What Analysts Are Missing About The Economy- By NEIL SISKIND

Analysts are used to a business cycle ending with growing demand chasing less resources (i.e. inflation) resulting in higher interest rates, and, thus, slower growth or even recession.

Some analysts fear this process is in place, but will take a year or so to play out, provided that the Fed does not go too far, too fast.

Other analysts see no recession coming soon, or any significant slowdown at all in the near future, because their training and experience leaves them with a void in thinking. Inflation is not persistent and wages and prices (tariffs aside) may not create upward pressures enough to push the Fed onward and upward.

What these latter analysts fail to realize is that, even though GDP and earnings outlooks are solid, and inflation is low, the Fed has already made a significant dent and doesn’t need to go much higher in order to induce a slowdown. But, this an opinion; this is my opinion versus theirs’. So, let’s talk facts. On a factual basis, these analysts fail to recognize that price and/or wage inflation, or even “significant” rate hikes, do not need to occur before a slowdown can occur. In modern economies, where liquidity drives asset growth, such as trading of houses as assets, and companies use profits and debt to buy back stock instead of raising wages and creating more consumer demand, and companies use debt for acquisitions and to fund loss-leaders to gain scale- instead of for capex, any notable withdrawal of liquidity- such as we have already seen- even if such withdrawal eventually ceases (if the Fed stops hiking), is enough to sink an economy built on debt- as opposed to one that is built upon demand from growing wages, stronger consumers, and resulting higher prices by businesses with pricing power, and then higher interest rates. It just does’t work this way anymore.

Where, in the past, the withdrawal of liquidity can slow wages and prices, in the modern economy, which is a structurally weak economy, rising interest rates and removals of liquidity have a faster and deeper affect on the economy than a mere slowing of prices and wages would. Asset values and risk capital can immediately disappear as cash and bonds offer less risk with near equal returns, and as corporate and consumer debt from previously low rates and high liquidity can’t be paid back as easily, and as risk capital fast disappears because investors are not willing to buy corporate loan and debt instruments.

This is exactly what happened in 2007 and 2008. Risk capital became more costly and everyone ran for the exits on assets- because that’s where the capital flowed to.

This is why the yield curve is flattening again as the Fed remains hawkish. The yield curve is flattening because many investors believe that we are about to slow down … significantly, because liquidity is being withdrawn

The Fed has been targeting asset prices and financial instability, not wage and price growth- because there isn’t any. The Fed is getting what it wants- but it may regret what it wished for.

So, let’s talk tariffs. Higher interest rates can’t get prices lower if those higher prices are based on tariffs, rather than on demand and higher wages. So, if new tariffs are implemented, companies will earn less, or consumers will pay more, and/or demand will decline (which means companies will earn less). The Fed can’t help maintain price stability if the tariffs take hold because it’s a policy issue, not a demand issue; so, if the Fed pushes rates higher due to price inflation on consumers from tariffs, it sure would do us a world of hurt.


Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

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