Thursday, April 18, 2019

"The 'Great Disruptor' Moment"

"The 'Great Disruptor' Moment"
by David Stockman

He said, “None of you understand. I’m not locked up in 
here with you. You’re locked up in here with me.
– Alan Moore, "Watchmen" (1986-87)

"We’re midway through month No. 118 of the second-longest and hands-down the weakest business cycle expansion in American history. Calendar-wise, a new record for duration is just two months away. But cumulative growth of real GDP – that is, what happened “under the curve” between cyclical peaks – is an altogether different matter.

In 1969, the business cycle rolled over into recession after 105 months. That’s the third-longest expansion on record. During the peak-to-peak period that encompassed that expansion, real GDP rose by a hefty 51%.

Likewise, during the 119 months of the record 1990-to-2001 tech boom, real GDP grew by 41% on a peak-to-peak basis. This time around… not so much.

Assuming the current consensus of just under 2% annualized growth for the first quarter of 2019 is roughly correct, the gain during the current cycle to date will be just 19.5% on a peak-to-peak basis. That’s from the fourth quarter of 2007 through the first quarter of 2019.

Now, the permabulls say not to sweat it, that what the current recovery lacks in virility will be made up in longevity. The implication is that there’s no recession in sight because the relevant benchmark is the 19.5% cumulative growth, not the octogenarianish 118 months of cyclical age. Unless the powers that be have invented the macroeconomic equivalent of Viagra, that palliative really doesn’t get you very far.

Real growth has oscillated around a 2% trend line during this entire expansion. Undulations lower and higher have been driven by the syncopated credit impulses out of China and their impact on world trade, production, and commodity prices. Accordingly, it would take an expansion of at least 250 months at this 2% real growth trend to get back to the 40% to 50% cumulative growth zone for this current cycle. Or, we need something to spark the 3% to 4% growth boom Larry Kudlow and Stephen Moore fantasize about.

You only need contemplate the following chart to rule out the “250 months with no recession” scenario.
Click image for larger size.
Economic contractions are normal responses to domestic and/or global shocks to the system. They become crises due to policy mistakes made by the fiscal and monetary arms of the state.

Nevertheless, the normal course of history appears to rule out the possibility that the world will be shock-free for the next 10 years. A catalyst will send the U.S. economy into the drink. It could be a thundering disruption of international trade following the collapse of the Red Ponzi's $40 trillion tower of debt. Perhaps it’s a global financial breakdown because the Bank of Japan finally printed the Land of the Rising Sun’s debt-ridden old age colony into monetary meltdown. Maybe reverberations from the final bust-up of the European Union stoke further political and social unrest abroad on top of economic and financial chaos.

On the home front, our monetary central planners ducked, dithered, and delayed normalizing rates and balance sheets during months 40 through 90 of the expansion. These “middle months” are the usual time when such matters of prudence are addressed historically. Now, the Federal Reserve is backed into a corner.

On the one hand, it desperately believes it needs to capture some head room to cut rates and goose its balance sheet down the road… it must create “dry powder” to fight the next crisis of its own creation. On the other hand, it’s confronted by a “low interest man” in the Oval Office. The Donald won’t hesitate to declare all-out political war on the Eccles Building should the truth of the so-called Trump Boom become undeniable.

The risk of a massive policy disruption involving the Fed is higher than at any time since the 1970s. The successful nomination of Stephen Moore to the board of the central bank only increases those odds. We’re getting closer and closer to the Great Disruptor’s moment…"

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