I think that quite a few pundits and beefers are using a 1990-1 template for this period in the markets. At that time, the commercial real estate industry was cratering due to massive overbuilding, the high yield bond market had high defaults and regulatory changes that were devastating, and the first Persian Gulf war was causing much fear. I remember that rumors abounded over the Christmas holiday then that Citibank couldn't sell commercial paper and was in danger of failing ... and that's when the Saudi prince got such a bargain by investing in it. Persons thinking history is repeating think a recession will occur, as in fact one did in the 1990 period.
And then, belated Fed easing was "pushing on a string" as they were far behind the momentum of the economic trajectory, so their efforts took quite a long time to show any effect.
A principle I use often is that history doesn't really repeat, if makes people think it will, then changes. People notice imprecise patterns and think the entire situation will repeat, but overlook important differences. Hence they error in their conclusions.
So what errors are the recession pundits making ? First, notice that the 1990 recession was quite shallow - it almost did not occur. On my 100 year chart of GDP, it's almost imperceptible. Second, see my description above - I listed three major negative factors for 1990. Today there is only one real factor: residential housing overbuilding and consequential value weakness and defaults in weaker mortgage loans. Third, the Fed is actually "slightly" on track - not completely behind - as they did start cutting rates in September. So they are pushing to re-accelerate the economy before it actually reverses course and slows.
But they aren't doing enough and their public dallying and unclear readings on the economy are hurting their efforts. And the overnight rate is still too high. And their monetary policy is still too tight.
I calculated the growth in the monetary base for the past year - it's only 1.3%. That's very restrictive for an economy growing at a nominal rate of at least 5%. So they still have a tight money policy and overnight rates are too high compared to core inflation.
So they need to get more aggressive on cutting rates and increasing the monetary base before more negative economic momentum can develop. Or that "pushing on a string" metaphor might become true.
PS: to clear up some readers' confusion, let me post this analogy that I wrote in the comments: "another way to explain my thinking, is that based on the real interest rate level and the non-growth of the money supply, the Fed now has its foot on the brakes, causing a slowdown. They need to take the foot off the brakes and tap the gas a bit to offset their errors of the past nine months."
About Me
- Bunkerman
- I have a pioneer mentality. My wife & I live in the woods - neighbors aren't visible except slightly in winter. Our "bunker" - hehe, really a fine home & barn - has plenty of security. We have four dogs: Krypto (age 9, Kelpie), Ava (age 13, Rat Terrier), Sky (Kelpie, age 5) and Lucky Star (age 1, kelpie). I don't take crap from anyone anymore, having enough resources & gear stocked up to survive in any circumstance. I have three degrees from Harvard including a Ph. D. in a physical science, and an MS in Management from MIT. I worked as an investment banker for about 25 years, mainly in secured finance, at three major Wall Street firms and for the last 17 years with my partners at our own firm. I'm semi-retired now, managing some private corporations and business interests and doing my own trading & investing. This is not to boast, but to give you an idea I know a little about some subjects from experience. The photo is my 1943 M16 half-track which I am restoring. These armored vehicles were ubiquitous in the US Army in World War II and Korea. It's driveable.
58 comments:
how do u come up with 1.3% for money growth. does the devaulation of the $ figure into that?
Uh ... I looked in Barron's this week. It gaves the $ amount of the monetary base for Jan 2 and the prior year. Then I did arithmetic.
I also confirmed from the St. Louis Fed web site to growth in the monetary base.
Dollar vs. foreign currencies does not come in the calculation.
The monetary base is what the Fed actually controls.
barrons, arithmetic? u r getting to grandular for me.
:-)
where do u see it on the st lou fed site? cant seem to find it
tia
http://research.stlouisfed.org/fred2/series/BASE
there is a link there for year over year % change, too.
those numbers checked vs. the Fed balance sheet published in Barron's every week.
think i found it. so even though m3 up almost 10%, the adjusted base doesnt look that high. some very interesting charts there
rhx
http://research.stlouisfed.org/publications/mt/20080101/mtpub.pdf
check that one out
M3 has all sorts of loans & stuff in it. It's not direct money growth at all.
maybe ill fire up some charts today, and take a peek. if we sell off today, cud be an ugly month.
watched some NH debates, im still a repub, but i dont get the part about socially conserative. its 2008, everyone is a freak, in there own freakish way. the dems just think the govt can solve all the problems, and that is just plain retarded. so the repubs have me with strong defense and small govt (supposedly, becuase we didnt get that with W).
hmmm I thought my Sunday post would fire you up, mern ;-))
ya back in the day, the women shopped and the man made the bank. today, most people, it takes two full time jobs to make ends meet. after working a full week, which is now like 45 hours maybe 50, who feels like cooking and cleaning after that? living the american dream continues to get more and more costly. can the fed do anything about it? not really, imo, these are secular trends blowing in our face.
hurricanes in florida, barring the two summer we owned the dog shop (04 and 05) there havent really been any since i moved here in 93. yet the property and casualty guys got away with murder.
with the property tax rollover my CPI is close to 0, yoy, maybe negative. but i still notice the price of food is going up. dvd's and eating in are nothing compared to the ramps in health care, education and energy. those costs are not rolling over.
lets remember the biggest weight in the CPI is rent. usa today had a big story on rent increases throughout the country as people started renting again, after getting squeezed out of homes they never should have been allowed to purchase.
actaully inflation is probably starting to rollover but we still need some healthy creative destruction (even more than we have seen. sorry but that lady from NH saying she would vote for whoever was most likely to bail her out of her 9k a month mortgage. she lives in a mansion, on over 2 acres, with 1 kid and a hubby. they were retarded for buying it, and shud have known, and my tax dollars mite help bail her out? STUPID BUSH!
the more the govt gets involved with housing, the tape, taxes, anything, it makes it worse!
I remember a study once that showed the entire income of the second earner went to pay the higher taxes imposed since the mid 1960s. So people were forced to work more to pay higher taxes for bloated government.
our govt is like a ready to explode brautwaurst
No recession........lmaooooooooo
reminds me of a famous quote from senator dirksen ( GOP minority leader during vietnam war)
when Lyndon told him the Tet offensive was a victory for the US in Nam - the senator said
'if this is a victory, then i don't even wanna fuckin think about what defeat is in vietnam'
oh bud, i missed u!
here is the recession. 4th q of 07, first q of 2008. but we wont find that out till the 2nd q of 2008 and they will claim the recession is already over.
watched the rocket on 60 min. i dont know if its becuase he is white, or becuase he was always big and great (but did seem to get bigger after the mid 90's, but not like bonds) but he seems more beliveable than bonds. he seemed almost teary eyed pissed. and that is how i wud act, if i was innocent.
im not seeing it bud, any gud left candidates. edwards gives he the heeby geebes, hiliary is a straight up crook, and obama thinks big govt is the answer for everything.
yes i think frosty shud be able to marry a farm animal, legalize it, and abortions for all. but that is about it for my left thoughts.
if the govt were an S&P 500 company, they wud cut staff by 50%, and get more done!
Bunkerman I am getting killed in a certain chat room for spreading your thoughts....
Throughout history have economists been useful in predicting recessions?
just because econmists were wrong ( or right ) before....that's irrelevant
facts currently are important
PS.....overwhelming majority of econmists work for the sell-side........surely you don't expect a GS or MS economist be bearish? sheeeeeeeeesh
kass going off on the big guys who blew up, but no mention of ex partner and buddy seth "i fly male prostitutes to my house from vegas" tobias.
those guys were tight. im sure back in the day they wud snort and oz of blow while dougie let seth twist his nipples and put lit cigarettes out on his tongue. during market hours, while the tape ripped, and they were 200% short. and then cramer in the backround, somewhere, looking for a reach around. LOL
ya barton biggs of MS hasnt been bearish since i was born or anything
its not irrelevant when it was my main point....uhh Bud guys like Stephen Roach and Richard Bernstein...they work on the sell-side for firms maybe youve heard of...Morgan Stanley...Merrill Lynch...they are bearish more often than not...Goldman has been bearish for many mnotnhs now...
I dont question whether or not we are in a recession or not...I question the usefulness of economists...when your boy on the stage posted the comment from the economist, that when i made my point....
hell just a yr ago, elmer was blasted for saying the chance of a recession was 33%.
actually i kinda like what ron paul is saying
congratulations Bman.....you've successfully brainwashed mfl
i think mern is 'on deck' to get b'washed
how is the tank? rev still thumping bibles, losing money and preaching etf's?
his new pick on RM is great. he looks skinnier and added some blond highlightes.
guess that HGH works, and maybe he is starting to run in seth's circle. i dont get adding the blond highlightes in your 50's but i dont have hair so im not agnostic on that deal. i shave my head and face once a week, whether it needs it or not
i cant see bman ( a harvard man) being able to brainwash mfl (a penn man).
and since i went to dayton, i dropped too much acid to ever be brainwashed. i dont have enuff brain cells left!
economists have a terrible recrod on both predicting recessions and in proposing cures.
They are good at trends, not turning points.
thank you bunkerman...finally a man of reason
lol blonde highlights...
Economists often become very politicized, too, as all want to experiment on us by becoming the next president's economic advisor.
Time will tell if I am right or not. Alot is undetermined and depends on the Fed.
The intellectual level of that certain chat room is quite low. Some good traders, but beyond that, there was little there when I was there (re economics, finance, etc.)
uh, Bud ... I was correct in predicting about when the Fed would stop raising rates :-)
That helped my returns a lot :-)
Knowledge and foresight can produce money :-))
I don't try to convince anyone ... I just express my thinking and reasoning in public for no cost.
Anyone can disagree with me and I don't call anyone arrogant for expressing opinions.
I've never deleted a comment.
sheesh, Bud ... guys like Byron Wien and Henry Kaufman were bearish and wrong for years in the 1980s. They worked and big firms.
Perhaps some facts are needed . as you say.
mfl, if they don't provide facts and a real reason, but just quote some economist, you know they really don't understand what they are talking about.
some guys like scottie used to post lots of good articles and facts there. I still re-read that one he posted by Bill Gross on the US trade deficit, as I used it to develop some thinkingg I wrote about here on the global money supply.
But imho that stage boss knew next to nothing useful about the world economics and finance. He got lots of people into trouble listing to him in 2006. That was sad.
I'm not always right about how things will develop, but you can re-read my early posts from Feb or March about a real risk of subprime being if it infected the CDO/CLO/CBO world. Unfortunatley, I did not play that well as it went further than I thought it would.
well, I should say that room had quite a few very intelligent people and certainly many fine traders. At times I corresponded with some privately. But if one didn't agree with the boss, one got the message fast to just shut up. Hence as a place to develop ideas and thinking, it was not. Which it isn't designed to be anyway.
lemme understand you correctly Bman....cuz it seems you are wobbling a bit
as the facts are today......you are still sayin 'no recession'
ps....larry kudlow is sayin no recession too
lemme understand you correctly Bman....cuz it seems you are wobbling a bit
as the facts are today......you are still sayin 'no recession'
ps....larry kudlow is sayin no recession too
rev is an ignorant facist. used to be a great trader, but imo his time has come and gone, like mine. but i stopped.
now im just an umemployed idiot living off a pension
;-)
I am saying no recesssion because I think the Fed will wise up and cut a lot more.
Tight money in a slowing economy is not good.
I've said before that they wenot too high with intereset rates. And sione the core infaltion rate is not about 2%, a "neutral" overngiht rate is about 4%. So they should be at the low end of neutral, ot in the 3-3.5% range.
If a recession occurs, the Fed will have caused it with tight money... as usual.
if the Fed does NOT keep cutting, then recession will be likely, caused by tight money.
I thought my post was clear - see the last few paragraphs.
in more simple terms, the Fed needs to do what I tell it to do ;-)
By the way, re the predictability power of economists, the Fed probably has the best team in the world with the most data and resources ... uh ... so how are they doing in "predicting" a recession ?
Crappy, obviously for months.
I saw this AM that 3 month LIBOR was down a lot. So maybe that TAFfy policy is helping some.
I don't understand why people make recession predictions without a presumed Fed policy. That's usually stupid. I think that now they can really make a difference if they do the "right" thing.
but if they cut rates like u want, what happens to the $? and if the dollar loses more (its gone from 1.25ish to 75ish since 2001) how does that not hurt us, and inflation?
another way to explain my thinking, is that based on the real interest rate level and the non-growth of the money supply, the Fed now has its foot on the brakes, causing a slowdown. They need to take the foot off the brakes and tap the gas a bit to offset their errors of the past nine months.
I posted that gas/brake anaolgy as a PS to clarify by views. Thanks for the Q, Bud - I was not precisely clear before.
hehe ... you must have missed my "Cross of Dollars" post a few weeks ago, mern.
"let no common man be crucified on a cross of dollars!"
let it go down.
the fallin dollar is killin the commmon man........i dont see how that is so hard to understand
I don't see why any common man cares what the dollar is at vs. the Euro. He doesn't eat Brie or drink french wine..
most of the stuff he buys that are imports come from China that is pegged to the dollar.
the yuan is going up despite the peg, no?
I meant that China lets the yuan go up a bit every week - not a fixed peg, but a fixed yuan revaluation rate.
so if the AVERAGE middle class american is MAXED out on his credit cards, and buys almost everything at WMT (which is imported), how can a falling $ do nothing but put the final nail in their coffin.
look at the st louis board u showed this am. this is the lowest savings rate we have ever had. which only kills the fiscally conserative like myself, i get penalized for having money in savings. that just seems stupid.
soon the ambulance chasers will be going after the fed. the already did the finance guys, now housing, next bubble who to blame, but the fed?
those saving rate numbers are crap. I remember in the 1980s they were really low, too and everyone was screeching.
Those numbers ignore lots of items.
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