A client asked me how economic growth post the great financial crisis compares to other prior periods. I did some digging and found this from Ned Davis Research, “Currently in its eighth year of growth, this expansion is the fourth longest of the postwar period. Early next year it will be number three. The longest expansion was ten years, which ended in March 2001 and encompassed the technology boom.”
Here is a look at the data from 1947 to present:
Lowest and fourth longest. OK – not so great. Expansions die because of tighter Fed monetary policy (raising interest rates) or a systemic economic or financial event. My best guess on this expansion’s ultimate age is it ends with a 2017 recession, but that is really a guess. Data dependent I say. Sounds kind of weak… right? I agree.
Federal Reserve Chair Janet Yellen promised us today that the Fed has the tools to fight off recession. And Greenspan didn’t think housing was in a bubble and completely missed the subprime mess (we didn’t). So call me a skeptic! As I shared last week, “In the Realm of Economics, No Government Can Play God.” Onward we march.
Back to the data. Pay particular attention to the highlighted 2.1% annual GDP gain since the start of the last expansion in 2009. The latest GDP annualized number coming in at 1.1%. “I think I can, I think I can.” Something is structurally wrong here and that other, really large engine (our beloved elected officials), like the large engines in the story, remain unwilling to do the fiscal work.
Risk on remains the theme. Debt remains the mountain we must cross as the Fed and the rest of the developed world’s central bankers grit their teeth and fight like mad to summit the peak. More debt on top of debt, to me, is a short-term easy answer but not the right answer.
My two cents is that eventually some form of default cycle is a certainty. When? The next recession… When’s that? Not just yet. There are high probability indicators that may help as time moves forward. More on this in a future letter.
Today, I have a few great charts for you (Charts of the Week) and share commentary from Guggenheim’s very bright Scott Minerd. His theme is “The demand for new monetary policy strategy and greater fiscal action is growing.” Scott concludes, “We live at a time where the unthinkable has become common.” He tells us to brace for lower interest rates for a very long time.
Nominal GDP is perhaps the best indicator of what’s going on in the economy. We are experiencing the weakest recovery since 1935. I too remain in the lower-for-longer interest rate camp but ultimately I believe that supply and demand dictates price and price behavior can help us stay on the right side of interest rate trends.
So I keep the Zweig Bond Model “on my radar” (sorry). I look at it daily and post it for you each week in Trade Signals (link below). Not perfect, no guarantees, but pretty darn good. Like most of 2014 and 2015 when the majority on Wall Street was looking for higher rates, the ZBM signaled lower rates and maintains that signal today.
Ultimately, ultra-low interest yields are not good for savers, pension plans and insurance companies. Like Fed policy and their confidence pre-sub-prime, we have to question the potential unintended consequences of unconventional central bank policy and use tools available to us to risk manage the risks we investors must take. – Steve Blumenthal
For charts, analysis, and commentary see the rest of the story in On My Radar: The Little Engine That Could
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.
