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 2¬Ĺ%. 

"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



Hello, Columbus


Barron’s MONDAY, SEPTEMBER 26, 2005         

Thought of the Day: U.S. Economy Out on a Triple Play
David Rosenberg
Merril Lynch Economic Commentary,  22 September 2005 
David Rosenberg Merrill.pdf

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  1. Dude commented on Sep 24

    Barry – how do you think this will affect the international markets? If GDP slows in the US, wouldn’t that mean that there is a good chance that this will ripple throught out the world? If fewer US companies are doing well, then they are less likely to be buying lost of goods from abroad, no? Or, it is possible that the foreign markets will make up for the goods and services that the US is no longer supplying? Or is there just no way to really tell?

  2. Jack K. Miller commented on Sep 24

    Excellent post! The interesting thing is the average gain in the year after. The simply average is 10.66%.

    It would not upset me a bit for the economy to slow down a little if the Dow would go up 38.3% like it did in one of these situations.

  3. Catablast! Media Group LLC commented on Sep 25

    Historically speaking, Septembers are typically very volatile months for the stock market.

    So the CNBC induced cacaphony and whipsaw action we’ve witnessed thus far doesn’t “shock” me.

    I’m expecting a strong Fall rally — there are too many depressed stocks out there.

    Pfizer, Microsoft, c’mon — give these good companies a break.

    I just bought more Pfizer today.

    The more negative news I see in the media, the more I realize it is time to call my broker.

    The triple play theory is VERY enticing, but I don’t think playing the market based solely on past data is very strategic.

    I think with the Fed + Rita out of the picture, the mental fog that’s been besetting downtown Manhattan should clear up.

    Expect a short term bear market rally soon, boys.

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