Barron’s agrees with our assessment that, CPI not withstanding, there is actually some inflation out there. Add Oil and Fed tightening, a voila! That’s a recipe for a slowdown:
"If we didn’t know better, we’d suspect the good governors are actually recognizing, as they’ve given broad hints they are, that inflation is very much alive and kicking, whatever the absurd government price readings show . . ."
Conditioned by the fiction that the price of energy isn’t all that important to the economy anymore and numbed to the effects of rising interest rates by the regularity, predictability and modest size of the increases, investors have grown to shrug off their impact. Yet, rationally, by itself, either would be enough to cause serious economic discomfort. Together, they are really bad news.
Merrill Lynch’s David Rosenberg points out in a Friday dispatch that "we’re witnessing an event that has happened barely more than 15% of the time in the past five decades: a year that sees the Fed tighten (liquidity pinch), oil prices rise (margin and personal-income squeeze) and the equity market head lower (wealth effect, discount mechanism) — a triple play.
Such a triple play has occurred only eight times in the past 50 years, and on seven such occasions, gross-domestic-product growth either slowed or stopped dead in the water. The odds, then, of a slowdown in 2006 are 88%, which David says without fear of contradiction, is not "a track record worth betting against." The decline in growth in the wake of triple-play years has averaged 2½%.
"So," David comments, "if past is prescient, we could well be in store for 1%-ish-type growth next year." And, he adds, wryly, "Something tells us that equity valuation, credit spreads and the dollar are not presently priced for such an outcome." Whatever could make him think that?
The Merrill data is attached as a PDF
IT’S A BIT EARLY TO CELEBRATE COLUMBUS DAY.
UP AND DOWN WALL STREET
Barron’s MONDAY, SEPTEMBER 26, 2005
Thought of the Day: U.S. Economy Out on a Triple Play
Merril Lynch Economic Commentary, 22 September 2005
David Rosenberg Merrill.pdf