Thursday, August 25, 2016

Are We Headed for Recession?

I don't want to go over all the comments made to my recent Austrian-lite posts. There are many comments which seem to go over well-worn territory, where I have replied to the arguments in the past and the arguments are re-raised by commenters without addressing my rebuttals.

But there are a few points I do want to address.

The first comes as the result of a comment that implies that I don't think we will see a recession.

This entirely distorts my view.

My initial point back in December was that we were not in a recession and that a minuscule Fed rate hike of 25 basis points was not going to have to be reversed because "the economy was so weak."

Austrian-lites appear to hold the view that the boom-bust cycle is actually a never-ending bust cycle with no boom. I do  not hold the opposite view that the boom-bust cycle is actually a never-ending boom cycle.

It is a boom AND bust cycle. That said, there were no indications back in December that we were in the bust phase and that a Fed rate hike at that time was going to send the stock market crashing, unemployment skyrocketing, etc., and it hasn't.

At present, there is no indication we are out of the boom phase. Indeed, as I report in detail in the EPJ Daily Alert, there are some money supply growth indications (but just some indications) that we may be headed for another spectacular up phase in the U.S. stock markets and in general economic activity.

I am not saying this will occur, but there are signs in this direction.

That said, it is entirely conceivable that  anywhere from 6 months from now to 6 years from now, I will be warning about a major developing recession.

So I want to make clear, I am not in the always bullish camp. I was bearish and called in real time  the 2008 financial crisis (See my detailed real time 2008 commentary here). For me, it is a boom-bust cycle and I try to determine where in the cycle we are. Some Fed-haters are so captured by fury at the Fed that they deny the boom phase of the business cycle.

I too hold the view that the Fed should be abolished, but this doesn't mean the Fed manipulations of the money supply don't create occasional boom periods.

I also want to address the commenter who wrote:
Maybe you could write a post on my dozens of comments regarding your posts and comments over the last 7 years that interest rates are going to begin rising.

Why is it that you don't talk about this fact? Is it possibly that you are in fact an "austrian-lite"? When you are right about a topic such as the failures of bit coin, you love to name call and mock the other side. But you don't have the courage or integrity to admit that you have been dead wrong about rising rates.

It was the Spring of 2009 when you started telling readers to "lock in your rates now!".
For the record, my advice to lock in rates was based on the combination of extremely low rates and low housing prices. I especially pounded the table very hard in 2010-2011 for people to buy cheap housing and lock in low rates.

I have had more than one person who followed my advice and thanked me for it.

As for rates, 30-year fixed mortgage rates bottomed in 2013. Three-month Treasury bill rates bottomed in 2015. I would venture to guess that the 30 year-Treasury is bottoming now. But the point is I am making a long-term forecast here. I expect a multi-year, perhaps multi-decade, of climbing interest rates, I am trying to break a low interest rate mindset, just as in 2005 I responded to two Fed economists who said the housing market was not in a  bubble. See my then response to them is here.

During that period, in 2005, 2006 and 2007, I was warning anyone that would listen that the housing market was in a major bubble. Anyone who heeded my warning saved themselves from  serious financial headaches when the bust hit. Even if they heeded my warning as early as 2005.

It's the same with interest rates now. Whether you locked in the spectacular very low rates at the exact bottom in 2010 or lock them in a bit higher now, the point is still the same from a long-term perspective, you need to be aware that rates are going to be much higher down the road---much higher, Lock in the low rates now!

Finally, I want to address this comment:
Mike GiannoneAugust 25, 2016 at 10:24 AMHow are the very anemic GDP numbers explained by ABCT if we are in a boom?
The GDP number is one of my least favorite data points, It is an aggregative mess. It doesn't tell you much. Certainly, "anemic" GDP numbers versus "Non-anemic" numbers is nonsense.
See Israel Kirzner on this.



  1. Not only that, but if you locked in a little 'too early' in 2011, you can always refinance if the rate moves lower thanks to the gov't subsidized call-option embedded in every mortgage. RW is right about the danger in betting on low rates forever, which is what every pension fund and large money manager is essentially doing right now.

  2. Robert- what are your favorite data points besides money supply and unemployment?