Five years after our most recent once-in-a-generation
economic calamity, is it safe to say that it’s back to business as usual from
here with regards to the US economy?
The question coalesced out of three things:
The change in the overall sentiment
of economic data, albeit still negative by historical perspective, has been stabilizing
if not improving.
Financial asset prices have maintained a
persistent march higher in spite of restrictive monetary policy guidance from
the Fed, low inflation expectations by most measures, and an economy stricken
with production capacity slack, and a risk of hysteresis in the labor.
In an interview on Bloomberg, the
head of the IMF said something to the effect of “everyone agrees that there is
slack in the US economy, and need for investment…”.
The data, first and foremost is telling a different story
from during the midst of the crisis and ensuing recession. Without that
underlying shift there wouldn’t be much room to quantify the change, since on a
qualitative basis not much has change for a lot of people. Following the
sentiment change in the economic data feed, the persistence of financial asset
prices also stand out.
Historically, the equities market has lead the real economy
[GDP, employment, etc] out of a recession and back to growth by about 3-4
fiscal quarters. Well stocks recovered their losses about a year-and-a-half or
so ago, and have been making a series of new highs with little time spent
correcting or retracing. Bond prices have also been elevated as a byproduct of
the Fed’s easy monetary policy. But, even with more guidance from the Fed
trying prepare markets for a more restrictive policy stance, bond prices have
resisted most of the downward pressure.
Lastly, we have world leaders talking on a worldwide
platform saying things like ‘everyone agrees…’. I think that a social consensus
is much easier to build than a political one, and politicians try to mirror the
consensus to appear legitimate, so if the international community is talking
along these lines then maybe that’s where their money is too.
In a business as usual world, the dollar trends lower for
many reasons, one of which is investors around the world seeking out risk in
exchange for return by selling their relatively safe [low yielding] US
investments and buy relatively riskier [higher yielding] international
investments. To keep my life simple, I looked at the regression trend of prices
of the front month dollar index futures over a twenty-year span, a ten-year span,
and a five-year span. Suffice to say the 2008 crisis had enough of an impact that it changed the long term regression trend of the dollar. But, the effects are only
reflected when the price data from 2009 – 2010 are included in the five-year
measure. Basically, the rest of the world in terms of economic activity and
capital flows, have been back to business as usual for over two-and-a-half
years now.
