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
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

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