On cycles and peaks
Anthony Peters questions if the US recovery hasn’t already run out of steam.
Yesterday, Wednesday, I found myself involved in a series of conversations which, on the back of the weakish September employment report, led to the question as to whether this was a one-off aberration or whether, perchance, we might be looking at the first signs of the recovery cycle in the United States coming to an end.
Traditionally, peak-to-peak economic cycles are deemed to last from seven to 10 years and I have argued for a while that, had Fed Chairman Alan Greenspan not implemented a counter-cyclical rate policy in 2001 in order to suppress the aftershocks of the 9/11 events, we would at that time have experienced a healthy cyclical slow-down rather than seeing the consumption cycle go into hyper-drive which, as we know, led to the monster bust of 2007/2008.
Although the rhetoric with respect to the recovery in the US remains strongly positive, the underlying numbers don’t really seem to fully support that view.
Since then, of course, the economy has been on quantitative life support and it is difficult to assess what is perception and what it reality when measuring the temperature and checking the hear-beat of the patient. But as little as medical life-support can slow the ageing process, so it must be questioned whether all the cheap money and all the deficit spending can and will suspend the presence of natural economic cycles. After the near stand-still in capital investment in 2008/2009, there has been a spurt to make up for delayed activity, both at corporate and at domestic level – note the stratospheric increase in US auto sales – but can this trajectory be maintained or is this, in the traditional sense, just a prolonged dead cat bounce?
The wording that went round the world on Monday was that of Caxton’s CEO, Andrew Law, who said in a widely quoted interview to the FT that the US economy won’t reach “escape velocity” and that hence Fed tapering won’t happen for the foreseeable future. He went on to suggest that the government shut-down, sequester spending cuts and the lack of visibility had worked to slow the economy. He therefore concluded that “…there are no incentives for the corporate world to go out and spend right now…”
In 2008, when everything was falling apart, governments had a unique opportunity to scale back their activity and to make clear to a battered populus that it was “game over” in the something-for-nothing society, that the word “entitlement” would be banished from the vocabulary and that fiscal rectitude would reign henceforth. The message should have been that government can help to alleviate inequality but that it can’t abolish it.
Alas, the prevailing political culture of the West no longer permits the light of social-economic realities to shine on either government or opposition promises and so, at an unknown cost to future generations, the natural adjustment of expenditure to match income was kicked into the long grass. Plummeting fiscal revenues – every dollar, pound or euro which had been spent on credit consumers couldn’t really afford and should never have taken out had still pushed sales tax or VAT into government coffers – were met with public pronouncements for the need for austerity but privately little of substance was really implemented. Somehow the myth was born that austerity would lead to renewed growth. That’s the stuff of Nobel Prizes – not for economics but for fiction.
Alas, if we scramble back into the past, we find that we are in fact now within the window of what would, time-wise, constitute an economic cycle. Since the summer, US economic data might have begun to indicate that the growth phase is flattening off, despite the fact that many of the cuts which the sequester demands have as yet not been fully implemented. It might therefore be that the tapering will find itself not only postponed until the Spring of next year but maybe suspended indefinitely. In that context, Reuters columnist Jim Saft wrote a delightfully insightful piece recently titled “Grand-dad, what’s a rate hike?”
Within the sphere of traders, investors and otherwise normally sane citizens I speak to, there is an increasing sense of foreboding that we have experienced the global economy’s Verdun or Passchendaele, a hugely expensive but in the end futile battle of attrition which left the participants not far from where they had set out from but hugely weakened by the wasted investments. Just one more push, one more supreme effort and we’ll break through to final victory. What was it they said about General George “Blood and Guts” Patton, commander of the 7th Army in World War II? “His guts, our blood”.
I digress. Although the rhetoric with respect to the recovery in the US remains strongly positive, the underlying numbers don’t really seem to fully support that view. Whether we are just pausing for breath before continuing the recovery or whether we are about to pass a cyclical peak is not at all certain but it might make sense to keep at least one eye open for that possibility.
However, as financial markets are, as I noted yesterday, trading rates and not fundamentals, I see no reason to panic and am happy to remain long equities but would also begin to commit some new cash to rebuilding some of the bond positions which have been run down in the past year.