Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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