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RE: Why Money Matters III

In La Bourse on November 28, 2009 at 8:45 PM

Possibly the final comparison in the Milton Friedman-influenced series: here is the third glance at three business cycles compared across three macro variables.

Cycles are all U.S. origin: the Great Depression with cycle peak of July 1929, the Dot-Com Recession with cycle peak of September 2000 and the Sub-Prime Recession with cycle peak of December 2007. Variables are M2 money supply, Industrial Production and S&P stock price index. Data is monthly, sourced through October 2009. Strike marks on the x-axis center around the cycle peak, reading from 6 years prior to 3 years post.

On a blue note, industrial production, as judged in the current cycle, is apparently leveling according to the data, increasing the likelihood of a W-shaped jobless recovery. Analysts including Meredith Whitney, formerly of Oppenheimer & Company, and Nouriel Roubini, of RGE Monitor, are warning of a possibility of so-called “Double-Dip”.

See the Whitney article and the Roubini article respectively.

At least one additional commentator featured in the editorials of the Financial Times a while back had predicted such a “Saxophone-shaped” recovery for the U.S. over this period.

Historically, nearly all business cycle recovery phases in the U.S. experience a bottoming out correction around the 1 & 1/2 year point post peak, only to be followed by a nested flattening off of recovery approximately 2 years out post peak.

Figure 2 displays this fact quite clearly.

Note that even in the much milder Dot-Com recovery instance, production levels re-kinked to a more sustainable path projection at roughly the 2 year point after the September 2000 apogee.

A more interesting interview of the past week spotlights Nomi Prins, former Managing Director of Goldman Sachs Company, being interviewed on Book TV courtesy of C-SPAN. Apparently the mortgage-backed securitization market dwarfingly outscales the overall size of the sub-prime housing market — described in the interview as an inverted pyramid.

Mathematically, a stong argument can be made that we are plausibly hitting a local maximum just now in the stock market and industrial production, as opposed to a global one. Quantatatively, this could amount to the right shoulder of an overall head-and-shoulders period having unfolded over the last decade period.

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