Meredith Whitney expects the US economy to face a reckoning in the fourth quarter, once temporary support from the World Cup and remaining government spending fades. She points to weekly credit card balances growing more slowly than in May and to higher gasoline prices squeezing lower income households. She still expects the Federal Reserve to leave interest rates unchanged on Wednesday.
Whitney, founder and chief executive of Meredith Whitney Advisory Group, warned that the US economy could face a reckoning in the fourth quarter as temporary support from the World Cup and remaining government spending begins to fade. The analyst who called the 2008 financial crisis said weekly credit card balances are growing more slowly than they were in May, suggesting consumer spending is losing momentum.
A tale of two economies
Households are also absorbing higher gasoline prices, placing additional pressure on disposable income, particularly among lower income consumers. Whitney described the current environment as a tale of two economies, where semiconductor companies and wealthier households continue to perform strongly while consumers with lower incomes are beginning to reduce spending. Those conditions, she said, give the Federal Reserve room to leave interest rates unchanged at the conclusion of its meeting on Wednesday.
During a Bloomberg Television interview she said the central bank will probably still use hawkish language that gives it wiggle room: "I think they will stay on hold". Markets were pricing roughly a one in three chance of an interest rate increase ahead of the decision, although economists generally viewed the threshold for a move as high.
Warsh's five task forces buy time
She rejected arguments that a surprise increase would strengthen Fed Chair Kevin Warsh's inflation fighting credibility. Warsh's decision to establish five policy task forces gives him several months to assess the economy before committing to a change in monetary policy, she said, and he has so far avoided giving markets clear guidance on his preferred rate path.
The Fed's limited power over long term rates
Whitney also argued that the Fed has limited power to bring down long term Treasury yields and mortgage rates, attributing elevated borrowing costs primarily to federal debt and fiscal policy. Rates could remain persistently high regardless of the central bank's actions, she said.
She dismissed concerns that bond issuance from major technology companies is crowding out demand for US government debt, describing the amounts as small compared with the size of the Treasury market. The recent increase in initial public offerings does not necessarily indicate that equity markets are approaching a peak, she said, and strong liquidity allows investors to rotate capital from existing holdings into newly listed companies without withdrawing money from the market.
Banks may trade buybacks for takeovers
In the banking sector, Whitney expects the current focus on share repurchases to eventually give way to major acquisitions. She identified JPMorgan as the most likely large US bank to initiate a transformational transaction, potentially restarting the type of consolidation that reshaped the financial sector during the 1990s and early 2000s.
Source: Crypto Briefing
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