beyond, with the UK 30-year gilt bond market trading close to 5% from just 1% in less than a year's time.

The rate of change of such a move is historically significant. We have not seen this level of yields since the 2008 Lehman crisis. But it is not the level as much as it is how fast we got there. The same is the move in all bond markets across the developed countries.

Pension funds and asset/liability-matched entities rely on these long-term bond markets to meet their liquidity and funding requirements. When we see such drastic moves in one, the balance is upset. This is what happened in overnight UK markets this week when UK gilts were causing pension funds to sell off holdings as they received margin calls and had to meet their liquidity requirements.

The UK bond market was on the cusp of coming to a halt, and this is no joke for a market like the UK. Hence, the Bank of England had to issue up to £65 billion to buy back their long-term gilt. In layman terms, this means they are basically doing quantitative easing. At a time when UK economy is experiencing inflation closer to 10% given its energy/gas problem, it decided to print even more money. One wonders why these bankers are sitting where they are, because in Classic Inflation 101, this move is going to trigger even more inflation, not ease it.

Just like the Japanese bond market and the Bank of Japan, an indebted central bank can have either a strong bond market or a strong currency -- it cannot have both. It is a wonder we did not learn from Japan, which went through all of this 20 years ago, yet we decide to make the same mistakes.

As there were rumors of UK funds freezing, which is the flashing red warning signal for any of the past crisis, the central bank had to step in and did what it knows best -- print more. That is why the sterling fell 5% on this news as the market knows fully well that, just like the yen, the sterling along with euro has no turning back.

The US Fed is perhaps the lesser of the evils as it, too, faces the same inflation crisis, but it has been vigilant about reversing some of its mistakes and is now tightening. As is typical, the bankers play backward-looking roles and are always late to the party, which creates massive tops and bottoms. For now, the fate of these developed-market currencies is dependent on the US Fed reversing its course. Until then they are the mercy of their own incompetent central banks that keep printing more each time there is a problem, making inflation almost certain for years to come. Welcome to the 1970s!

Prepare for global recession and stagflation, World Bank chief warns

Tristan Bove - Yesterday 

A“perfect storm” of challenges could reverse years of economic development and threaten to tip the global economy into a recession, and potentially into stagflation, the head of the World Bank warned this week.


Shot of David Malpass, President of the World Bank, speaking on stage© David Paul Morris/Bloomberg via Getty Images

Global institutions including the International Monetary Fund and the World Trade Organization have both warned that countries around the world are sliding into a “global recession,” and experts say a combination of low growth and persistent inflation, known as stagflation, is a very real risk—especially for developing economies.

On Wednesday, World Bank President David Malpass echoed fears about global economic challenges during a speech at Stanford University. With current policies, it will take a long time for countries to readjust their economies, Malpass said, and in the meantime the world’s governments—especially those of developing nations—should prepare for a drawn-out period of slow growth.

“A tough reality confronts the global economy—and especially the developing world. A series of harsh events and unprecedented macroeconomic policies are threatening to throw development into crisis,” Malpass said.

“This has consequences for all of us due to the interlinked nature of the global economy and civilizations around the world.”

Prolonged stagflation risks

In June of this year, the World Bank warned that the aftereffects of the Ukraine War could lead to stagflation around the world. And earlier this month, the international lender and developmental agency cautioned that a global recession is a very real possibility as central banks worldwide raise interest rates to fight rising inflation.

On Wednesday, Malpass reaffirmed stagflation fears, citing how long it will take for the global economy to recover from the shocks of the Ukraine War and the global energy market’s disruption caused by Russia’s international isolation.


“Global energy production may take years to diversify away from Russia, prolonging the stagflation risk,” Malpass said. He added that the developing world is set to be hit hardest, as these countries are still recovering from the aftershocks of the COVID-19 pandemic, rising foreign debt, and increasingly limited fiscal budgets.



“A pressing danger for the developing world is that the sharp slowdown in global growth deepens into global recession,” he said.

Russia is the world’s second-largest natural gas producer and third-largest petroleum producer, but international sanctions and disrupted supply chains have left a significant dent in the global energy market. The Ukraine invasion has sparked an energy crisis in Europe and has raised prices globally.

The developing world, which is suffering from high energy prices, has also been hit by high food and fertilizer prices, exacerbated by the Ukraine War. Russia and Ukraine used to be primary suppliers of food and fertilizer products to several developing countries, but the war has severely disrupted supply and threatened a new global food crisis.

Malpass said that a recession is an increasingly likely outcome in Europe too, largely because of high energy prices. Growth is showing signs of slowing in the U.S. and China as well, trends which could have reverberating consequences on the global economy.

Alternative responses

Rich and poor countries around the world have resorted to raising interest rates this year in an effort to reduce domestic inflation. But Malpass cautioned that this approach was significantly raising the risks of a global recession, and urged nations to think of different strategies.

“Developing countries are in the middle of one of the most internationally synchronous episodes of monetary and fiscal policy tightening,” he said, adding that trends playing out in advanced economies—including raising interest rates, slowing growth, lower economic productivity, and draining of global energy supplies—are creating significant risks for the developing world.

Malpass warned that if these policies become the “new normal,” it could cause under-investment in the developing world and hurt economic growth prospects, which combined with persistent high prices for energy, fertilizers, and food, could prolong stagflation risks.

“With inflation high, several tools are available beyond interest rate hikes,” he said. Malpass recommended advanced economies to invest more globally to increase supply of critical commodities including energy and food, and to improve domestic fiscal spending plans.

Malpass also requested that wealthy nations allocate more capital towards promoting growth in developing and more vulnerable nations, especially in projects involving climate change adaptation, healthcare infrastructure, and education.

This story was originally featured on Fortune.com

Paul Krugman, Mohamed El-Erian, and Nouriel Roubini are tearing into UK leaders whose spending plans upended markets. Here's what the 3 top economists have said.

Theron Mohamed
Thu, September 29, 2022 

Paul Krugman.Jeff Zelevansky/Getty Images

Paul Krugman, Mohamed El-Erian, and Nouriel Roubini blasted the new UK government's spending plans.


Prime Minister Liz Truss' planned tax cuts tanked the pound and spiked bond yields this week.


"Trussonomics is deeply stupid," Krugman said, while Roubini slammed policymakers as "clueless."

Paul Krugman, Nouriel Roubini, and Mohamed El-Erian have torn into the new British government's proposed tax cuts, and weighed in on the Bank of England's 65 billion pound ($70.5 billion) bond-buying plan.

Prime Minister Liz Truss and Chancellor Kwasi Karteng's proposals tanked the pound and roiled the UK pensions sector this week. They also prompted a warning from the International Monetary Fund, and spurred the BoE to buy long-dated government bonds and delay the start of its bond sales, in order to stabilize volatile markets and forestall a financial disaster.

Here's what the three leading economists have said about the fiasco:

Paul Krugman

"Trussonomics is deeply stupid," Krugman tweeted on Wednesday. "But there seems to be a lot of hyperventilating going on. Not, it won't cause a global crisis — for God's sake, Britain is only 3.2% of world GDP. And while British markets are a mess, we're a long way from 1976. Get a grip."

The Nobel Prize-winning economist was referring to the UK's last currency crisis — a product of painful inflation, trade and fiscal deficits, and surging oil prices. The nation received a nearly $4 billion loan from the IMF, which required it to make deep cuts in public spending.

Krugman also derided the UK government's fiscal plan as "stupid and cruel," and accused Truss and her cabinet of "buying into supply-side nonsense", in a Twitter thread on Saturday.

Advocates of supply-side economics tout tax cuts, deregulation, and lower borrowing costs as the best tools to drive economic growth.

Mohamed El-Erian

In a Financial Times column, El-Erian underlined how unusual it is for a developed country like the UK to experience what's happened this week: chaos in its currency and bond markets, a loss of confidence in its leaders, an urgent central-bank intervention, calls for an emergency interest-rate increase, and a warning from the IMF.

Allianz's chief economic adviser warned the current tumult could result in higher borrowing costs and wealth losses for UK households. He said that would raise the risk of stagflation — when an economy faces stubborn inflation, stagnant growth, and rising unemployment.

El-Erian slammed the UK's planned tax cuts as "unsettlingly large, relatively regressive and unfunded" in the column published Wednesday.

Moreover, he underscored the incoherence of the country's policies in a tweet the same day. He noted that rate hikes and government-bond sales typically cool an economy, while tax cuts and bond purchases usually aim to stimulate it.

"There's an inherent contradiction in what they're trying to do," he told CNN on Wednesday. "That's why this is nothing more than a Band-Aid," he said about the BoE's bond-buying program.

Nouriel Roubini

"Truss and her cabinet are clueless," Roubini tweeted on Saturday about the government's fiscal plans. "Back to the 1970s. Stagflation and eventually the need to go and beg for an IMF bailout."

The economist, nicknamed "Dr. Doom" for his dire predictions, argued in a Wednesday tweet that the BoE should be raising rates to shore up the pound's value, instead of buying bonds and pumping money into the economy.

He also compared the UK to an emerging-market economy, given its incorrect mix of policies.

"BoE blinks and monetizes the reckless fiscal deficit at a time when monetary policy should become much tighter given the surge in inflation," Roubini tweeted after the central bank announced its bond-purchasing program.

"1970s stagflation ahead! Full lunacy of MP and FP," he added, referring to monetary and fiscal policy.

The 'disorderly' moves in the pound and loss of confidence in UK policy makers is historic, and point to the paradigm shift markets are headed towards, Mohamed El-Erian says

Jennifer Sor
Wed, September 28, 2022 

Photo by Rob Kim/Getty Images

The drop in the pound and the loss of confidence in policy makers is part of a larger paradigm shift, Mohamed El-Erian said.


The economist reiterated that the era of high-liquidity and low-interest rates was over.


But it could be painful for economies to dig themselves out of overly-iquid conditions, possibly resulting in stagflation.

The swift drop in the value of the pound against the dollar and the loss of confidence in UK policy makers is a historic moment – and points to a larger paradigm shift in global financial markets, Mohamed El-Erian said on Wednesday.

The top economist pointed to volatility spurred by the UK's new budget plan, which involves cutting taxes for the wealthy and slashing planned corporate tax hikes. It caused the pound to plunge to a 37-year-low on Friday, and to sink another 2% on Monday, with analysts projecting that the UK currency could sink below parity with the dollar next year.

The plan was criticized on Wednesday by the International Monetary Fund, which gave a stinging assessment of the new "mini-budget" for its focus on cutting taxes at a time of sky-high inflation. Unfunded tax cuts and increased debt will cause further harm, economists say, and the Bank of England could be forced to hike rates more aggressively than planned and increase the risk of a recession.

"It is amazing that this is a G7 country, that over the last six days, has experienced disorderly moves in the currency and in bond yields, a loss of confidence in policy making, now, direct, central bank intervention, and an IMF warning." El-Erian said on an interview with CNBC.

"That normally happens in a developing country. It does not happen in a G7 economy. So this is historic. It points to the paradigm shift we're going through and the fragility of markets," he added.

El-Erian has previously warned markets of the paradigm shift, pointing to central banks' pivot from quantitative easing to quantitative tightening as inflation continues to climb. That means that the era of high-liquidity and ultra-low interest rates is over – and exiting that regime could result in stagflation, hammering the global economy with of high inflation, high unemployment, and low growth.

"The longer you stay in this la-la-land of [quantitative easing], floored interest rates, dislocated markets, funny interventions, distorted asset allocations, the longer you stay in, the harder the exit. And what we're seeing [in the UK] is that the exit is really complicated," El-Erian said.

To combat the potential for higher inflation, the UK will have to hike interest rates to keep inflation under control. But that could also cause enormous financial pain to households, causing unemployment and floating mortgage rates to skyrocket.

It demonstrates the competing paths of the UK's fiscal and monetary policies, and it's critical that the US avoids a similar situation, El-Erian said. He has previously criticized the Fed for not acting on inflation sooner, but has recently urged the central bank to continue hiking rates to bring down runaway-inflation, despite the possibility of slowed growth and high unemployment.

Mark Zuckerberg says Meta will freeze hiring and cut costs



Taylor Hatmaker
Thu, September 29, 2022


After a decade of explosive growth, the company formerly known as Facebook is planning to trim down. Bloomberg reports that Meta CEO Mark Zuckerberg announced plans to freeze hiring and restructure some groups within the company Thursday in an internal all-hands call.

According to Bloomberg, Meta plans to shrink budgets widely within the company, including to teams that it was recently investing in. Meta has thrown a lot of weight behind VR and creating its own metaverse in recent months and is also scrambling to build out short-form video products, like Reels, that can compete with TikTok.

Meta is far from the only tech company downsizing at the moment, but a hiring freeze still signals relatively dire times for the parent company of Facebook, Instagram and WhatsApp. While many companies in tech are battening down the hatches at the moment given a worsening global economic outlook, Meta is also grappling with fresh threats to its advertising business, most notably from iOS privacy changes implemented by Apple last year.

Zuckerberg signaled that the company was in for leaner times back in July, noting in an internal meeting that his company was approaching one of the "worst downturns that we’ve seen in recent history" and would slow hiring to prepare. Meta already selectively paused hiring within certain organizations in the company, but the universal hiring freeze marks a new era.

"I think some of you might decide that this place isn’t for you, and that self-selection is OK with me," Zuckerberg said in the internal call this summer. "Realistically, there are probably a bunch of people at the company who shouldn’t be here."

Meta reportedly suspends all hiring, warns staff of possible layoffs


Anadolu Agency via Getty Images
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Kris Holt
·Contributing Reporter
Thu, September 29, 2022 

As with many other industries, the tech sector has been feeling the squeeze of the global economic slowdown this year. Meta isn't immune to that. Reports in May suggested that the company would slow down the rate of new hires this year. Now, Bloomberg reports that Meta has put all hiring on hold.

CEO Mark Zuckerberg is also said to have told staff that there's likely more restructuring and downsizing on the way. “I had hoped the economy would have more clearly stabilized by now, but from what we're seeing it doesn't yet seem like it has, so we want to plan somewhat conservatively,” Zuckerberg reportedly told employees.

The company is planning to reduce budgets for most of its teams, according to Bloomberg. Zuckerberg is said to be leaving headcount decisions in the hands of team leaders. Measures may include moving people to other teams and not hiring replacements for folks who leave.

Meta declined to comment on the report. The company directed Engadget to remarks Zuckerberg made during Meta's most recent earnings call in July. “Given the continued trends, this is even more of a focus now than it was last quarter," Zuckerberg said at the time. "Our plan is to steadily reduce headcount growth over the next year. Many teams are going to shrink so we can shift energy to other areas, and I wanted to give our leaders the ability to decide within their teams where to double down, where to backfill attrition, and where to restructure teams while minimizing thrash to the long-term initiatives.”

In an earnings report, Meta disclosed that, in the April-May quarter, its revenue dropped by one percent year-over-year. It's the first time the company has ever reported a fall in revenue.

Word of the hiring freeze ties in with a report from last week, which suggested that Meta has quietly been ushering some workers out the door rather than conducting formal layoffs. In July, it emerged that the company asked team heads to identify "low performers" ahead of possible downsizing. The company is said to have been cutting costs on other fronts, such as by cutting contractors and killing off some projects in its Meta Reality Labs division. Those reportedly included a dual-camera smartwatch.

Goldman Sachs has started laying off workers across the US — with a focus on cutting mid-level investment bankers. Here's why that's a bad sign for the economy

WHITE, BLUE OR PINK THE COLOUR OF YOUR COLLAR DOESN'T MATTER WE ARE ALL PROLETARIANS NOW

Serah Louis
Thu, September 29, 2022 

Goldman Sachs has started laying off workers across the US — with a focus on cutting mid-level investment bankers. Here's why that's a bad sign for the economy

As the economy hovers on the precipice of a recession, Goldman Sachs is targeting low performers in a new round of staffing cuts.

The recent firings come after Goldman reported a 41% year-over-year decline in revenue over the summer.

Deal-making in general has drastically plunged this year amidst elevated interest rates and inflation, and analysts foresee continued decreases in company earnings — signaling more troubled waters ahead for the U.S. economy.

Goldman is letting go of low performers after its low earnings report

The investment giant reported second-quarter earnings of $2.93 billion in July this year — significantly lower than the $5.49 billion that was pulled in during the same time in 2021.

“No question that the market has gotten more challenging,” David M. Solomon, Goldman’s chief executive, said on a call with analysts. “We have made the decision to slow hiring velocity and reduce certain professional fees going forward.”

Goldman now seems to be reinstating its annual culling — the bank fired 1% to 5% of its underperforming staff each year prior to the pandemic. About a dozen members in the tech, media and telecommunications teams and some in the consumer retail, healthcare and industrials divisions received their pink slips last week, according to Insider.

This isn’t just limited to the U.S. Bloomberg reports that at least 25 investment bankers were fired in Asia, while Financial News states another dozen were let go in London.
It’s not just Goldman

Goldman isn’t the only Wall Street firm that’s floundering. JPMorgan’s investment banking revenue also plummeted by about 60% in its second quarter.

About $1 trillion deals were struck in 2022 through late July, according to financial markets platform Dealogic. That’s almost 40% lower than the same time last year — and also marks the lowest number of deals in five years (aside from 2020).

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Analysts are predicting S&P 500 companies will report weak third quarter earnings in October, after two straight quarters of negative growth. And more layoffs are forecasted for the future.
What this means for the rest of the economy

The current deal-making drought is yet another signal that the economy could slide into a recession. After a tumultuous first half of the year with interest rate hikes, supply chain issues, conflict in Ukraine and Russian gas cutoffs, companies are veering away from mergers and acquisitions.

The national GDP fell by 0.6% for a second consecutive quarter, according to the latest estimate from the Bureau of Economic Analysis.

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity” that persists for “more than a few months” — however it hasn’t made an official call yet, likely because the labor market and consumer confidence are still going strong.

So far, most economists have been predicting a recession to arrive at some point in 2023.

Billionaire Carl Icahn warns the 'worst is yet to come' — but when an audience member asked him for stock picks, he offered these 2 'cheap and viable' names

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

RBC cuts 10 investment banking jobs in U.S., spokesperson says

WHITE, BLUE OR PINK THE COLOUR OF YOUR COLLAR DOESN'T MATTER WE ARE ALL PROLETARIANS NOW

Thu, September 29, 2022 
By Divya Rajagopal

TORONTO (Reuters) - Royal Bank of Canada (RBC) cut about 10 jobs in its U.S. investment banking division last week, a spokesperson for the bank said in an email on Thursday.

The cuts, which represent 1% of its U.S. investment banking division, were in line with "normal attrition" and the staff laid off are part of U.S. capital markets division, the spokesperson said.

RBC is Canada's biggest bank and its capital markets business reported a 58% drop in net income in the third quarter to C$479 million ($350 million), primarily because of the impact of loan underwriting markdowns of C$385 million in the United States.

RBC's U.S. business includes retail banking, capital markets, wealth management and treasury services and wealth management.

Bank of Montreal has also laid off staff in its U.S. capital markets division, a spokesperson for the bank said earlier this month, without giving details.

Rapid interest rate hikes by the U.S. Federal Reserve to tame runaway inflation have rattled global financial markets, curbing companies' appetite for deals and making them wary of stock and debt offerings.

In July, Goldman Sachs Group Inc warned it may slow hiring and cut expenses as the economic outlook worsens.

($1 = 1.3697 Canadian dollars)

(The story corrects job cut number to 10 from 30)

(Editing by Richard Chang and Gerry Doyle)

A New Report Shows Just How Wildly Unaffordable Canadian Housing Prices Have Become

Willa Holt - Yesterday -mtlblog

If you're looking to buy a house, now might not be the time. Canada's Office of the Parliamentary Budget Officer (PBO) has published a report showing that a reduction in the average house price since the beginning of this year has done little to improve the market for Canadians across the country.



After a 52% increase in the average house price across Canada brought on by the pandemic, the PBO witnessed a slight decrease of 7% nationwide. But this doesn't mean housing is that much cheaper — the average house price in several cities, including Montreal, is still over 50% higher than what the PBO considers affordable for residents.

In February 2020, the average Canadian house price was $551,100. By February of this year, it had skyrocketed to $839,600, before that 7% decrease brought the price to $777,200 in August of 2022.

Despite the decline and an increase in average household incomes, skyrocketing mortgage rates have "[led] to a significant reduction in the borrowing capacity of Canadian households and a further widening in the house price affordability gap," the PBO says in its report.

“The gap between the national average house price and what an average household could afford has increased from 45% in December 2021 to 67% in August 2022, a jump of 22 percentage points in just eight months," explained PBO Yves Giroux.

His report says it's possible average house prices could continue to decrease. Meanwhile, mortgage rates are expected to continue to increase, potentially further squeezing borrowing capacity as a result.

In other words, the pandemic's significant impact on housing affordability is likely to continue to exert pressure on households.

This article's cover image was used for illustrative purposes only.

Wave of retirement hits Canadian workforce as healthcare, education lose workers

TORONTO — Canada is facing a wave of retirements driven by workers in high-pressure sectors, with an increasing number retiring before they turn 65.


Wave of retirement hits Canadian workforce as healthcare, education lose workers© Provided by The Canadian Press

A new analysis of labour force survey data by the Canadian Centre for Policy Alternatives (CCPA) found that 73,000 more people retired in the year ending August 2022 compared to a year earlier, a jump of 32 per cent.

Two-thirds of those excess retirements were in four industries: health care, construction, retail trade, and education and social assistance.

Senior economist David Macdonald said it’s highly unusual to see retirements at this level. But a closer look at some of the industries in question paints a picture of burnout, stress and ongoing pandemic difficulties leading to workers retiring earlier than they perhaps planned.

While retirements are expected to go up gradually as baby boomers retire, 2022 is seeing a clear spike, said Macdonald.

“This is very focused on some specific areas, which … makes it more of a short-term trend,” he said.

The retirement wave began earlier in 2022, Macdonald found. By April 2022, retirements in health care in a year had almost doubled, with 19,000 excess retirements compared with a year earlier.

This likely means there’s a wave of highly skilled nurses leaving the profession, perhaps due to burnout after two years of the pandemic, said Macdonald.

Related video: 9 in 10 Canadians cutting back on spending amid inflation: Angus Reid survey


Canada’s most populous province is also driving the retirement wave, making up 66 per cent of the extra retirements in the year ending August despite having less than 40 per cent of Canada’s workers. Teachers retired in droves; two-thirds of extra retirements in education were in Ontario.

Retirement in teaching drove the trend in the year ending August; 21,000 of the 73,000 additional retirements were in education services.

Wage increases in Ontario’s public sector have been restricted by Bill 124, which may be a factor in health care and education workers deciding they’ve had enough, said Macdonald.

“There’s a breaking point,” he said.

“Those professions have not returned to normal. They are substantially different from how they were in 2019."

In the year ending June, extra retirements in retail trade peaked with an extra 13,000 workers. In July, it was construction that saw retirements jump.

It’s not just the boomer generation that’s contributing to this wave, either. A surprising number of workers younger than 65 are retiring early, said Macdonald.

In August 2021, the largest age group retiring were between 65 and 69, at 38 per cent of total retirements. A year later, that group made up 33 per cent of retiring workers, while the next youngest group of workers aged 60 to 64 had gone up three percentage points to 31 per cent. Retirements among workers 55 to 59 also went up

“People are retiring, not because they're hitting 65, they're retiring for some other reason," said Macdonald.

There was also a wave of retirements at the beginning of the pandemic, as many workers decided to retire early instead of going through unemployment, he said.

If Canada goes into a recession, something similar might happen in some sectors, such as finance or real estate, said Macdonald.

This report by The Canadian Press was first published September 30, 2022.

Rosa Saba, The Canadian Press