7 Comments

  1. Grant January 3, 2009 @ 11:00 am

    Great stuff. This is coming from a BA in econ from UT Austin. Very infromative. Do you still see the Fed hyperinflating the dollar or has the global recession and corresponding devaluing of currencies put a hold on hyperinflation?

  2. Franklin January 4, 2009 @ 6:41 pm

    Thanks. Appreciate your comment.

    It is hard to tell right now what may happen with hyperinflation. I will run the chart with the fourth quarter data to have a better clue of where we are. If we have seen a bottom to the recession, we will enter a period of inflationary pressures during 2010/2011. Government policies are always reactive, so they will be pumping money and economic assistance even though the crisis was over.

    For instance, during the first two quarters of 2009, there will be more layoffs. However, employers tend to fire more people near the bottom of economic cycles and hire more people near the top. This is a natural tendency, as your decisions to hire and fire employees will be dictated by you gut intuition of the future.

    We, as humans, tend to follow trends in a linear manner and have more difficulty understanding non-linear trends (besides, it is much riskier to try to profit from a non-linear trend) so what we do is to assume that the future is going to be equal to the recent past. At the top of the economic cycle it is very difficult to convince anybody that they should start saving for the bad times and that the value of their inventories is much lower than they think. In a similar manner, at the bottom of the cycle it is very difficult to convince anybody that it is the time to restart investing and that the value of others’ inventories is much lower than anybody thinks.

    Now, is this the bottom? I don’t have the data yet to say so. Neither has anybody the data to affirm that things will go from bad to worst. Neither the trend followers nor the trendsetters have any “real” insight into the future (as it is unknowable by definition).

    That said, there are “early indicators” of changes in trend. I wrote before that I think that real estate in some particular places is a good investment now. This is a hard sell, and four months ago was a harder sell. However, with 10% to 20% downside in paper loses (as I would expect a real estate investment to be a long time one –longer than 5 years–) I think that a cash flow positive real estate investment in some selected markets could be a great 10 to 20 year investment.

    That said, as the markets quiet a little, and with tons of government intervention to jump start the economy for longer than needed, the possibility of high inflation is still out there. I doubt it is going to be during 2009 though. The inflationary peak should fall around 2012 (based on other cyclical indicators).

    Looking at the Dow Jones chart, we could argue that we are seeing a flat correction (Elliott Wave four) or a square correction and that a massive multi-year rally may follow. However, the last flat correction lasted from around 1965 to 1985 and we had during that correction inflation and recessionary inflation.Just for fun, let’s say that Elliott wave 3 went from 1932 to 1999. If that’s true, wave four should push people away from the stock market, volume should decline over time and the faith in the stock market should disappear from the public’s minds. A Wall Street career should be seen for weirdos, and most people should focus their attention on other ways of making money. As an aside, the figure of the Wall Street wizkid and the figure of the yuppie (80s, version) should disappear. So, if this is a fourth wave, it should take 10 or more years for us to see a decisive 14,000 on the Dow Jones. But that’s just very high level.

    On the other hand, if the Dow Jones pattern from 1997 to date is a broadening formation, or broadening top (John Magee), we should see a new high on the Dow Jones around 2012-2014 without any cultural and attitude changes in the American public (regarding the use of debt, leverage, and other steroids) with a global conflict or other economic cataclysmic event that should send the Dow to around 2,000. To finish. I think that inflation is still a danger but these mass psychology processes need time to develop. I would not worry about inflation now until the end of 2009 or later. If the US economy finds ways to become productive again (and I don’t mean leveraging debt, but creating wealth) with new industries (check the article about the need to re-industrialize the country) we may see a new powerful rally after most everybody wrote off the stock market as a waste of time and money and decided to make money on productive enterprises.

    If we don’t do that, we will collapse either by the weight of our own debt or by the weight of the fall the of global economy. The current crisis is nothing. Wait for hunger to show in Europe to know that the system is actually collapsing.

  3. Chicago Breast Cancer January 5, 2009 @ 11:45 am

    Scary but so true. I think inflation will be a big deal by the end of 2009, if these banks and other industry leaders get these bailouts they will have to create the money out of thin air no? Won’t this create inflation?

  4. Grant January 20, 2009 @ 3:18 pm

    The UK is sinking fast… What to make of the Euro’s inflation policies and Obama’s soon to be inflation policies?

  5. Ferienhäuser Kroatien May 28, 2009 @ 2:00 am

    Well researched and well written writeup, very detailed comment too. This hyperinflation affects so many countries around the world. I hope people help one another during this time of recession. Anyway, keep up the good work on your site!

  6. Matt Kurtzlich January 13, 2010 @ 8:32 am

    Excellent! Thank you for a very detailed analysis. The recession shows little signs of improving but those that do survive the current economic climate will have learned valuable lessons.

  7. Raju March 29, 2010 @ 8:48 pm

    Wow what a post. Recession is always harmful. It’s a threat for ecoomy.

Some Historical Perspective on the Current Recession

Economics, Economy, Thoughts Comments (7)

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Back in 2007, a simple device allowed me to pin-point the start of the current recession on the fourth quarter of 2007. Instead of relying on massaged data, I simply looked at what was the real situation of American corporations. For doing so, with the Bureau of Economic Analysis data on GDP using the Table 1.10. Gross Domestic Income by Type of Income, I calculated and plotted the Undistributed Corporate Profits (corporate profits that are neither paid as corporate profits taxes nor paid to shareholders as dividends) as percentage of GDP. That proved to be a very interesting chart, and produced interesting and timely information.

Based on my own ideas of the current economic situation, and the general climate of despair and fear about the future, I decide to re-run the chart with updated information. We have only data up to the 3rd quarter of 2008, so the situation may be much worse than during the 4rd quarter (anecdotal evidence seems to point to a deterioration of the economy during the fourth quarter). In any account, lets play the complete chart to give some perspective on the current situation up to the 3rd quarter of 2008.

image

The chart shows a few interesting things:

1. We are not in a depression yet. Undistributed corporate profits from 1931 to 1933 were negative, something that has not happened again since. At the onset of the depression, from 1929 to 1930 Undistributed corporate profits fell 70%. And from 1930 to 1931 fell into negative territory. You can see the dramatic drop at the left of the chart.

2. Up to the 3rd quarter of 2008, the economic recession was shallower than the 2001 recession (let’s wait for the four quarter data to see where we are now). When I say shallower, I mean it is only “academically shallower” (0.003056935 in 2001, against 0.003545593 in the 3rd quarter of 2008).

3. More interesting, for me, is the decline of American enterprise ability to retain profits as percentage of the GDP. American enterprises peaked in 1965 and have been declining since, with each new profit squeeze being deeper than the previous one. We need to see if the Q4 data validates this trend. My guess is it is going to show a deeper lower point as this seems to be the historical trend.

4. The above trend, if it does not break with the next 2 quarters of data (that’s it, shows a higher bottom than the previous recession), seems to suggest that if it not during this economic contraction (all things being equal), the next economic contraction will be a full blown depression with negative corporate profits. We are perilously close to the 0 line here.

However, this chart does not show the whole story with American corporate profits. To understand why this decline is so painful and looks so scary, we need to chart the rate of decline (or its speed). In other words, instead of focusing on how low we are, lets see how fast we got so low.

image

The above chart shows the percentage change from the previous year.

As you see, now the picture shows that we had not seen declines of this magnitude or speed since the great depression. The rate of decline seems to be stable now and my contrarian self thinks that the risk of a new depression has been averted so far. With less than one month to see the economic announcements of the new administration, it may be safe to start relaxing (with a vigilant eye).

Franklin @ January 2, 2009

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