Three weeks ago we posted an update on the probability of recession that had jumped up into the warning zone: Update on Recession Probability: Rough Seas Ahead? The chart from the St. Louis Fed’s FRED data looked like this:
Only twice in the last forty five years has the level gotten this high without a recession following soon after. The chart is usually updated only once a month but I check it every week, especially since it had risen. When I checked this week I got quite a shock because the high levels I had seen earlier had disappeared:
Bill McBride over at Calculated Risk stares at this stuff all day and has a pretty good track record reading the Fed’s tea leaves. He believes that actual ‘tapering’ of QE3 purchases most likely won’t start before December although there is a slight possibility that it could happen in September if…..
3rd Qtr. GDP rose enough to make 2013 growth look like it will hit the low to mid 2% range.
Unemployment would have to dip enough to make it likely to get down to 7.2%-ish by year end.
Inflation has to be increasing. Currently the trend is in the wrong direction and Q1 produced only .3% which is well below the 2% annual the Fed Wants.
See Bill’s analysis here: Analysis on Tapering QE3 I highly recommend following Bill’s blog and this is just one of several posts in the last week on Fed comments around the end of tapering. Here’s the inflation chart he posted last week showing four different measures of inflation, note the trend since the beginning of the year:
Click on image to go to Calculated Risk article with chart.
James Montier, who works at the intersection of value investing and behavioral investing (Author of ‘The Little Book of Behavioral Investing’ http://amzn.to/X9Olzc on Amazon among others) has a great quote in his latest white paper published by GMO Global Investment Management entitled “The 13th Labour of Hercules:Capital Preservation in the Age of Financial Repression” Note that you may have to register at the site (free).
His paper discusses the effects of financial repression on portfolio stock and bond allocations and by implication the effects on real estate and particularly apartment building investments. Financial repression is the term used to describe central bank’s strategies for forcing interest rates to zero or negative to spur investment and spending at the expense of saving. Take it away James:
William McChesney Martin was the longest-serving Federal Reserve Governor of all time. He is probably most famous for his observation that the central bank’s role was to “take away the punch bowl just when the party is getting started.” In contrast, Bernanke’s Fed is acting like teenage boys on prom night: spiking the punch, handing out free drinks, hoping to get lucky, and encouraging everyone to view the market through beer goggles. [Emphasis mine]
The paper goes into depth on the effects of financial repression on investments, which grow the longer the repression lasts, up to twenty years. Does the phrase: “… for an extended period” ring a bell? How about QE1, QE2, QE3, and now QE-infinity?
