Monday, April 27, 2009

The business cycle to come

  • Quarterly outlook – Hoisington & Hunt  h/t Mish.  MV=PQ.  We all know the inflation from massive money creation will come, the question is when.  If it picks up before the next election, my guess is the Fed will get to determine whether we get hyperinflation and Obama (wait to tighten after the election), or recession and a return to the Republicans (tighten before the election, yield curve inverts, recession before election).  See also The Age of the Fiat Currency: A 38-year experiment in inflation on why gold and the dollar may fare well in the future.  (See yesterday’s post for why the dollar….)
  • Larry Summers’ New Model – Baseline Scenario.  Maybe if we support the zombie banks the economy will stay sluggish through the next election, and our team will win.

Whatever happens, it is likely that our forecasting model will see it from a year ahead (recent update).  Even though this recession is accompanied by a debt-deflation and a globally synchronized downturn, making it different from other recessions, it was forecast correctly (actually our model showed difficulties beginning in 2006).

However, if “animal spirits” do not improve measurably by the Michigan Sentiment index over the next several months, the implication is that the determinants of “animal spirits” have changed fundamentally.  Basically people will have been too shaken by volatility to get their mojo back.  Under normal circumstances (i.e., the last two recessions) even though unemployment continues to rise, “animal spirits” recover at the bottom of the business cycle, which we are still forecasting to occur in second quarter.


  1. The Animal spirits measure is a willingness to spend, the problem we have now, and this appears to be still in a self-reinforcing mode, is a diminishing ability to spend. Until we get a really productive economy with fair distribution of wealth based on ability to produce, we will not have any sustainable ability to spend -- regardless of the desire.

  2. Don't fall into the trap of thinking it's the economy. It's the distribution. America is far richer than it was 30 years ago, so everyone should be better off, right? The problem is the top few percent are getting way more than their fair share (IMHO). In my judgment it's a class problem, as a tiny elite takes care of itself at the expense of everyone else. See today's post.