Steve Hanke: US Recession Imminent, Fed Blind to Money Supply

Recession Forecast and Monetary Policy

• 💡 Economist Steve Hanke predicts an 80-90% probability of a U.S. recession, primarily due to anemic money supply growth.
• 🎯 He criticizes both President Trump and Fed Chair Powell for focusing on interest rates rather than changes in the money supply, which he argues is the true driver of economic activity and inflation.
• ⚠️ Hanke asserts that central banks like the Fed, Bank of England, and European Central Bank have abandoned the quantity theory of money, leading them to be "behind the curve".
• 📈 Historically, significant inflation has always been preceded by a substantial increase in the money supply, a concept he believes is ignored by modern macroeconomic models.

Global Economic Weakness and Uncertainty

• 📉 Hanke points to weakening global demand, citing examples like Louis Vuitton's sales decline and profit warnings from airlines like JetBlue and FedEx.
• 🇨🇳 He highlights deflation in China, where money supply growth is insufficient to meet targets, leading to a declining price level.
• 🗣️ The governor of the People's Bank of China criticized the "weaponization of the dollar" through sanctions and tariffs, though Hanke notes China's own economic troubles.
• 🇺🇸 The U.S. dollar is expected to remain under pressure, potentially moving back towards a fair value range against the euro.

Regime Uncertainty and Labor Market Concerns

• 💼 "Regime uncertainty," driven by unpredictable policy changes from figures like Trump, is identified as a significant depressant on investment and hiring.
• 🎓 College graduates are facing difficulties finding jobs, an anomalous situation attributed to this uncertainty, reminiscent of the investment freeze during the New Deal era.
• 🇨🇦 Similar youth unemployment issues are observed in Canada, with high rates impacting young graduates.

Government Spending and Geopolitical Tensions

• 💰 Hanke criticizes the "one big beautiful bill" for increasing government spending, deficits, and debt, particularly the significant, unaudited defense department budget.
• 🕊️ He argues that the U.S. should cut defense spending and cease funding conflicts like the one in Ukraine to promote peace, stating that stopping funding would stop the war.
• 🌍 Deep divisions within the G7 and the continued funding of the Ukraine war by Western nations are seen as problematic, with leaders described as "third-rate people" running "first-rate countries."
• ⚔️ The resolution of the Russia-Ukraine war is expected on the battlefield, with Russia continuing to advance and Ukraine's economy being destroyed.

Market Bubbles and Bond Market Concerns

• 🎢 Hanke's "bubble detector" indicates the stock market is in a bubble, comparable to the dot-com era of 2001, with a high risk of a pop or slow deflation.
• 💰 Warren Buffett's strategy of holding significant cash is seen as a sign of caution amidst market overvaluation.
• 📉 The bond market is also showing signs of distress, with rising real yields and increased treasury issuance due to deficit spending expected to push nominal yields higher.
• 🥇 Hanke remains bullish on gold, viewing it as a safe haven, and points to the Hanke-Kofnas Gold Sentiment Score for real-time market sentiment data.