I have developed a diverse set of longer lead time economic
indicators over the years. As a group, the indicators provided the
strongest positive reading late last autumn for the past 90 - 100
years. It was an arresting moment that underscored the potential
for the economy to recover. That reading was not sustainable, and
with some decay here and there, the indicators are now moderately
positive. There has been some slippage in the growth of measures of
monetary liquidity. The oil price has rebounded to a level that is
close to turning negative, and inflation and a weaker job market has
eroded the real hourly wage. On the plus side, a positive yield curve
has steepened, and banking system liquidity is repairing in good
fashion. The improvement in banking liquidity is essential to lay the
base for a new round of private sector credit expansion.
My measure of capital slack, which is helpful in assessing prospects
for the duration of an economic expansion, remains quite low and
suggests there is sufficient idle plant, labor and lending power to
sustain a lengthy expansion.
I think it is still early to tell how conservative consumers and
business will be regarding consumption and investment in this
cycle. Various measures of sales and production fell 10 -15% in
the recession. We came very close to depression readings. In a
rapid economic decline, folks move to get liquid by saving and
deferring use of credit. When a decline gets as steep as 2008 -
early 2009 was, getting liquid covers the paydown of debt where
possible as well.
We are seeing rebounds in key economic output data, but with
confidence having been shredded in recent years, some patience is
required to see how folks all let themselves back into the game.
I still support the idea of a lengthy moderate economic expansion.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!