Is This Time the Same?*

Is This Time the Same?

Is history repeating itself? Most economists and historians think so. They believe that cycles recur, that human nature endures and requires that economic, political and social trends take the same non-random walk … and that 2019 is a rerun of past cycles. Are they right? Do times resonate again and again … and lead to the same economic, political and social outcomes? Or are past times only preludes, introductions to the present, suggestive rather than indicative? To paraphrase Mark Twain, do times rhyme rather than repeat – are different eras only somewhat analogous? Or, is it possible that this time is entirely different? Have the massive technological, environmental and social disruptions of the past 50 years, the more recent revolution in Central Banking economics, and the cumulative effects of the agricultural and industrial revolutions of the past 200+ years seeded a new cycle? If so, how will this new cycle differ from prior cycles? In the end, will times have changed so dramatically that today’s economic, political and social times will lead to entirely different outcomes?

“May you live in interesting times” is a Chinese curse (or, depending on which source you look to, a British one). Like it or not, 2019 is an interesting time. It is similar to past times in that in many respects it resonates with the same issues/tensions/conflicts of past economic, political and social cycles. (See, for example, “Managing The Economic Cycle (Part 1)” in the May 8th TLR and “Managing The Economic Cycle (Part 2)” in the May 10th TLR.) But it also has several significant divergences. The harsh reality is that we are in the midst of a new historical cycle in which the outcomes nevertheless will be as they have been in the past … as will be made clearer below.

History indeed repeats. After all, human nature has not changed. This time therefore is very much like prior economic, political and social times. The way this cycle is playing itself out, however, is different. This cycle has evolved differently – with Central Bankers playing a … central role (see, for example, “The Central Bankers’ Dilemma” in the March 22nd TLR and “The Fabulous Federal Reserve” in the April 19th TLR) – and, as a consequence, it will continue to advance differently. Revolutions change things, and the human race is in the midst of a potent combination of agricultural, industrial, technological, biotechnological and economic revolutions. The revolutionary changes that have come about – and that continue to rapidly develop – have had an immense impact on the course of the current cycle … and on its duration. They won’t, however, change the eventual outcome of the cycle. That outcome will be a repeat of prior cycle-endings … at least economically (although they hopefully will not end as the 1930s cycle ended, with a war … although see “Red Storm Rising” in the April 12th TLR).

America has an inverted yield curve – interest rates on ten-year Treasury bonds are lower than on three-month Treasury bills. That is unusual and the media is abuzz with predictions that such an inversion is foreshadowing an imminent recession. After all, as many economists point out, an inverted yield curve has been an accurate predictor of recessions for the past 50+ years. However, although inversions necessarily precede recessions, they aren’t accurate predictors of when those recessions begin. Since recessions are the inevitable end-point of every expansion, saying that an inversion presages a recession is to state the obvious. The trick is to predict when the expansion’s end will actually occur. Given the strength of recent economic growth in the U.S. and China, it is safe to say that the current interest-rate inversion does not presage an imminent recession.

Historically, the lag between inversion and recession has ranged from 7 to 19 months. All inversions have followed periods of significant Federal Reserve tightening. In this regard, the current cycle has mirrored prior ones. Interest rates first inverted in December 2018 following several rounds of Fed tightening. Since then, however, the Fed has been loosening. Will that be too little and too late? Or just right? Is recession imminent … or 12 months … or 24 months … or 60 months away … or incapable of accurate prediction?

Inversions also have been accurate predictors of stock market tops, although once again with unpredictable timing. For the past 50+ years, market tops generally have followed inversions by between 0 and 18 months. Does that mean that the stock market has peaked and is facing a period of decline? Or will the Fed’s loosening shake free more cash for equity investing?

To all these questions, the answer of course is “Yes.”

America’s current expansion is its longest on record. Economists point to that length as a sign that a downturn is overdue. Length, however, is not the same as strength. This expansion has been tepid with average annual GDP growth of ~2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} — that is, ~25{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} over the past 10 years. GDP growth during shorter post-WWII expansions, some far shorter, has ranged from 19{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} to 52{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. That means that the current expansion has generated the slowest growth rate of any such expansion. If the past is a good predictor, the current expansion perhaps is only halfway to its goal and the Fed’s interest-rate easing will further extend that expansion. (In this regard, see “A Perpetual Bull Market” in the March 4th TLR.)

The expansion has been fueled by an accelerating pace of change … primarily technological change. Agricultural and industrial jobs have been declining for more than 200 years … and will continue to do so on an accelerated basis. The substitution of machines for manual labor has resulted in lower goods prices … at a rate that will continue to accelerate as technological change accelerates. That is deflationary. Fewer agricultural and manufacturing jobs and lower agricultural and manufacturing costs have forced those who previously worked in agriculture and manufacturing to take jobs in unskilled service industries, where they earn lower wages. That also is deflationary … and stokes social dissatisfaction disruption. Politicians blame immigrants and foreign competitors rather than technology and the inevitability of the economic cycle for the changes that have overtaken millions of constituents workers … but are unwilling to take the political risks effective control of the retraining and fiscal processes necessary to successfully address the problems. Hence, the rise of populism.

Labor is abundant … and will continue to be abundant … and labor dissatisfaction and income inequality accordingly will continue to fuel extremists and extremists’ contentious solutions. With the lower cost-of-goods-production and the absence of wage pressures, and despite warnings to the contrary, inflation is dead. (See, for example, “Whither Inflation?” in the March 13th TLR and “Deflation?” in the June 19th TLR.)

Meanwhile, globalization – the flat world of Thomas Friedman – is at an end. The world is fracturing … much as it did in the 1930s, with rising nationalism – both economic and political, competitive devaluations and increasing tariff barriers reminiscent of Smoot-Hawley that will increase global imbalances. It was those imbalances that paved the way to WWII. (See “1937” in the March 11th TLR.) Add the U.S.-China Trade War (see “Announcing the Winners of the U.S.-China Trade War” in the August 19th TLR), the new trade war between South Korea and Japan, Brexit, potential hot spots in Iran, North Korea, Russia, Turkey (see “More Turkey Anyone” (May 29th TLR) and “Let’s Talk Turkey” (April 1st TLR) in the April 24th TLR), Syria, Afghanistan and Venezuela (see “Red Storm Rising” in the April 12th TLR and “Axis of the Sanctioned” in the June 21st TLR), renewed military tensions between Pakistan and India, the riots in Hong Kong, rising global anti-Semitism, and threats of economic disintegration from Italy and Argentina … and the fractures are likely to widen.

Central Bankers recognize that there’s a problem. They see themselves as the solution guardians of the world’s financial system and the last defense against economic instability. That’s why they’ve been lowering interest rates and talking again about Quantitative Easing, actions that cushion economies – although they also create asset price inflation (especially with respect to equity prices) and exacerbate already contentious income and wealth disparities. European and Japanese yields have fallen to unprecedented negative levels … and this is before recent concerns arose about a reversal of global growth triggered largely by escalations in the U.S.-China Trade War and the potential for new tariff wars between the U.S. and others the EU. Those yields are likely to fall further now. Global economic growth nevertheless has remained on an albeit slower upward slope (though with weakening growth in China and Germany, the second and fourth largest economies in the world), with the U.S. economy continuing to be the global economic engine, its economy (and therefore the US Dollar) remaining the strongest in the world strong. Central Bankers’ actions therefore are intended to further defer a recession rather than prevent an imminent one … and their actions are likely to achieve that goal. China is readying a package of fiscal incentives, including interest rate and tax cuts. Germany has indicated that it may be prepared to inject up to Ôé¼50 billion into its economy. And President Trump continues to pressure the Fed to cut rates while also testing the waters for further Federal tax cuts (although a better approach would be to allocate Federal dollars to infrastructure improvements).

So, “yes,” this time most certainly is “the same.” The economic cycle has not been repealed. The current boom, muted though it may be, will be followed by a bust … although absent an unexpected event, that bust – a recession – is not imminent. And “no,” this time also is different. The cycle has been altered by revolutions in agriculture, industry and technology – as well as by globalization and a revolution in Central Banking economics – and resulted in a higher standard of living and a more robust global economy. Those changes created an opportunity for humanity that governments and politicians unfortunately have squandered are squandering.

However, because of the passivity of governments and the actions of Central Bankers, the world is sitting on a debt bomb with more than $16 trillion of global sovereign debt carrying negative interest rates. The U.S. government has a $22 trillion debt mountain … and that excludes what many calculate to be more than $100 trillion of State and local obligations (not to mention private company debt (estimated at almost $30 trillion), student loan debt (over $1.5 trillion), mortgage debt (over $9 trillion), auto loans (over $1 trillion) and credit card debt (over $1 trillion)). Global debt today is far larger than it was in 2008, the prior peak of the greatest credit-bubble in history. Perhaps the world’s outstanding debt could have been repaid had there been more rapid global GDP growth over the past decade, but that possibility has dissolved with the end of globalization and in any event would have been impossible without an ability of politicians to successfully formulate and coordinate fiscal and legislative reform. The Central Bankers’ printing of more money has been a successful exercise in deferral … at least so far. It also has been working well for politicians who have sought to extend their tenure in office, although it provides no cure for future generations charged with the necessity of repayment. Mr. Market understands this and is responding – gold and silver prices are surging and bond yields are plunging … while governments hide behind tariffs and trade barriers and their respective Central Bankers. Extremism grows … and not only within religions, but also within political groups, among a more-and-more polarized general public, and with the racists, the shooters and the protectionists. The fuse has been lit …, and the most optimistic possibility for the world is that the fuse is a long one.

Finally (from a good friend)

It had to come to this sooner or later!

A blond man is in the bathroom and his wife shouts: “Did you find the shampoo?”
He answers, “Yes, but I’m not sure what to do … it’s for dry hair, and I’ve just wet mine.”

A blond man spies a letter lying on his doormat.
It says on the envelope “DO NOT BEND.”
He spends the next 2 hours trying to figure out how to pick it up.

A blond man shouts frantically into the phone, “My wife is pregnant and her contractions are only two minutes apart!”
“Is this her first child?” asks the Doctor.
“No!” he shouts, “this is her husband!”

A blond man is in jail. The guard looks in his cell and sees him hanging by his feet.

“Just WHAT are you doing?” he asks.
“Hanging myself,” the blonde replies.
“The rope should be around your neck,” says the guard.
“I tried that,” he replies, “but then I couldn’t breathe.”

A tourist asks a blond man: “Why do scuba divers always fall backwards off their boats?”
To which the blond man replies, “If they fell forward, they’d still be in the boat.”

A friend told the blond man: “Christmas is on a Friday this year.”
The blond man then said, “Let’s hope it’s not the 13th.”

Two blond men find three grenades, and they decide to take them to a police station.

One asked: “What if one explodes before we get there?”
The other says: “We’ll lie and say we only found two.”

A woman phoned her blond male neighbor and said: “Close your curtains the next time you and your wife are having sex. The whole street was watching you yesterday.”
To which the blond man replied, “Well the joke’s on all of you because I wasn’t even at home yesterday!”


*┬® Copyright 2019 by William Natbony. All rights reserved.

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