Lacy Hunt's third quarter report re the US economy with a few salient points:
hoisington.com
In the fourth quarter of 2019, the quarter before the pandemic disrupted economic activity, real per capita GDP was about 17% below the trend line of the historic pre2000 growth rate. References that real GDP has recovered to the pre-pandemic level badly miss the point. As correctly documented many times, the expansion from 2009 until early 2020 was the worst in U.S. economic history. The period of subpar performance is not eleven years but nearly two decades. During this long span the pernicious effects of massive indebtedness on U.S. economic well-being has increased dramatically.
As a result of the pandemic, the economy has fallen markedly further below where the U.S. economy would be operating if it had not become as massively over-indebted. The unprecedented debt financed stimulus measures since the spring of 2020 have only produced transitory spurts in economic growth that quickly dissipated. Despite consensus wildly optimistic forecasts, the 6% plus growth of the first half of 2021 did not rectify the situation.
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The velocity of money (V) demonstrated a major inflection point in 1997, peaking at about 2.2 in the third quarter of that year. By the second quarter of 2021, V had declined nearly 49%, to 1.12.
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The Fed is able to increase money supply growth but the ongoing decline in velocity means that the new liquidity is trapped in the financial markets rather than advancing the standard of living by moving into the real economy
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We expect the third quarter’s weakness to continue over the balance of this year and into 2022. The main lift from inventory investment occurred in the third quarter of 2021. U.S. money supply growth decelerated sharply over the first three quarters of this year, mirroring the pattern in the Euro Area, Japan and China. Moreover, the downtrend in money velocity continued in all four of these major economic powers.
The deterioration in money and velocity is worse outside the U.S. in the more heavily overindebted countries and where economic growth has consistently underperformed that of the U.S. Adding to the situation, the most widely followed measure of the U.S. dollar at the end of the third quarter was at the highest level in a year. This combination of considerations should transmit economic weakness from the foreign into the domestic economy.
The U.S. economy has clearly experienced an unprecedented set of supply side disruptions, which serve to shift the upward sloping aggregate supply curve inward. In a graph, with aggregate prices on the vertical axis and real GDP on the horizontal axis, this causes the aggregate supply and demand curves to intersect at a higher price level and lower level of real GDP. This drop in real GDP, often referred to as a supply side recession, increases what is known as the deflationary gap, which means that the level of real GDP falls further from the level of potential GDP. This deflationary gap in turn leads to demand destruction setting in motion a process that will eventually reverse the rise in inflation.
In the 1970s, the economy was beset by a string of such supply curve shifts primarily because of falling oil production. Then the inflation rate did not fall but continued to march higher. However, before Paul Volcker was made Fed chair late in the decade, the Fed actions allowed money supply to accelerate steadily. During the 1970s, unlike currently, the velocity of money was stable (although not constant). As a result, the aggregate demand curve (C + I + G +X = M x V) also shifted steadily outward. This allowed the inflation from the supply side disruptions to become entrenched. Currently, however, the decline in money growth and velocity indicate that the inflation induced supply side shocks will eventually be reversed. In this environment, Treasury bond yields could temporarily be pushed higher in response to inflation. These sporadic moves will not be maintained. The trend in longer yields remains downward.
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IOW, we are screwed. Policymakers have no clue. And Biden, pfft, he moves his lips when he reads.
Although the pandemic gave me some great buys in March 2020, the recent omicron scare is not to my mind sufficient to bloody the markets enough to get me to buy.
We'll see
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