Wednesday, July 17, 2013

What Could Possibly Go Wrong?

Click to enlarge.


It's just a simple answer to a simple question. I'm not saying that it will happen. I'm simply saying that it could happen.

July 17, 2013
Hilsenrath: What Bernanke Means

“If a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5 percent (unemployment rate) as a sufficient reason to raise its target for the federal funds rate.

What if we don't even make it down to 6.5 percent before the next recession hits? As seen in the following link, Ben Bernanke's powers of assumption appear to exceed his powers of prediction (by a fairly wide margin).

October 25, 2005
Bernanke: There's No Housing Bubble to Go Bust

"Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity," Bernanke wrote.

Welcome to the first "moderate dip" of the 21st century. Thankfully, there was no housing bubble to go bust and therefore there were no monetary policy blunders leading into it, lol. Sigh.

Sarcasm, it isn't just for breakfast any more.

See Also:
Trend Line Disclaimer

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

This economy sure seems to generate a lot of 2nd order polynomial trend lines. As we all know, 2nd order polynomials are known for their stability.

This economy is also known for its long-term exponential trend failures. We must not forget the prosperity that can temporarily generate!

Sarcasm emphasis added.

Troyy said...

"before the next recession hits"

the economy's been on a pretty thin gruel since 2008, compared to the boosters it was on 1999-2007.

I don't see much of anything to fall away from here, leaving a Wiley E. Coyote-esque drop-off to follow like what happened in 2008.

The 2001 recession is harder for me to understand, but I suppose after 10 years of expansion the economy's looking to take a breather

We've had expansion since 2010, but nothing to write home about yet. (gov't interest paid / GDP)

shows that ZIRP has reset the debt clock to some extent, just like it's given the Japanese economy more runway/rope.

Boomers retiring & taking the SSA will be very stimulative as this decade goes on, SSA checks will akin to Bernanke doing money drops.

Hell, since debt is fungible, it's arguable that Bernanke's buying is sorta funding SSA checks now.

Hmm, back in my mind has been the thesis that the great boomer retirement will pull money out of equities this decade and next . . . we'll see if Gen Y will provide enough buyers to maintain the valuations . . .

Stagflationary Mark said...


I don't see much of anything to fall away from here, leaving a Wiley E. Coyote-esque drop-off to follow like what happened in 2008.

Yeah, I would certainly not bet that the next recession will be as bad as the 2008 dropoff.

On the other hand, I tend to think there could easily be a return to historical recession frequency, if for no other reason than our economy is much weaker than most once thought.

There have been 20 recessions in the past 100 years. A return to "normal" recession frequency would mean we're just about due for another one. That's one every 5 years. That would put the next trough at June of 2014.

I will once again point out the following. I think it is a widespread belief that a recession is not even possible right now (thanks to ZIRP). One wonders what would happen to confidence if the the impossible happens.

Nothing good! I would therefore not be willing to say with any kind of certainty how bad the next recession could be.

Recession of 1937–38

By the spring of 1937, production, profits, and wages had regained their 1929 levels. Unemployment remained high, but it was slightly lower than the 25% rate seen in 1933. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster.

Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.

The S&P 500 is higher now than before the Great Recession hit. For what it is worth, I think there's plenty of room for downside surprises. Just an opinion of course!