‘It’s the bottom’ says the Fed with ‘level’ words
With the change of just one word, the US Federal Reserve has called a quiet end to the recession, while in Australia, it seems to be all hands on “deal deck”.
Is it over? Are we there yet? Can we breathe a sigh of relief? According to economics commentator Alan Kohler of Business Spectator, “yes”.
The United States Federal Reserve System - aka “the Fed” – has “called the bottom and tapped the brakes” says Kohler.
The Fed funds rate will remain as it is, but the bank has lengthened the deadline for buying long-term debt. And, says Kohler, while that’s not exactly a megaphone to announce the war is won, unless there is an unexpected double-dip, history will record this as the turning point.
But with no megaphone announcement, how do we know it really is the bottom?
Kohler says it all comes down to one little word: “levelling” instead of “slowing”.
In June, the Fed referred to information received suggesting “that the pace of economic contraction is slowing“. In August, it said the latest information suggested “that economic activity is levelling out“.
The “information” the bank referred to was a fall in unemployment, a rise in consumer sentiment, a bounce in the leading indicators, a tick up in vehicle distances travelled and, above all, a 50% rally in the stock market.
Mr Market
Then there’s the man they call “Mr Market” - George Soros. Kohler quotes the billionaire US financier as saying “the economy has actually bottomed and I think we are facing a positive quarter”.
In the USA, as in Australia, they had a “stimulus”, encouraging consumers to do what they do: consume. (Indeed, the Obama Administration pumped US$787 billion into that economy.)
Soros believes the bottom “is largely due to the stimulus”.
But it’s not just Soros who seems to think we’ve seen the back of the recession. The names of Warren Buffett and economist Nouriel Roubini have also been linked with positive comments. (Roubini is, of course, the economist who stuck his neck out three years ago and called the global financial crisis. Interestingly, even in May this year, he was talking about “the light at the end of the tunnel”. Warren Buffett, probably one of the most successful investors in history, is currently worth around US$40b.)
And the sentiment has been echoed in Australia.
SME specialist SmartCompany says, “The level of deal-making activity seen in the last few weeks is surprising – almost as if our wealthy entrepreneurs have decided the economy has finally reached a point where it’s time to move. The stock market rally looks solid, consumer confidence has strengthened for three straight months and credit markets appear to be thawing nicely.”
SmartCompany says, “In the last few weeks, all sorts have people have declared that the economy has passed the bottom and is now in recovery mode, …. even RBA Governor Glenn Stevens“.
Cautious neutrality?
Kohler says there will now be a series of “we’re not out of the woods” and “double-dip risk” warnings from those who “understandably find this hard to believe”, as well as “those who haven’t quite finished their retrenchments and need to be gloomy for a while yet”.
But, he says, forecasters tend to get it wrong both on the way down and on the way up because activity and prices are set by the marginal outliers.
“That is, in direction there are extreme pessimists and optimists but the balancing item is cautious neutrality, not the other extreme. On the way down it’s bears versus ‘do nothings’, so naturally the bears win; on the way up it’s the bulls versus the ‘do nothings’, so the bulls win.”
While Kohler says that sounds obvious, it’s forgotten too often - which is “why Mr Market is described as manic depressive”.
Furious re-stocking
And Kohler takes issue with the superficial view that this sort of pricing behaviour doesn’t apply to GDP, since it’s an output, not a price.
“But look closely and it does. GDP is subject to the inventory cycle, especially at times like this. When demand fell last year, there was only caution and frenzied de-stocking – no one was stocking up.
“As demand picks up again this year, there is only caution on inventories and furious re- stocking, which is why GDP tends to surprise on the upside in the early stages of a recovery.”
And before we blame the forecasters for not bleating louder about the fabulous news of an end to the recession, they’re all just being cautious, Kohler says, because “anyone who has been around for more than five minutes has got it wrong at some point by getting carried away”.
Kohler says the inventory cycle is now working for a sharp rise in global GDP and the share market bulls have been setting prices for five months. “They were at it again [in August] when the Fed coughed once and quietly announced the end of the recession.
Sources: “The Fed calls the bottom” by Alan Kohler, Business Spectator; “U.S. economy has bottomed: George Soros” from comcast.net News; “Roubini’s ray of hope” by Tony Boyd, Business Spectator; “Time to make a deal” by James Thomson, SmartCompany; www.federalreserveeducation.org/101; Wikipedia.
Tags: economic outlook, Fed