Macro Digest: The US is heading to recession and the next non-big thing in economics

This chart I redid with inspiration from King's report this morning – interesting in nominal terms the US need minimum 4% growth to avoid recession each time we have been "here" we have entered recession as seen by my shading.

 

 

 

 

Furthermore each time we have seen a drop similar to that in Q1 GDP data from Friday's disposable income the US market have topped – the saving rate is now lowest since Q4-2007.

 

 

Conclusion:

 

I have said all along Q1 that the "real economy" is much weaker than the underlying economic data suggest and certainly considerably weaker than the survey data projects.

 

I have visited all of the world regions in Q1 including Latin America last week and we are in a significant slow-down even among hitherto strong economies: Poland, South Africa, Chile, Russia, Czech – All of them stand in front of massive challenges to keep their growth projection on course –and many of them also have to fight relative high inflation. Interesting times, where stock market valuation is totally separated from reality as they offer the "easy and cheap" way out of asset allocation.

 

Personally I remain over-weight in fixed income as we are entering a disinflation / deflation as the debt trap in Europe and US is combined with the Middle Income trap in Emerging markets. Where it leads stocks I don't know, but I know it will lead to higher deficit, more debt issuance and more daring economic experiments where politicians will have one dangerous final go at extending-and-pretending.

 

I think there is ample reason to keep the head cold and reduce equity risk into this April/May seasonal top – market betting on both FED and ECB to extend their monetary experiment and the concept of Modern Monetary Theory is gaining more and more tracktion despite it being nothing new but a restatement of elementary well-understood Keynesian macroeconomics oversimplifying the challenges of attaining non-inflationary full employment by ignoring dilemmas posed by the Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the the dilemmas confronting open economies. (Source: Money, fiscal policy and interest rates: A critique of Modern Monetary Theory by Thomas I. Palley, January 2013) 

 

I sincerely recommend you to read the above piece as this concept is the new black for many people in the "more nonsense is needed" camp of the Keynesian's. Let me stress I am neither Keynesian or Monetarist – I am pragmatic – I do believe in ANY MACRO will help us out of this crisis, only rejecting macro, stopping intervention will bring market, employment and prices back to equilibrium – not pretend-and-extend squared – not believing we did too little in the first place – Reality is an ugly word for the market and the always non-accountable central bankers, policy makers and often non-elected EU officials. This is a crisis of the mind – a lack of diversity – and a lack of common sense. It's should be about the micro-economy – the ability of mankind to deal with crisis (which is big)) and to react positively, but as long as we keep the patient of life-support and a believe in easy money nothing will change.

 

I find it telling that when I meet CEO's and business leaders around the world – they are all holding back in investment in their own company (buying back their own stocks instead of investing), but meanwhile privately they are willing to buy a third persons stock. We need things to be the other way around, but it just shows you how misconstrued the financial markets have become.

 

Safe travels,

 

Steen

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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