New Column up at Real Money (04/29/05)


My latest Real Money column, "Understanding the Post-Bubble Economy" is up. The column contains several themes which readers of the Big Picture will recognize, covering issues from Wages and Consumer Spending to How the Fed has allowed Inflation to paint it into a corner to the importance of Understanding The “Kitchen Sink Economy."

Here’s an excerpt:

"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."  — John Maynard Keynes, Tract on Monetary Reform

If you have been listening to the financial press recently, you might be shocked (shocked!) to learn that inflation has been increasing and the economy is slowing.

You don’t say?

Of course, readers aren’t just now discovering that this economy has been suffering from inflationary pressures for more than two years, as a chart of the CRB shows. It’s the same with GDP. Follow the numbers: The third-quarter 2003 number was 7.8% (originally reported as almost 9%), the next quarter’s was 4.2% (originally 6%+) and 2004’s quarterly data came in at 4.5%, 3.3%, 4.0% and 3.8%.

This week, we learned the first quarter of 2005’s number of 3.1% was way below consensus expectations. While some will tell you that 3%+ GDP growth is pretty decent, it’s the trend of waning momentum that is the issue. An early mentor of mine used to admonish traders to not look at the photo, but to watch the full movie instead.

So much for the idea of kinda-sorta-eventually-efficient markets hypothesis.

Slowing GDP and rising inflation have been discussed on this site for over a year now. The investing issue with macroeconomic concerns is not the actual data, but how — and when — that data affects psychology. It’s a question of timing. The commentators who are first now discovering weak GDP and inflationary pressures are not much help to you once the ocean is flat again.


Understanding the Post-Bubble Economy
4/29/2005 3:30 PM EDT

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  1. muckdog commented on Apr 29

    I dunno, I’m not really buying the inflation gremlins. The Fed saw them in 1999-2000, and put a whammy on the economy. I hope they don’t do that again.

  2. John commented on Apr 29

    It appears to me that in each cycle the fed has pressed rates up until they could see pretty clear signs of slowing. So much so that rates ultimately rolled down to NEW LOWS each time to stimulate (since 1982). Maybe because politicians know we aren’t real patient for a ‘gradual recovery’? Makes sense that we have become increasingly leveraged because the expansion is created by net new debt isn’t it? And lower rates allows for it’s creation. The economy (like Joe 6 pack) becomes more ‘rate sensitive’ the more debt it carries so the level of rates to slow things have also been lower each time.
    Then again the new lows in rates each time allows for even more debt to be carried… causing us to be more sensitive to the next rate increase cycle bringing on a politically unpopular slow down in the economy… which leads to new lows to stimulate again… which allows for higher debt to be carried… Virtuous cycle? Maybe until we get to zero%… then what? Japan 1990’s style?
    If so those emerging growth stories the street has embraced are in for a painful test.

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