A gentlemen by the name of Chris Puplava, that I highly respect and follow, recently wrote in his weekly newsletter:
All in all, the above factors suggest that the US economy is either in or slipping into another recession. Our firm’s own recessionary probability model is nearing the key 20% threshold mark in which a recession has occurred every time the 20% level is exceeded. Given we were at 19.5 for August, it appears a reading north of 20% is a given for September or October, which appears to be the month that the next recession will begin in the US.
That quote takes us to todays chart of the day above. Basic cycle shows us that we are now somewhere between market sell off and potential early stages of central bank reflation. On the other hand, I know a lot of smart super bears out there think that the next recession will be so huge that equity and commodity markets will crash to about 80% lower than we are currently.
The stage between bear market, global recession and reflation in 2008 took a long time, but my opinion is that central bankers and governments have learned their lesson since than. What might push the central bankers like Bernanke over the edge into expending their monetary base - in other words printing more money, as opposed to just twisting it from short term to long term bonds - is just one negative quarter of GDP growth in both Eurozone and the US.
At that point, the money printer will be back to his usual tricks - deforestation the Amazon. Remember... history has always showed us that money printing never leads to prosperity, but just higher commodity prices, especially agriculture and precious metals!
On the other hand, during expansion, we enjoy a longer period than recessions - lets say 4-5y average versus 2 for recessions. Assuming we are in a bear market and history is a guide, a 2.5y expansion followed by a 1y recession sounds. Cycles are shorter.
ReplyDeleteThe period pre WWII of expansions before recessions was much shorter. After WWII credit was used much more and typically prolonged expansions and curtailed recessions.
ReplyDeleteIf credit is crimped, we may expect to see the pre War pattern reimposed.
http://oi51.tinypic.com/2rr99v5.jpg
I completely agree with Hotairmail. Just look at global industrial production data going back to late 1800s or even early 1900s unto World War II. Cycles were extreme on both sides. Since we are in a secular bear market which started in 2000, we are definitely not a buy and hold phase!
ReplyDeleteAgree too. But financials regulations go down and the credit/debt goes up. So expect also new regulations on financials markets (taxes, restrictions to invest in some countries or commodities). It will be a good time for swings (for few weeks to few months).
ReplyDeleteAfter all this mess get resolved, I will be very bullish on Central Africa (not now, but I expect an entry point in the next 5-8 years for a wildly bullish growth).
Fred
http://illusionofprosperity.blogspot.com/2011/09/real-yield-zone.html
ReplyDeleteThat is a very interesting article wsm, however the inflation data has been edited so much, you have to be dumb to believe in it. If you use the old way of measuring CPI, you will find inflation north of 5%!
ReplyDeleteHere is a question for you... regarding the second chart in that article, what do 1950/60s have in common with 2000/10s?
Both periods had low interest rates, reoccurring recessions, currencies devlauations, massive government debts and most importantly the commodity secular bull market. Therefore if history is any guide, just like in the 1960s, this will soon be the bottom for yields once again.
When commodities rise, what follows is the rise in overall inflation and therefore a huge move in interest rates, like we saw in 1970s. So my point all along has been that interest rates have been falling since 1981, pricing in disinflation for three decades and now we are in an environment where every man and his dog is buying Treasuries, Bunds, JGBs or Gilts because of all the bad news linked to deflation.
You should have been piling into government bonds in 1981 and pricing in disflation for decades to come, just like Gary Shilling has... because in 2010s, we are now at the end of the great bull. Every great bull market ends in a blow off top and a bubble, and bonds are now doing just that.
However, the noise is always loudest at the top for any asset class and "fundamentals and academic theories" always support the price rise!
Precisely because of that, you shouldn't been worried about deflation. You should be looking at the history, just like in 1960/70s and saying to yourself, this will send bond yields much higher because they are artificially supressed by central banks of this world!
In other words wsm... you should be a contrarian to all the bad news, all the debt problems, all the deflation worries out there... and once the bonds spike, as we are now doing... you should short them for a long time to come. After that you will be a very wealthy man wsm!
WSM, I'am agnostic about inflation/deflation. I just invest according what I see, not what I read.
ReplyDeleteHere, you can find a composite inflation measure from FED (thanks to RJ):
http://www.raymondjames.com/images/monit/110919_1lg.gif
Inflation got bottom last autumn.
On your trading platform, you can take a look at the different yields along the curve. While all the yields (form 2Y to 10Y) had breach their 2009-lows, the 30Y isn't. Expect non-confirmation of lower yields from the 30Y as a major divergence against lower rates. In 2 words: bottoming process.
Fred