Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Is Economic Optimism Warranted Or Not?

Economics / US Economy Nov 20, 2011 - 06:19 AM GMT

By: Tony_Pallotta

Economics

Best Financial Markets Analysis Article"Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden" - Author unknown

Recent economic data has surprised to the upside and once again hope springs eternal. Like a school of bait fish many economists and market pundits seem to be reversing course scrambling to highlight the positives in the economy while ignoring the structural problems that still exist.


I caution against taking the easy road and simply accepting this renewed optimism at face value for two reasons.

The first reason is probably the most blatant argument one could make against the quality of the current economic recovery. The consumer price index (CPI) has averaged approximately 3.5% on a rolling 12 month basis in 2011. The price deflator though which is used to inflation adjust nominal GDP into real GDP has been 2.5%. In other words the BEA estimates inflation a full percentage point below CPI. Considering GDP through 2011 has averaged .8% there's your entire "economic recovery."

I will ignore that argument though because I am sure an academic can "explain" why the two measures of inflation are different yet correct. Talk about irony though as the Fed fears the effects of deflation the BEA finds it very useful. The second reason is far more compelling. We have been here before.

In the summer of 2008 market chatter was all about goldilocks and the Fed adjusting monetary policy just enough to manage a soft landing. Like a plane practicing touch and goes the US economy would skip right off the runaway and back into a normal flight path. The data was supporting this argument.

On July 31, 2008 the first estimate of Q2 GDP was 1.9% up from 0.9% in Q1 2008 while unemployment averaged 5.8% throughout the summer. Far from a recessionary outlook and certainly not what one would expect as a precursor to the "Great Recession." Then a shock event came, subprime MBS affected the quality of collateral in the repo market and overnight liquidity disappeared.

Three months later the first estimate of Q3 2008 GDP contracted (0.3%) later revised to contract at (3.99%) and (6.78%) in Q4. So much for goldilocks and monetary policy getting it just right.

GDP 2007-2008

Fast forward just three years and once again the economy is teetering on expansion or contraction. Goldilocks has been replaced with "transitory soft patch" and a new shock event has hit the global economy. Sovereign debt has replaced subprime MBS. For those who think this is a European problem explain why MF Global (how fitting global is in the name) is the first and so far only bankruptcy from a "European problem."

I won't go into the mechanics of how a freeze in liquidity can turn a global economy on a dime as it did in 2008. In 2008 the threat was a run on the banks. In 2011 the banks themselves are now causing their own "bank run." This time on sovereign debt.

Europe arguably has already entered recession. The US consumer has pushed their savings rate to 3.6% from 5.3% in just three months and at levels last seen in December 2007. The inventory build cycle which drove economic growth has come to an end and contracted in September. Most alarming though was the words of Eric Rosengren, Boston Fed President during a speech November 16 when he was quoted "Crisis might warrant coordinated action by Fed, ECB."

So whether it is the "deflated" price deflator or the liquidity crunch facing the global economy I believe history will once again show the current state of economic optimism to be completely misguided. Question what you are being told and don't be deceived by first appearances.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright  Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules