Cart (0)
business newsThe Stimulus Effect
Recession looks to continue through at least 2009.
PRINT
 |
|
First, a quick look back at how I did in my 2008 forecast issue. In general, it was not a bad year in terms of getting the direction right on many of the markets, including gold, oil, the dollar (especially against the pound sterling), and stocks. Some predictions were on target, like a second-half rebound in the dollar.
But I missed the economy. I noted then that I believed we were already in recession (which we’ve now realized we were), and I wrote that a recovery would begin by the end of the year, but that it would be a very weak one for a long time - my basic “Muddle Through” scenario. Obviously, the recession is a lot worse than I thought it would be. Looking to the end of this letter, I now think we’ll be in recession through at least 2009 before we begin a recovery. This will again be a rather anemic Muddle Through period of maybe 2 years for a variety of reasons, some of which I cover today and others over the next few weeks.
And I should note that it wasn’t long into the year before I got decidedly gloomier, as many of you noted. I expect this year will bring a few surprises that will cause me to change my opinions yet again. When the facts change, I’ll try and change with them.
Forecast 2009: Deflation, Deleveraging, and the Stimulus Effect
For a very long time, I’ve been adamant that deflation is in our future. In the next few pages I outline how inflation might come back, but I doubt it’ll be this year. For now, deflation is the economic factor that the Fed and central banks will be battling -- and it will be a very large and controversial one.
We had a brief period last summer where inflation -- as measured by the Consumer Price Index (CPI) -- was over 5%, and the trend was clearly up. The increase was almost entirely due to food and energy costs. Core inflation (less food and energy) was around 2%. Many commentators noted that real people actually bought gas and food and we should look at overall CPI and not just core. Now, with the drop in these costs, their impact has vanished.
For the 3 months ending last November, the compound annual rate for the CPI was a negative(!) -10.2%, reflecting the almost 70% drop in energy. Annualized core CPI for the last 3 months ending November was a very low 0.4%. November CPI was a flat 0.0%. It has been falling steadily for the last 5 months.
December is likely to be negative. There’s a trend here, and if you’re a central banker, it’s not one you like. The trend is being manifested in every part of the developed -- and much of the developing -- world. It’s a global problem.
Given how high inflation was last summer, how could I credibly maintain that deflation was in our future? For reasons that I wrote about extensively then. Briefly, we were in a recession. Recessions are almost by definition deflationary. We had two massive bubbles bursting: the very visible housing bubble - which destroyed wealth enormously, and the less visible but even more powerful bursting of the credit bubble - which was accompanied by profound deleveraging and the destruction of what Paul McCulley termed the “Shadow Banking System.”
It would be a strange, strange world indeed if inflation could get any real traction in such an environment - and it didn't.
But now we have a structural problem in that deflation has the potential to get some very real traction going forward. Why? Because not only in the US but all over the world, we built too much of almost everything: Too many houses, too many manufacturing plants, too many retail stores, too much “stuff.”
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
