Monday, May 30, 2016

Business Cycle Theory

I want to point out that the great recession started first then the finacail crisis followed.  The great recession was tagged by the ECRB as starting December 2007.  Then the finacial crisis hit after people started defaluting on their sub-prime mortgages.

Simplified cycle theory

Recession watch reduced to two cycles.

Two medium term cycles, Cap Ex and Wages.  Plus population growth which is a really long term cycle.

Companies maximize profits then clean up their balance sheets.  Borrowing takes place in the first phase and debt is liquidated in the second phase.  The borrowing in the first phase puts new money created into the economy.  Bam.  People have money to buy the products that the initial investment went to.  The exact oppose happens when companies retire debt.  Money is eliminated.

Wage growth is often thought of as the main driver in GDP growth. Much more so than new jobs because there are so many more people working that get raises than people with new jobs.  Regardless, over time wage growth tracks inflation.  Workers really don’t get ahead due to wage growth.  When wage growth exceeds inflation it really seems like workers are doing well and adding to GDP growth in a big way.  But eventually when wage growth exceeds inflation the the Fed kills off economic growth and wages revert to tracking inflation again after going below inflation for a period.  Most of the time wage growth simply tracks inflation.

Population growth is perhaps the most important factor in GDP growth.  This is because wages over time only track inflation so wage growth isn’t a big factor over time.  But each new human body ensures a certain amount of GDP growth.

Where are we, Cap Ex.
      Q4’15 was down $5.4 billion from Q3’15 and Q1’15 was down $23.7
      billion from Q’4’15.

{click to enlarge)




(First estimate)



(First estimate)


(Second estimate)



(Second estimate)



      This is a slow down so far.  You don’t know if it is a change from
      profit maximizing to balance sheet clean up until the slow down
      becomes sufficient enough to declare it so.

Where are we, Wage Growth.
      Average wages all employees as well as non-supervisory and
     production workers up 2.5% from a year ago.  Median CPI
      is up 2.5%.  Wages are not ahead of inflation.  The Fed probably
      doesn’t feel the need to cool the economy by raising rates but
      really does want to normalize.

     The Fed follows core PCE, not CPI.  Core PCE is at 1.67%.




Watch for wage growth to exceed inflation.




Early warning of a slowdown and a greater slowdown is cap ex for equipment and initial claims.  Look for initial claims to go above 300k and come down but not a low as recent lows and subsequently create an uptrend.  I am not predicting it.  Just watching for it.



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Where are we, Slowing Growth Population


What is being done by the sick and deranged leaders in the US and Europe about very low population growth is to import the least desirable people.  Prediction: in the near future there will be great competition among low population growth countries, which is 100% everywhere except Africa, for the best people.  Hopefully the torches and pitch forks don’t have to come out first for this to happen.

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