Monday, August 17, 2009

Downdraft: stress testing “animal spirits”

Warning:  This is research, not investment advice.  You invest at your own risk.

With the coming wave of foreclosures (see Mish and T2 under Worthwhile Reading on left) and the worldwide market plunge this morning, I thought it would be worth considering what kind of unemployment increase it would take to drive confidence down.  More than is likely to occur, it turns out:


Even assuming unemployment (U3) goes to 18 percent, after a jag down confidence will crawl upward, the next outright collapse due in about 2013 or 2014. 

The Feds can be expected to panic about now and inject untold amounts of liquidity into the market.  As I pointed out in Animal spirits in the stock market, the Big Mo in the stock market is very positive.  And if you believe Tyler Durden and other close-in observers, there is ample manipulation of the market taking place, so we might expect this downdraft to be allowed to go a while to achieve verisimilitude, setting the stage for a miraculous rally.

Preconditions by my lights for a double-dip recession (as opposed to simply a severe “underemployment equilibrium” in slow-or-no growth mode) are (1) an inversion of the 1/10 Treasury yield curve (that could be accomplished by a currency crisis in short order with collapse to follow a year later) and (2) some level of perceived unemployment that would push the U – UMEAN spread wider; this could happen if people start considering U6 to be the “true” unemployment rate (reference); or (3) the overall level of macroeconomic and world volatility and instability overwhelms people’s ability to adapt and feel at all confident. 

No comments:

Post a Comment