We stated in late July that we may have seen the best from this cycle or “recovery,” US side.
“May have” then, is almost a certainty now; and, may be “more of a certainly” thanks to a German cave in, and even perhaps thanks to the Ebola scare – yet another gift from that continent.
Not all developments have fit into place for us. We made a big deal in 2013 and H1 of predicting declining business confidence but in fact Q3 looks to be fairly strong for capital spending. And we did not predict the recent buoyant payroll reads (but we did maintain and still do that they really don’t translate much - witness today’s Sep Retail Sales print).
However, larger picture: We have been decelerating. Now the pace of deceleration will pick up.
Annualized GDP, H1 2014 is only a tad better than 1% and that is lower than all of 2013, and 2013 was lower than 2012.
Why the creep? It is because Fed policy is a retardant; super low rates are not a spark. Velocity (GDP/M) has tanked. We know from the St Louis Fed’s work that velocity of the money base is at 4.4, its lowest ever, meaning “…that every dollar in the …base was spent only 4.4 times…during the last year, down from 17.2 times prior to the recession.” We are not launching a satellite. This means that the explosion in the base driven by Fed policy – QE – has failed to spark a one-for-one proportional increase in GDP.
And just ahead? The longer the Fed extends its largesse, the longer that particular retardant will remain in place. But the FOMC will panic and do just that – extend their largesse, and so double down.
Finally, how are we to prosper? The easiest way is to look for every opportunity to own, not to sell, implied (volatility), either on the Eurodollar or note. And this is because the more Yellen tries to communicate with the market mob, the better are the odds for market violence. That is baked in and neither she nor any other single individual can do anything about it. It’s too late.
Robert Craven
“May have” then, is almost a certainty now; and, may be “more of a certainly” thanks to a German cave in, and even perhaps thanks to the Ebola scare – yet another gift from that continent.
Not all developments have fit into place for us. We made a big deal in 2013 and H1 of predicting declining business confidence but in fact Q3 looks to be fairly strong for capital spending. And we did not predict the recent buoyant payroll reads (but we did maintain and still do that they really don’t translate much - witness today’s Sep Retail Sales print).
However, larger picture: We have been decelerating. Now the pace of deceleration will pick up.
Annualized GDP, H1 2014 is only a tad better than 1% and that is lower than all of 2013, and 2013 was lower than 2012.
Why the creep? It is because Fed policy is a retardant; super low rates are not a spark. Velocity (GDP/M) has tanked. We know from the St Louis Fed’s work that velocity of the money base is at 4.4, its lowest ever, meaning “…that every dollar in the …base was spent only 4.4 times…during the last year, down from 17.2 times prior to the recession.” We are not launching a satellite. This means that the explosion in the base driven by Fed policy – QE – has failed to spark a one-for-one proportional increase in GDP.
And just ahead? The longer the Fed extends its largesse, the longer that particular retardant will remain in place. But the FOMC will panic and do just that – extend their largesse, and so double down.
Finally, how are we to prosper? The easiest way is to look for every opportunity to own, not to sell, implied (volatility), either on the Eurodollar or note. And this is because the more Yellen tries to communicate with the market mob, the better are the odds for market violence. That is baked in and neither she nor any other single individual can do anything about it. It’s too late.
Robert Craven
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