Let's -- Start -- Thinking About Tomorrow Contd
A global slowdown seems likely to weaken oil, at least cyclically. It was down -$4 last week. The GSCI was down a big -13 points. Inflation fears seem likely to recede if all this falls into place. The Fed may ease quite a bit. The dollar was up 0.5% last week -- flight to safety. Perhaps the dollar doesn't have to fall if the Fed eases.
S&P up 21 Points Last Week
With all the ups and downs, it was easy to lose track, but the S&P was up. All the foreign markets we track were down (this perhaps helps explain why the dollar was up). It would fit with some previous financial crises that when they hit, stocks start to rally, encouraged by the prospects of Fed easing and expecting better growth beyond the current crisis conditions -- see the Continental Illinois crisis in 1984, the Mexico crisis in 1995, and the Pac Rim crisis in 1997. In these instances, better growth, not recession, lay ahead.
Central Banks Have a Lagged-Response Role
Well after it was known Cont Ill was in real trouble in 1984, the Fed tightened 50 bpin early Aug. Well after it was known Mexico was in real trouble in 1995, the Fed tightened 50 bp in early Feb. We're not throwing rocks. It is the nature of the job. Last week, global short rates moved up again with RBA and BoK both tightening, and ECB and BoE suggesting more tightening. PBoC is expected to tighten again.
Financial Crises and the Business Cycle
History suggests that financial crises are typically associated with Fed tightenings. They are not random events. Sometimes a significant economic slowdown is not associated with a financial crisis (see 1987, 1997, and 1998), but more often a significant economic slowdown is associated with a financial crisis (see 1982, 1990, 1984, 1995, and 2000). The current financial crisis IS associated with a significant economic slowdown.
Real "Progress"for the Fed
We're probably seeing five quarters of real GDP growth averaging below 2%. The unemployment rate is almost up to 4.7%. Weíre probably seeing the weakest two quarters for real consumer spending since the last recession. Housing is in a serious and dangerous slump. The ECI in 2Q slowed to just 3.3% y/y. The core PCE deflator has slowed to 1.9%. Oil is down -$7 from its peak. And now a financial crisis has hit. This "progress" is probably pretty much what the Fed set out to achieve.