Investors Sleepwalking into Turbulence and Recession, Warns Steve Hanke
Renowned economist and professor of applied economics at Johns Hopkins, Steve Hanke, has issued a stark warning to investors, cautioning that they are currently too complacent and risk being blindsided by an economic slump in early 2024. In an interview with Stansberry Research, Hanke expressed his concerns about the prevailing “soft landing” narrative, which suggests that the Federal Reserve can effectively combat inflation without causing a significant downturn in the economy or a spike in unemployment.
Hanke challenges this optimistic perspective, asserting that the decline in the money supply has not yet had its full impact on the real economy. He goes on to explain that the US money supply saw a 26% expansion at the height of the pandemic, but recent months have witnessed a contraction. Based on historical patterns, Hanke argues that there is typically a delay of six to 18 months before the effects of a contraction are fully felt in the real economy.
“Money is a fuel that runs the economy, and we had a huge buildup of excess fuel,” Hanke warned. “Now that excess fuel has been drained out of the tank, and we’re running on fumes now.”
This situation, along with the Federal Reserve’s decision to decrease the size of its balance sheet and potentially raise interest rates further, paints a bleak picture for the economy in Hanke’s view. He suggests that the recession will hit once the remaining “fumes” are depleted.
Furthermore, Hanke also highlighted the mounting concern around the federal debt. He cautioned that the US government is likely to allocate an increasingly larger portion of its budget to interest payments, potentially resulting in reduced funds for other critical areas.
Regarding Fitch’s recent downgrade of America’s credit rating, Hanke described it as a “demerit” for the country. On the topic of the BRICS nations’ plan to introduce a reserve currency that would rival the US dollar, Hanke dismissed it as “grasping for straws” and a “pie in the sky” idea.
With Hanke’s warning ringing loud and clear, investors will need to carefully reassess their strategies and consider the potential risks on the horizon. The turbulent times ahead require a cautious approach in order to avoid being caught off guard by a potential recession.
Analyst comment
This news can be evaluated as negative. Steve Hanke’s warning about investors being too complacent and the risk of an economic slump in early 2024 indicates potential turbulence and a recession on the horizon. Hanke’s concerns about the decline in money supply and the Federal Reserve’s actions contribute to a bleak outlook for the economy. Investors should reassess their strategies and approach the market cautiously to avoid being blindsided by a potential recession.
