Dec

29

 We've all seen too many black swans over the past decade. But why must all the black swans be negative? Why can't we have a black swan on the positive side?

This is NOT my prediction– but it's worth contemplating the following from Jan Hatzius (GS). In a nutshell, he alleges that much of the recent economic sluggishness is attributable to deleveraging in the private sector. And he suggests that this is coming to an end.

As a thought experiment, I'm analyzing how Hatzius' outlier prediction of 6% or 7% growth in 2011 might affect my portfolios. I routinely fret about double dips, and triple dips, European crises, and $30 oil/$200 oil, but I haven't spent much time fretting about 7% growth…but I probably should! Is it possible that we'll look back at QE2 with the same funds that we look back at the final Fed rate cut during the summer of 1993? (It's left as an exercise for the reader to see how stocks, bonds, and commodities behaved in 1994.)

And, why is Hatzius' prediction any wackier than Mr. Roubini's repeated predictions in 2005 and 2006 and 2007?

(Oh, and by the way, the US commercial truck fleet age is now the oldest that it's even been!)

From the FT:

Jan Hatzius, chief US economist of Goldman Sachs, is one who has become more positive. "There's been a clear improvement in underlying final demand," he says. "My explanation is that we're seeing a slowdown in the pace of deleveraging in the private sector." Deleveraging is the fundamental reason why the economic recovery since 2009 has been so slow. It explains why unemployment remains stuck at 9.8 per cent.

The call on consumption is contentious because debt levels in the US remain high by historical levels. Household debt, at about 90 per cent of GDP, is back to levels seen in 2005 but it would take years of deleveraging to return to the 80 per cent seen in 2002-03. Consumers do not need to stop saving, however. They just need to stop increasing the rate at which they save for the economy to grow.

If the US populace really does begin to catch up on consumption after three miserable years then growth could hit 6 per cent or even 7 per cent in 2011. The chances of that remain modest – but if it happens then the boost to confidence may feed on itself and the nastiest US downturn in decades might truly start to feel as if it is over…

Mr. Albert writes:

For what it's worth, Prof Roubini just bought a Manhattan condo…

Kim Zussman writes: 

Which begs the question where did the energy of the housing bubble (and related lending/spending) go, and is it now durably irrelevant?

The attached charts Shiller real home price index, which shows the 2006 bubble dwarfing any prior local maxima/minima for the last 120 years. Real home prices are now near where they were in 2004– which is still above all prior levels.

The FED over-rules the law of post-bubble over correction?

Ken Drees comments: 

1. this is a warm and fuzzy outlook (especially after 2 years of up market)
2. this is good to think about because its the white swan
3. if growth were to hit 6% it must do it in three quarters because it will take 1 quarter to pay off fourth quarter frugal fatique binge
4. if growth hit 6% it would ramp up quickly in a 3rd and 4th quarter burst
5. the ben factor about putting on the breaks would be argued down–can't hurt the president's reelection chances with a rate hike
6. Inflation would be running probably higher than 2% (fed measured) and no doubt inflation factors would be influencing growth–tainting real growth
7. Market would surge–second half after it wakes up to the fact of growth without a fed bummer.
8. banks would start to lend more in second half.
9. Real estate would firm some and so forth–growth begets growth.
10. Fed would leave it alone and overheat in 2012 would be a risk.

Jobs and job outlook in the spring 2011 would be key to overcoming recession inertia. I don't know if we are there yet–3 dollar gas with some predicting 5 next year will not help the prospect of saving less. Gas prices need to be 2.50 or less to give this scenario a fighting chance. 5 dollar gas would be an inflation goose (swan).

Bill Rafter writes:

I would agree that Hatzius is certainly correct in that a lot of the economic malaise can be attributed to deleveraging. It is evident in the Fed series TOTBKCR, CIBOARD and TOTALSL, bank credit, commercial and industrial loans and consumer credit respectively. You can also look at the monetary aggregates (going nowhere) and make calculations of the velocity of money (so low as to be underneath the outhouse).
What I cannot justify is the prediction of a turnaround. Admittedly at some point those who wish to deleverage have nothing else to deleverage. But that only manifests itself in a mean reversion of the rate of decline. It does not necessarily manifest itself in increased leveraging activity, presumably a result of economic growth. Thus we believe that those who see a decline in deleveraging as evidence of upcoming economic growth are extrapolating way beyond what is reasonable.

Many of the indicators we follow are extremely bullish, and yet others scare the daylights out of us. This is a time of mixed signals. The speculator must make certain that he goes into his activity without preconceived ideas, for if he perceives things to be bullish he will certainly find indicators which reflect that belief. But here's the rub: it's the same with the bear.

It may simply be too soon for the unequivocal good things to happen or be evident. I believe there is evidence that decision makers do not act on anticipated tax relief, but wait for it to actually take effect. Also, the recent tax legislation was not a drop in costs, but the suspension of an increase, which is not the same. Other than taxes, entrepreneurs tend to find a way to cope and then a way to eke out profit. No one is sitting around just waiting for the deus ex machina. To some that means outsourcing (perhaps overseas) and being maligned for doing so. There have been some private equity deals lately. All of that repositioning is good eventually. Maybe we just need to wait for the fog to clear a bit.

Fred Crossman writes:

Rocky, there could be a black swan event next year, but probably not in GDP growth. The last time we had over 7% growth was in 1984. This past recovery in 2002-2008 only had one year of GDP growth over 3%. That period had very low rates and benefited from tremendous credit expansion with huge housing growth, a construction boom, massive home equity withdrawal, etc. only 2003 had a GDP over 3%. It was 3.8%.

If hatzius believes in 6%- 7% GDP growth for 2011 or 2102, (basically the 2002-2008 recovery replicated next year at over twice that past period's 3% GDP rate growth) in a current environment of high unemployment, negative home equity and facing city and state layoffs, then he would be worthy of more than the black swan award.


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