USA: Worsening Economic Time as of 2H18

Thursday, June 01, 2017 // Written by Enzio von Pfeil

Based on their anachronistic thinking about inflation, the Fed will overshoot when raising rates. That will choke the economy. When do markets start discounting this?

  1. Anachronistic thinking.  The bulk of the Fed remain disciples of the Phillips Curve.  At its most basic, it states that if unemployment is low, wages and thus ("wage-push") inflation rise.  Step in the USA with her low unemployment rate. But hang on: low unemployment and LOW inflation? How come? 
  2. What went wrong? Driving by looking into a rear view mirror is what the Fed are doing: they are applying yesterday's empirical realities to today's world - and finding that "something" has changed in that unemployment/inflation nexus.  That "something" is automation, globalization and demography.  The first two factors reduce dependency on labour, while an ageing society means that old people consume less, thereby watering - down that tale of "too much money chasing too few goods."
  3. The consequence of rear view mirrors . Assume that I am right (for a change) and that inflation remains low on account of these three factors. If the Fed keeps on hiking rates because it anachronistically fears inflation, however, then the real interest rate will rise above where it should stand in order not to interfere with economic growth.  In plain talk: the Fed runs the risk of choking growth by raising rates way above where they "should" stand in order to keep the Economic Time® ticking along.  
  4. Worse Economic Time® by 2H18.  We reckon that US growth gets choked-off as of 2H18: this is when her Economic Clock® switches from an excess demand for goods to an excess supply of goods. That will dent the profits outlook.  Clever market players will sense this worsening in Ameridc's Economic Time® about 8 months in advance, i.e. as of this October...
  5. How to make money off this.  Be sensitive to rising real interest rates in America and note in your diaries to begin exiting/shorting the market as of October 2017. Rising rates, of course, mean that the US dollar will regain its allure...
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