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Minyan Mailbag: Economy's Hard Landing?


I can only tell you based on risk premiums indicated by option premiums and credit spreads that the risks are very high.


I enjoy your daily commentary. It seems that the consensus belief is that the fed has orchestrated a soft landing. What do you think is the probability the US Economy will experience a "hard landing?"

Minyan Ryan


The stock market has always been a great indicator of economic activity because people bet with their money. Insiders see things we mortals do not and stocks begin to discount good or bad news before it becomes evident.

The stock market is saying not only a soft landing, but good economic activity going forward.

But the stock market can get it wrong, especially at extremes. This is because people with less than perfect information are very inductive in nature: they are re-enforced by rising prices to pay more and more. Higher stock prices describe less risk to the inductive thinker; the deductive thinker would think more. This is what happened in 2000. I think it is happening again.

A very big factor in calling the stock market wrong is deciding that there is more and more "bad" information contained in it. I believe this is a function of government intervention in markets. The U.S. economy has passed from an "income" economy, one where real production produces income that can be saved and invested (stable) to an asset based economy, one where production lags consumption and is bolstered by borrowing (unstable). The government realizes this and does everything it can to keep asset prices rising to further borrowing to further consumption.

This can go on for lengths of time but deductive thinking tells us there is a limit. Infinite debt is not a possibility since eventually servicing that debt crowds out other consumption. The U.S. economy of late is now being driven almost exclusively by consumption; capital investment by companies is lagging severely and government spending is being crimped by deficits and total debt.

I can only tell you based on risk premiums (everyone is starved for income and taking great risks to make anything) indicated by option premiums (very low) and credit spreads (very tight) that the risks are very high.

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