Friday, May 15, 2009

The Current Consensus: Close But No Cigar?

Over the course of less than two months, we have seen the phrase "green shoots" enter the public vernacular, and proceed rapidly towards cliche status. Now, the problem with using green shoots as a metaphor for the current economy is that it is a wholly inaccurate description. The implication of this overused phrase, insofar as the broader economy is concerned, is that growth, albeit meager, is occurring. In the current environment, there is not only a lack of evidence that the economy is growing, but there is also the existence of evidence that the economy is in fact shrinking.

The US economy lost over 500,000 jobs in the month of April. Given that the Department of Labor, by way of the Birth/Death model, has cited mythical business creation statistics that account for job gains, thus offsetting the headline number, and the fact that the same agency will undoubetedly revise April's job loss total down further, we would argue that there was nothing "green shootish" about April. We understand that the labor market is considered a lagging indicator of the direction of the economy, however, we know of about half a million people in particular who would likely classify the lagging aspect of the labor market as either irrelevant or innacurate.

The truth is, that this recession has been a largely unpredictable one. For our part, we proscribe to Mohamed El-Erian's assertion that the world economies will experience a "new normal", characterized by heightened volatility and systemic risk. That being said, we do not expect this "recovery" to proceed in any sort of typical fashion. It appears that, for now, the risks of a banking sector collapse have been averted. However, new problems could easily arise. Consider what it would mean for the banking system if the average default rate on bank's holdings of credit card backed assets reached 50%. Before you dismiss this possibility as crazy and assign a 0% probability, consider your reaction if a friend had, in early 2007, predicted the collapse of both Bear Stearns and Lehman Brothers.
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