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From Chaos to Turbulence: Myths and Realities in the Economy, Markets and Policy

From Chaos to Turbulence: Myths and Realities in the Economy, Markets and Policy

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Published by Dave Livingston
In the second half of 2009 we moved from a chaotic economy that avoided falling into the abyss to a turbulent one thru government policy. Unwarranted complacency has set back into the markets but the economy remains weak and fragile with a likely weak recovery and poor job creation. We lay all that out and consider several of the myths that were floated on debt, savings, de-leveraging, trade, exchange rates and financial flows that provide a large body of machinery, trends and patterns that will define the recovery and the economic outlook for the next decade. If you want to understand where we came from, what the consequences are and what the outlook is you might want to at least skim this one.
In the second half of 2009 we moved from a chaotic economy that avoided falling into the abyss to a turbulent one thru government policy. Unwarranted complacency has set back into the markets but the economy remains weak and fragile with a likely weak recovery and poor job creation. We lay all that out and consider several of the myths that were floated on debt, savings, de-leveraging, trade, exchange rates and financial flows that provide a large body of machinery, trends and patterns that will define the recovery and the economic outlook for the next decade. If you want to understand where we came from, what the consequences are and what the outlook is you might want to at least skim this one.

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Published by: Dave Livingston on Jan 19, 2010
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10/23/2011

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From Chaos to Turbulence:Myths vs. Realities in the Economy, Markets and Policy
By Dave Livingston, Managing Principal, Llinlithgow Associates (www.llinlithgow.com)
 Dave is a management consultant primarily focused on improving enterprise performance by coupling strategy with execution thru the design and implementation of workable, integrated  management systems. He blogs on this and related issues in Economics, Markets & Investments and specific industries and companies atwww.llinlithwo.com/bizzx
 
 , his BizzXceleration blog.Where you can keep current on the state of the Economy, the implications for Markets and read explorations into business performance for Industries and specific companies.
 
This collection of blog essays covers the period from August to November, 2009 as the Chaos inthe first half of the year gave way to Turbulence. That’s a critically important distinction as Chaos iswhen nothing is predictable and where you end up could be disastrous depending on minordifferences in where you started. In contrast turbulence is still a very disturbed environment,technically a collection of smaller-scale chaotic behaviors, but subject to overall patterns and flows.In other words what we experienced in this period was the re-emergence of more predictablebehaviors in the economy, largely as the result of effective and successful monetary and fiscalpolicy.In the process of laying out this evolution we dig into the structure and patterns of GDP andbusiness cycles, where the economy was at and is likely to go, the interactions between marketsand the economy as well as multiple delusions about the future that set into market outlooks andtackle multiple numbers of mythologies that were floated during this period as to what was going onand the implications for the future.While you might think this look back is dated in fact the machinery and long timespans detailedhere will determine the course of the economy for years to come. In particular the explorations ofDebt, Savings and Growth, the role of debt and the future of de-leveraging and the impacts ofTrade, Exchange Rates and trade balances will be things we wrestle with for the next decade.We also spent considerable time exploring the role and impact of government fiscal policy and thestrategic outlook for the US economy. It was government intervention, thru fiscal and monetarypolicy, that kept what could have been a disaster as we fell into an abyss from being much worsethan it could have been. An important point to learn is that the health of the economy is still utterlydependent on government support though we can look ahead to a tricky transition. The key to thattransition will be whether or not the economy reaches takeoff velocity and establishes a level ofself-sustaining growth, or whether it remains weak and vulnerable. It will, in any case, remainfragile and we’re facing a weak recovery with very poor job growth for years.In other words we lay out the groundwork behind the New Normal using machinery that you can,we hope, readily understand and re-apply.
 
 
Page 2 of 50
Table of Contents
1. Interrupting Your Reported Data Distortions: More Darkside for the Economy 32. Same 'Ol, Same 'Ol: Economic Cliff-bottoms vs. Cliff-diving 63. Between Stalingrad and Kursk: Real Economy, Policy and Outlook 84. Where's the Money: Markets, Outlooks & Re-Thinks 125. Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness 156. Refreshing the Economic Outlook: Fundamentals to Business Outlook 197. Moscow, Stalingrad, Kursk: Edge of the Abyss to "Recovery"? 228. From Mythologies to Realities: Economy, Employment, Credit & Trade 269. Markets Away: Run Baby Run? Or Stumble? Or What? 3110. More De-mythologizing: a Little Markets, Some Economics, Lots of Policy 3311. Really Different This Time: Liquidity, Rates, Markets & Risks 3712. Surprise, Surprise: Not a Rally and It's Still Different 3913. It's Still Different: Refreshing Policy and Market Info 42
14.
Cuspiness, Collisions & Conundrums: Market Carry, Employment & Euphorillusions 43
 
 
Page 3 of 50
August 01, 2009
Interrupting Your Reported Data Distortions: More Darkside for the Economy
http://llinlithgow.com/bizzX/2009/08/interrupting_your_reported_dat.html We're interrupting your regularly scheduled data dumps of economic data, and ourplanned posting schedule, to bring you this special bulletin about what yesterday'sGDP numbers really said. First off there were not just huge revisions but a completere-factoring of the data. This is not, and for the record, some nefarious governmentplot (though it will again be taken that way) which resulted in better data andrevisions stretching back decades. Which made, among other things, the '01downturn much milder and this one must worse. More importantly our recurrenttheme of needing to really look into things needs re-emphasizing because thereported headlines are based on QtQ data instead of YoY and when you look atproperly are much worse than anybody is telling you.The fact that mis-interpretations and resulting distortions are beyond widespread,beyond endemic and would appear to be innate is another critical factor.This morning's WSJ put it all very nicely in historical context though by comparingthe decline in GDP to previous downturns since the end of WW2 with this nicechartporn. We'll dig into all this graphically because it's critically important but whatyou need to know is the headlines reported QtQ changes over the last threequarters in real GDP of -5.4, -6.4 and -1.0%. Which gives great weight to thefantasies of a V-shaped recovery.In actual fact, on a YoY basis, the last three quarters were -1.9, -3.3 and -3.9%. Letme repeat that - REAL GDP WAS DOWN IN Q209 BY ABOUT -4% !!! If you takeout the effects of trade (exports were down -15.7% while imports dropped further by-18.6% and net exports as a whole were -28.7% YoY. That last number is a slightimprovement over the previous -29.8%) GDP x-Trade was down the last fourquarters by -1.1, -2.5, -4.4 and -4.7%. Let's try that again too...DOMESTIC GDPWAS DOWN ALMOST -5% !!!!!.No way, shape or form that one can read those as good numbers. Nor can oneargue that they show much flattening of the rate of decline, or bottoming out. TheQtQ numbers do tell us that we're in the process of crossing that cusp point though and we'd expect to see betternumbers in the next few quarters, at least in the sense that the rate of declines drops. Positive GDP improvements area ways off, significant positive GDP improvements farther, growth in employment and investment and the return of anaturally growing economy is much...much...much farther off. In fact the Fed expects that after a bump up the long-term outlook is for an average growth rate of 2.4% - that's barely breakeven on required new job creation and meanswe're going to have an organically weak economy - thru 2015 and beyond.

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