Saturday, 19 November 2016

Weekend Update 19/11/2016 – 2017, A New Recession?

"Past performance is no guarantee of future results."

This weekend, food for thought. Yesterday we covered Goldman’s expectations for 2017. Today, maybe we’ve all got 2017 wrong. Below serious former money manager Raoul Pal thinks he’s spotted a reliable indicator of trouble directly ahead. While past performance is no guarantee of future results….

The race is not always to the swift, nor the battle to the strong, but that's the way to bet.

Damon Runyon

Raoul Pal Warns "Trump Will See A Recession In 2017"

Nov 17, 2016 9:25 PM

US Presidential Elections and Recessions

As you know, I follow the business cycle, which describes the ebb and flow of the economy from boom to bust that drives asset prices and thus our investment choices.

Linear models in a cyclical world

Most economic models don’t use the business cycle even though it clearly exists, which strongly suggests that economic linear models are wrong, yet economists sadly persist in this flawed linear analysis. This lack of acknowledgement of the business cycle is why so many economists are almost always wrong in their forecasts. Steady state analysis is proven time and time again to be junk.
Austrian economists (and a few others) do however accept the business cycle as given but they endlessly debate what causes this ebb and flow in the economy. In general, most opt for the credit cycle as the explanation without thought as to what creates the credit cycle and thus they fall into the economic model trap again.

The practical world

I live in the world of practical economics – where the investment rubber meets the economic road – so I ponder less about the detailed why and try to instead look at the when in terms of timing of the booms and busts.

Recession and Elections

I recently noted that since 1910, the US economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency… effecting a 100% chance of recession for the new President.

No recession without an election

I then spent some time looking at US recessions in general, and found that every single one occurred during, or just after, an election, without exception.
Not every single election sees a recession, only every two-term incumbent change. Some two-term Presidents saw recessions at their first-term re-elections too (Wilson and Eisenhower).
The following chart shows every NBER recession since 1910 (in yellow) with the new President after a two-term election marked in white and the new Presidents after a single-term presidency in red. Wilson and Eisenhower appear as both. Only Coolidge saw more than a year (sixteen months) from his second-term election and the onset of the subsequent recession at the end of WWI...

---- Some observers might suggest that the correlation between recession dates and election dates is spurious but I simply refuse to believe that based on the chart above. It is not a coincidence.

Why some new governments, after a change of a single-term presidency, don’t see an immediate recession remains a mystery, but those instances are few: Clinton, Carter and Johnson. Of these only Johnson and Clinton did not see a recession at all. Carter got his recession at the end of his presidency, but don’t forget Ford was not voted in so no election cycle occurred.

In the last 100 years, the recession of 1979 is the only recession not to occur around an election date (again, Carter came into office after Ford who did not undergo the election cycle).
Just mull that over...

Every single US recession bar one (with explainable circumstances) occurred around an election. Only two Presidents in history did not see a recession and they were inaugurated after single-term Presidents.

There are a few other things to note from this analysis:

Politics creates recessions
Firstly, it is the political cycle that is the key driver of recessions – governmental cycles in one way or another are an essential component. I am really not yet sure of the reason why two-term presidential cycles are so spectacularly consistent in provoking recessions but I do know that election dates are super helpful for predicting recessions and thus asset prices. The investment game is all about odds, and odds of 100% – even from a small data sample – are incredibly useful. Sure, it might not remain 100% forever but the probability is still going to be extremely high and that’s all we need to make successful forecasts and investments.

 [If you are not yet familiar with the relationship between the business cycle and asset prices, I’d suggest watching the video on the subject that I produced for Real Vision Television.]

Politicians care about themselves
Secondly, it makes you question whether the governmental system in general has politicians’ best interests at heart, or that of the country. It is difficult to believe it is primarily the country’s economic wellbeing that the politicians care about when this cycle is so evident.

Trump will see a recession in 2017
Finally, bearing in mind the above, we have to acknowledge that there is an extremely high chance of a recession within the coming year with the imminent change of government in the US after a two-term presidency. History would suggest that the odds are 100%.

Should you really be betting on growth and inflation for 2017?

I very much doubt it.

I think that the current euphoria for equities and hatred for bonds is going to be exactly the wrong trade for 2017.

Raoul Pal has previously co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world.

Raoul came to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe. Other stop-off points on the way were Natwest Markets and HSBC, although he began his career by training traders in technical analysis.

Raoul Pal retired from managing client money in 2004 at the age of 36 and now lives on the Valencian coast of Spain, from where he writes for The Global Macro Investor. In 2008, Raoul also helped design the TV programme Million Dollar Traders for the BBC, and trained the participants in investment and risk management strategy. His articles have appeared several times in the press and he has also taken part in TV interviews.

Meanwhile back in the wealth and jobs destroying EUSSR, crisis looms. Italy seems about to deliver yet another shock to Brussels and the five EU presidents.

Final Polls Show Renzi’s Referendum Heading for Defeat in Italy

November 18, 2016 — 11:33 AM GMT
The final rush of public opinion polls before Italy’s referendum next month showed voters are leaning toward turning down the constitutional reforms.

Four polls published Friday showed the “No” camp in the lead, in a trend that has been predominant for several weeks.

As of Saturday, there will be a blackout period making it illegal to publish public opinion polls on the Dec. 4 vote.

Prime Minister Matteo Renzi has promised to quit if voters reject the referendum reforms, which he says would streamline Italy’s government decisions.

About 62 percent of Italians say they will vote, 27 percent won’t vote and 11 percent don’t know, according to a poll conducted on Nov. 16 by Ixe for Agora-Rai3 television program. While the “Yes” vote was unchanged at 37 percent from the previous week, the “No” is up to 42 percent from 40 percent previously. The poll was based on responses from 1,000 potential voters, and had a margin of error of plus/minus 3.1 percent.

La Repubblica

A poll conducted by Demos & Pi for newspaper La Repubblica on 1,231 people from Nov. 14-16 shows that the gap between the two sides widened from the previous month, with the “No” at 41 percent and the “Yes” side at 34 percent. The share of those who were undecided or didn’t respond was at 25 percent. The margin of error was plus or minus 3.1 percent.

Marky's Father: Look, this is my little girl. I'll leave her here while I go for the money.
Sorrowful 'Sir Sorry' Jones: I ain't taking no dolls for security.
Marthy Jane, Little Miss Marker: Look, Daddy, he's running away. Is he afraid?
Sorrowful 'Sir Sorry' Jones: Take her down off there. You get down off there.
Marthy Jane, Little Miss Marker: You're afraid of my daddy. Or you're afraid of me. You're afraid of something.
Sorrowful 'Sir Sorry' Jones: All right, take his marker. A little doll like this is worth twenty bucks any way you look at it.
Regret: Yeah, she ought to melt down for that much.

Damon Runyon, Little Miss Marker. 1934. Starring Shirley Temple, “Little Miss Miracle.”

We close for the weekend with an update from Jason in California, as America heads into Thanksgiving Day week.

U.S. Equity Markets End the Week Treading Water after a Post-Election Runup as News Reflects Dual Realities
N. Jason Jencka November 19, 2016 3:13 am ET
Ten days have passed since it has been known that Donald J. Trump would be the 45th president of the United-in-name-only States of America. In that time, U.S. equities have rather steadily marched upward, with relatively little attention from mainstream media outlets. This is reflective of the growing dissonance between market sentiment and media sentiment. One who had only consumed news from major non-market focused outlets would have been bombarded with sensationalistic stories of intrigue and scandal surrounding President-elect Trump’s proposed Cabinet appointments. The manufactured outrage & consternation has been a fever-pitch.

Meanwhile equities markets have shook-off talk of crisis to graze record highs. It is evident that the equation of “uncertainty equals decreased likelihood of monetary tightening” remains firmly intact. As long as this is the case, those that follow the news will be confronted with conflicting realities. To paraphrase a certain rather well-known English author, it truly is the best of times and the worst of times. Each reality is assessable with no more than the click of a mouse or remote control. I will not venture to predict any developments for next week other than that the bitter divisions Americans feel will be momentarily soothed by the two things that bring us together most reliably. These would be food and lines to buy depreciating consumer goods, on Thursday and Friday respectively.


N. Jason Jencka is presently studying Finance and Economics at Sierra Nevada College, located near the shores of Lake Tahoe on the border of California and Nevada. His interests include the interplay between world markets and the global political sphere, with a focus on developments of both sides of the Atlantic in North America and Europe. In his leisure time he enjoys connecting with those people that have an interesting story to tell and a genuine desire to make an impact in the world.

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