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Longbrake Letter

October 2016

If one only listened to the consensus, one would be optimistic, notwithstanding the ugly US presidential contest, that the US economy is moving forward steadily with strong employment, low inflation, and low interest rates. In this month’s letter, Bill Longbrake takes a more critical look at recent data and discusses the consequences of years of aggressive and market-intrusive monetary policy, which leads him to a much different and more troublesome outlook. According to one well-respected economic research firm, there is now a 50-50 chance of recession in the next 12 months. The strong third quarter real GDP report was a mirage that hid a steady six-quarter long deterioration in growth momentum.

October Letter.

 

September 2016

In previous letters Bill Longbrake has discussed the growing imbalances in the global economic and political fabric. Because there is much at stake the established political and financial elite have an enormous vested interest to maintain stability at all costs. To date they have been successful. But, let there be no doubt that events are gradually undermining the foundation of the old order. In this month’s letter Bill examines US productivity, a much too neglected topic but one that is key to real economic growth and our society’s well-being in the long run. The course we are on is unhealthy but not inevitable.

September Letter.

 

July-August 2016

Britain’s vote to leave the European Union is already having negative consequences in the U.K., but the rest of the world  has yawned and “risk-on” animal spirits are back in vogue as the U.S. stock and bond markets hit all-time highs.  Otherwise not much has changed in the U.S. Productivity and economic growth remain weak and inequality is worsening, but employment growth is strong. Populism and nationalism increasingly is impacting politics in the U.S. and other countries. In the July-August letter, Bill Longbrake discusses the policy flaws embedded in neoliberalism, which espouses free movement of capital and fiscal austerity. He also explains why interest rates are very low and are likely to remain so for a very long time. Special topics include Italy’s banking crisis, Japan’s revamping of Abenomics, and unexpectedly large inventory destocking in the U.S.

July-August Letter.

June 2016

The US and global economies are marking time while imbalances continue to build slowly. But, there were two surprising, and not necessarily related, events in June – the US May employment report was dismal; the Federal Open Market Committee (FOMC) slashed interest-rate projections. In this month’s letter Bill Longbrake explains why neither of these developments is all that surprising. Slower employment growth and low interest rates are here to stay. He believes that the FOMC’s interest rate projections are still too high.

June Letter.

 

May 2016

In this month’s letter Bill Longbrake explains why he is putting his “Recession Watch” on the shelf for the time being. He summarizes why recent policy intervention has been successful in papering over significant global imbalances. But, he goes on to explain why policy has been palliative, not curative. Longbrake also examines the rise of populist movements across the globe, including the United States, and their genesis in the 2008 global financial crisis and subsequent policy responses. The remainder of this month’s letter provides updates on GDP, employment, inflation, productivity, financial conditions, and monetary policy in the U.S.

May Letter.

 

April 2016

In this month’s letter, Bill Longbrake shares his worries about global economic and political trends along with summaries of similar concerns expressed in the International Monetary Fund’s World Economic Outlook and by the editor-in-chief, Zanny Beddoes, of The Economist. He also explores reasons for the surprising strength of Donald Trump and Bernie Sanders in this year’s presidential campaign. In addition to regular updates about the U.S. economic outlook, he provides a review of a recently published book, The Smartest Places on Earth, by Antoine van Agtmael and Fred Bakker, which describes how brain-belts that are emerging in the U.S. and Europe will reverse the global competitive advantage held in recent years by emerging economies.

April Letter.

 

March 2016

Bill Longbrake initiated a “Recession Watch” in last month’s letter. He was explicit, however, that a watch only means that the possibility of recession has increased, not that it is necessarily likely to occur any time soon. Thanks to the Federal Reserve once again galloping to the rescue and the decline in the value of the dollar markets have stabilized, financial conditions have eased, and eager risk-taking is once again in vogue. Does this mean that fundamental global imbalances have dissipated? Bill believes little has changed. Optimists were ready to take advantage of extreme oversold market conditions and all they needed to swing into action was policy reassurance. What seems to be supporting stock prices and optimism is belief that monetary policy will cure all that ills the economy. Is that belief well founded? We shall see. In the meantime, Bill’s “Recession Watch” continues, but as of this time an actual recession does not appear to be an imminent threat.

March Letter.

February 2016

In this month’s letter, Bill Longbrake explores the possibility of recession commencing some time during the next few months and initiates a “Recession Watch.” In recent weeks several developments emerged more or less at about the same time which spooked global financial markets. Are these developments the forerunner of worse to come, including a U.S. recession? Or, is the market overreacting to “temporary” shocks? Will policymakers be able to defuse anxiety? From the vantage point of the present it’s difficult to discern where the U.S. and global economies are headed and just how fragile global financial markets really are. Regardless of whether recession is imminent, substantial global economic and financial imbalances exist. Bill examines these imbalances and comments on how they might evolve and impact the global economy and financial markets.

February Letter.

January 2016

In this month’s letter Bill Longbrake extracts discussions of major topics that were included in various 2015 letters. These discussions explained and examined deep-seated trends which continue to evolve and shape global economies, markets, social systems and political governance. He provides additional commentary and updates on each topic, which are identified in bold italicized print. Developments in the United States receive the most attention, but because we are increasingly interconnected globally what occurs elsewhere has impacts on what happens in the United States

2015 Review.

Markets began 2016 with a massive anxiety attack about the threat of a collapse in global growth. In this month’s letter Bill Longbrake explores whether recent developments are a forerunner of worse to come, including a U.S. recession? Or, is the market overreacting to “temporary” shocks? Part of the difficulty in assessing prospects has to do with the unprecedented and aggressive monetary policy intervention of central banks in all major developed economies to force down interest rates in an attempt to stimulate demand and increase inflation. Academic theories are supportive of these policies. But, the theories may turn out to be deeply flawed or flat out misguided. It’s a huge bet! The consequences could be quite dire, if the bet turns sour.

January Letter.

December 2015

In this month’s letter, in a series of tables, charts and commentary, Bill Longbrake provides long-term forecasts for 15 U.S. economic indicators for the period from 2016 through 2023. Bill shares the view of many that potential inflation-adjusted growth will languish in the vicinity of 2 percent. However, he expresses skepticism about the consensus view that inflation will rise to 2 percent over the next three years and explains why inflation might remain very low in the near term and take much longer to rise to 2 percent. Bill’s inflation view, if correct, has significant implications for forecasts of many other economic indicators.

Bill provides a final assessment of observations he made a year ago about how the U.S. and global economies might fare in 2015. He got some things right and many things wrong. The U.S. and global economies are dynamic and ever changing. Some trends are foreseeable. But, governmental policy intervention, whether it be political or economic, can alter outcomes and set in motion feedbacks that significantly affect economic developments. In this respect, 2015 was no different from any previous year. Such will also be the case in 2016. Nonetheless, Bill summarizes key U.S. and global economic developments that seem possible, perhaps likely, in 2016.

This month's tables and charts.

Read this month's letter.

November 2015

As we enter the holiday season, the U.S. economy continues its slow forward march, with the exception of manufacturing which is struggling curtesy of a strong dollar. Much of the damage inflicted by the Great Recession has been repaired. The Federal Reserve is poised to take the first step to raise short-term interest rates after seven years of zero rates. Although the outlook is sanguine, most no longer expect robust growth. When the consensus coalesces around benign trends, it is especially important to listen to opposing viewpoints. The question we should ask is: what is different today that could result in unpleasant surprises? This month’s letter explores how the cumulative impacts of monetary policy might lead the U.S. into recession. Bill Longbrake also voices his skepticism about significant acceleration in wage rate growth. Read this month's letter.

October 2015

After a turbulent August and September, a semblance of calm has returned to global financial markets. Fears that China is on the verge of economic Armageddon have subsided. Policy makers have soothed markets by doubling down on monetary stimulus. The fundamentals were never as troublesome as the market feared. But they aren’t great either. Growth is slowing … everywhere, including the U.S. where soft third quarter growth is probable. Inflation is hard to find. Slow growth and low inflation is the order of the day. The only good news is that recession is probably not imminent. This month’s letter includes an examination of the impact of macroeconomic trends on long-term rates of return on Investments and discusses the consequences of a persistent low-inflation/low-growth environment and the challenges that will pose for fiduciaries who are responsible for pension funds and endowments. Read this month's letter.

September 2015

Primarily courtesy of Chinese policy communication bungling and China’s slowing economy, turbulence has returned once again to global financial markets. Financial conditions in the U.S. are the tightest they’ve been since the panic of 2007-09. Yet another round of falling commodity prices has raised investor fears that the global economy is slowing, perhaps materially. But, on the home front all is well … or, is it? The Fed didn’t raise rates … perhaps there is reason to worry. Productivity is barely discernible, inflation refuses to rise, and in spite of a plunging unemployment rate, labor wage rates show no sign of acceleration. Is recession around the corner? Probably not just yet, but growth certainly could slow down. Could it be that monetary and fiscal policies are fostering malaise rather than growth? Bill Longbrake ponders these issues and questions and more in this month’s letter. Read this month's letter.

July 2015

In this month’s letter Bill Longbrake examines the short and long-run consequences and implications of the Greek fiscal crisis and the Chinese stock market crash. He also explores the question of whether the next U.S. economic recession might be just around the corner. The remainder of the letter contains updates about the U.S. economic outlook for employment, inflation and monetary policy, as well as a summary congressional work on a variety of fiscal policy issues. Read this month's letter.

June 2015

After the shocking -0.7 percent GDP growth in the first quarter, recent data reports are painting a better picture. So, the economy is not about to go into a tailspin as some worried about a month ago. But neither is it poised to accelerate as most forecasters expected prior to the start of the year. In this month’s letter Bill Longbrake explains why economic growth is likely to continue to be low and disappointing for many years to come, primarily because of a lack of private and public investment which will result in historically low productivity gains. Read this month's letter.

May 2015

First quarter U.S. real GDP growth came in at a paltry 0.2 percent and updated economic activity reports promise to push growth well down into negative territory. Where is the much expected benefit of lower oil prices? When the data don’t fit expectations excuses proliferate. But, a close examination cannot explain away all of the unexpected weakness. In this month’s letter, Bill Longbrake discusses how misguided monetary and fiscal policies may be undermining economic growth and how global monetary policies may be fostering yet another bubble. Read this month's letter.

April 2015

With the exception of Europe, the global economy, including China and the U.S., is off to a disappointing start this year. As for Europe, the stars appear to have aligned at long last but is Europe’s recent good fortune prelude to steady, if uninspiring growth, or will it turn out in a few quarters to be a dead cat bounce within a trend of long-term secular decline? Bill Longbrake discusses Europe’s long-term prospects and the threat posed by Greece’s acute financial crisis. He also examines the surprisingly weak first quarter growth in the U.S. and what this portends. Read this month's letter.

March 2015

Economic activity in the U.S. has been somewhat softer over the last two months. Notwithstanding this the U.S. economy is performing reasonably well. Better data reports are likely as winter turns to spring. Nonetheless, there are serious disconnects in key economic phenomena. Employment growth is very strong, GDP growth is weak and productivity is negative. In this month’s letter, Bill Longbrake discusses the reasons for these disconnects and the long-run consequences of underinvestment. Other forces are stirring – the collapse in energy prices, the strong dollar, the plunging euro, and ultra-low interest rates – which eventually may pose significant challenges for the U.S. economy. Read this month's letter.

February 2015

It would seem that everything is coming up roses, at least in the U.S. Is this a goldilocks world? In this month’s letter Bill Longbrake discusses global mega trends, secular stagnation and global monetary policies, the long-run implications of which appear to be at odds with the short-term goldilocks scenario. Bill concludes that it’s hard to say where all this leads but it probably won’t be what the consensus expects. Read this month's letter.

January 2015

2014 ended with the “surprising” collapse of oil prices, although there were plenty of warning signals in advance. With the benefit of hindsight, the commodity price boom was just another bubble. It was initiated by substantive changes in the global economy but then carried to unsustainable heights by cheap and abundant money. Now as 2015 commences, bond yields around the world are in free fall and worries of potential deflation abound. Of course, the two sets of developments are related and are the inevitable result of monumental global adoption of market-driven economic systems and by aggressive use of policy to try to tame the extremes of market-driven systems. This has led to an explosion in aggregate global supply that has not been matched entirely by a commensurate expansion in global aggregate demand. Such a mismatch inevitably leads to intense deflationary pressures. In marked contrast with global developments, the U.S. economy seems to be doing just fine and is gaining economic momentum. Bill Longbrake focuses this month’s commentary on developments in the U.S., which for the most part are favorable. Nonetheless, the U.S. outlook is not free altogether from risk and one needs to be careful not to be dismissive of troublesome international developments or their potential consequences. Read this month's letter.

December 2014

In this month’s letter, Bill Longbrake provides a brief overview of key global economic themes as we end 2014 and enter 2015. There is also an in-depth assessment of the impacts and potential consequences of the recent 45 percent crash in oil prices. He provides a year-end assessment of observations he made a year ago about how the U.S. and global economies might fare in 2014 – noting what he got right and the many things he didn’t. He then speculates about what might happen in 2015 and outlines key risks to the 2015 outlook. Read this month's letter.

November 2014

Markets have shrugged off recent anxieties and have stabilized because market participants still want to believe in market-friendly outcomes. “Hope” is ascendant. But, unfavorable demographic trends, a global excess supply of goods and services relative to underlying demand, monetary profligacy, negative real rates of interest, and huge and rising debt-to-GDP ratios collectively are the hallmarks of a slowly developing global deflationary bust. The climactic moment of capitulation and realization that the status quo is neither fixable nor sustainable is not yet at hand. Also in this month’s letter, Bill Longbrake provides a brief update on economic developments in the U.S., examines U.S. housing and fiscal policy, and discusses the plunge in global oil prices. Read this month's letter.

October 2014

In recent days market sentiment has shifted from optimism and complacency to pessimism and fear. Significant and troublesome imbalances have been building in the global economy for a long time but the threats they pose to global economic well-being have largely been ignored. But now the possibilities of much slower growth in China, failure of Abenomics in Japan, and deflation in Europe, not to mention the existential threat to the euro and the European Union, are being discussed more openly. In this month’s letter Bill Longbrake explains why unfavorable demographic trends, excess supply of goods and services relative to underlying demand, monetary profligacy, negative real rates of interest, and huge and rising debt-to-GDP ratios collectively are fostering a global deflationary bust in which increases in prices and output slow, or even fall, and bankruptcy potential rises for firms and countries. Read this month's letter.

September 2014

In this month’s letter, Bill Longbrake discusses how the U.S. economy is gradually gaining momentum, while downside risks are diminishing. There are signs that the virtuous circle of higher employment, higher income, higher spending and higher investment may finally be getting underway. But, the pace of improvement remains painfully slow with little indication that the still very large output gap will close quickly. Bill provides detailed commentary about trends in GDP, employment, consumer income and spending, prospects for interest rates and the backlog of tax and spending issues that await the lame duck session of Congress after the November congressional elections. Read this month's letter.

May 2014

First Quarter real GDP growth was a barely visible 0.1 percent and appears likely to be revised down to -0.6 or -0.7 percent. In this month’s letter Bill Longbrake explains why significant shortfalls in both residential and business investment were not solely due to bad weather and bode poorly for growth reaching expected levels during the remainder of 2014. Bill’s special topic this month is burgeoning income and wealth inequality and Thomas Piketty’s new book, Capital in the Twenty-First Century, in which Piketty forecasts inexorable increases in income and wealth inequality in industrialized countries with insidious and deleterious impacts on democratic values of justice and fairness. Read this month's letter.

April 2014

Now that spring has sprung, the U.S. economy is beginning to look a little more spritely. But someone forgot to tell the stock market. Perhaps the stock market’s recent snit is reflecting nascent anxieties that faster economic growth will unleash inflation. In this month’s letter, Bill Longbrake discusses recent improvements in economic activity and examines whether inflation will be the next big problem faced by the U.S. economy, or whether deflation is really the greater threat. To read this month's letter, click here.


To read past issues, click here.