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Thursday, March 26, 2015 1:58 PM

Damn the Reports, Full Speed Ahead; Recession Overdue; Good Time to Normalize Rates?

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Here's one for the I'll believe it when I see it category: Fed Officials say Rate Hike Plan Intact Despite Weak U.S. Data.

In separate events in Frankfurt and Detroit, St. Louis Fed President James Bullard and Atlanta Fed President Dennis Lockhart said U.S. monetary policy might need to be adjusted in light of the economy's steady improvement since the 2007-2009 financial crisis.

"Now may be a good time to begin normalizing U.S. monetary policy so that it is set appropriately for an improving economy over the next two years," Bullard said at a conference in the German financial hub.

The challenge now, Lockhart said, is to sort out whether recent weakness in exports, manufacturing and capital investment indicate the start of an economic slowdown or other temporary factors such as the soaring value of the U.S. dollar.

Lockhart said he is confident for now that the weakness is "transitory," and still regards it as highly likely that the Fed will raise rates at either its June, July or September meetings.

"We're still on a solid track ... The economy is throwing off some mixed signals at the moment and I think that is going to be passing or transitory," Lockhart said in an interview with CNBC from a Detroit investment conference.

"In the beginning when the dollar declined I was prepared to, to some extent, dismiss the influence of the dollar as being not great because our economy is not so export-dependent, but I'm upgrading it as a factor to watch," he said.
Totally Clueless

In simple terms, Lockhart may as well have said that he is "totally clueless."

We are going on 7 years of economic expansion.

The San Francisco Fed has an interesting report on the Duration and Timing of Recessions.
NBER records show that, over the period from the mid-1940s until 2007, the average recession lasted 10 months, while the average expansion lasted 57 months, giving us an average business cycle of 67 months or about 5 years and seven months. However, there has been considerable variation in the length of business cycle expansions and contractions in the past.

The shortest recession between the mid-1940s and 2007 lasted only six months, from January to July 1980. The two longest recessions during the period lasted 16 months each, one extending from November 1973 to March 1975, and the other from July 1981 to November 1982. In both of these periods there was a noticeable decline in real GDP.

In contrast to the relatively short duration of most recessions, periods of expansion tend to last much longer, helping the economy expand over time. The shortest expansion period from the mid-1940s until 2007 lasted only 24 months, from April 1958 to April 1960. The longest expansion continued from March 1991 to March 2001, setting a record of 120 consecutive months of growth.
Recession Overdue

Statistically speaking, a recession is overdue although there is wide variance in both the length of recessions and recoveries.

Yet, there is very little reason to believe weak report after weak report is "transitory". The idea "we're still on a solid track," is downright ludicrous.

Good Time to Normalize Rates?

Is this a good time to normalize rates?

Let's answer it this way: It's better than a month from now but not as good as two years ago. In fact, for the second time, rates never should have gotten as low as they did for as long as they did.

The Fed has sponsored three asset bubbles in recent history, each of increasing amplitude.

Three Major Bubbles

  1. Dot-Com bubble
  2. Housing and credit bubble
  3. Global equity and junk bond bubble

Bubble number three is still expanding. Few admit that it's a bubble, simply because it  hasn't popped yet.

If the Fed does hike (which is doubtful because Yellen is calling the shots, not Bullard or Lockhart), most will point a finger and say the "Fed caused a needless recession".

Nothing could be further from the truth.

By blowing yet another asset bubble, the Fed guaranteed another hugely destructive asset deflation bust.

Why hike? The reason to hike is the bigger the bubble, the bigger the bust, something the Fed should have thought about in advance but didn't, and never does.

Mike "Mish" Shedlock

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