1. The peak in US jobless claims will be shown to occur between 01 NOV 2008 and 01 MAR 2009. This four month period will reveal both a spike in jobless claims and then a recoiling from that spike as jobless claims start to seriously diminish as we head into Summer 2009.
2. The business cycle trough in the US, ironically, was probably set to do a slower motion advance well into next year. However, my heretical idea today is that the credit crunch and stock market crash accelerated the business cycle. So now instead of a slower trajectory into a trough in early Q3 2009, I see a business cycle trough now in late Q1 2009.
3. The stock market. Well, the stock market is going to be confused several times, over the next 6 months. At the moment, I believe it sees the jobs trough which is being put in right now, and, is starting to see the business cycle trough next March. However, next year, the stock market is going to realize it needs to price in a slower recovery.
4. There is risk that oil re-tests its old high in late 2009. This risk would be zero had oil maintained itself above 80.00. The trip to 40.00 destroys actual supply but more important it damages psychology in the industry. Just watch as global oil producers refuse to spend one penny to increase supply next year. As it stands, oil will return to 80.00 at minimum in 2009.
Try not to laugh at the globally coordinated fiscal stimulus. It’s accurate to use the word gargantuan, to describe the scale of everything that’s been announced. Also, regardless of one’s views about 2009, we also need to price in macro outlook volatility. Government intervention kicks streams out of their beds, and gets them running in different directions. For example: You could wake up one day and realize that all that excess PV that is in oversupply is being quickly sucked up by global governments, to do solar projects. Same too with SPR fills on oil, and metals and fertilizer stockpiling.
Final thought: economic events are both structural and psychological. The credit crunch was both, and, created its own structural mess. But there is still a psychological component. Economics is a social science. What’s at issue is human behavior, not foot-pounds of pressure through pipes. By definition, reflation must eventually result in velocity or there has been no reflation. Once you get that velocity, it is reinforcing. Oil was a very important medium for capital to travel around the world. Low oil prices are just another condition of low velocity.
I am sticking with my view that the FED and global governments will keep reflating until they get strong signals they have succeeded. But, by then, they will have done too much. That’s the key dynamic. They will just keep upping the ante until they get feedback. Which means that they are fated to go too far. Regardless of how one sees the battle between Deflation and Inflation, one simply has to capitulate to the fact that policy makers are now all-in, and will keep doubling down on their reflationary bet until they get returns they like, or lose it all.
-Gregor
