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A Pinch of Salt:

October 2012

seasoned insights into the global markets Matthew Salter, CFA

Vol. 1 Issue 1

So, hows that economic recovery thing doing, then?

Heres a question to start things with when did this latest (US) recession end? Dont read on have a guess first! According to the NBER, the respected authorities on these matters, it ended in June 2009. Thats a whopping 3 and a quarter years ago. Doesnt feel like it with unemployment at almost 7%, 10-year yields at 1.70% and with QE3 now a done deal. Ask your friends or your family Im guessing a lot of them wont think we are more than three years out of a recession. I want to spend this piece having a look at whats different about this recession from previous US recessions, just from a GDP (growth) perspective. It has important implications for what is likely to happen to employment over the next two to five years, which is something Ill look at in the next newsletter. Id like to put this into a historical perspective and Im going to do so by only looking at recessions defined rather more strictly (or traditionally) as periods where the US saw two consecutive quarters of negative growth. Under this definition there has only been one other recession in the past 30 years, and that was over 20 years ago, back in 1991. So, there are a whole lot of people out there working in the investment and finance world today, who have no living memory of what happens after the US experiences (at least) two consecutive periods of negative growth. So, what does happen? First of all, lets look at how long the US takes to recover its pre-recession level of GDP. PLACE PHOTO HERE, OTHERWISE DELETE BOX On average, since 1948 (excluding the 2008 recession) the US has recovered its pre-recession GDP level within just less-than 6 quarters. The good news for the current 2008 recession is that the US has recovered past its pre-recession GDP level, achieving this at the end of last year, but taking a whopping 16 quarters to do so, or almost three times the post-1948 average. The table on the left hand side shows all the recessions recovery time since 1948.


Unemployment lines in 1933

Matthew Salter, CFA

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A Pinch of Salt:
October 2012

seasoned insights into the global markets

Vol. 1 Issue 1

Dont fasten your seatbelts!

So, it may not be a surprise that this recession has taken longer to escape from than most hence the term Great Recession. But what is more shocking is how fast the US economy was growing when it surpassed its pre-recession GDP think of it as a kind of exit speed as the US economy finally broke the surface. Now, conventional wisdom and history tells us that deep recessions are followed by zippy recoveries with a rubber-band effect as the economy starts to emerge from negative growth. Though not necessarily always supported by economic studies, its an idea that is often floated by economists and politicians alike. The chart below measures the momentum of growth on exiting recessions by looking at the average annual growth in the four quarters around when the US economy surpassed its prerecession GDP peak again, think of it as exit speed on surfacing. In the majority (6 out of 9) of post-war recessions by the time the economy surpassed its prerecession GDP, it was chugging along at a growth rate of at least 4.5%, well above the long-term trend growth rate of the United States. Which is what we would expect (or at least hope for) after a deep recession.

.youre going to see the economy come

roaring back. PLACE PHOTO HERE, OTHERWISE September 2012 Mitt Romney, 1st DELETE BOX

Not a lot of Read more at round here roaring

This time around, with the longest and deepest 01/story/mitt-romney-promises-roaring-us-economy-landingrecession on record and the longest period (by a rally#ixzz25VV6xAfK of long way) of recovery to a level pre-recession GDP, average growth over the last four quarters is still only a tepid sub-2.5%. And that figure itself is heading downwards with the last two quarterly readings printing at a dismal 2.0% and 1.3%. With forecasts for the advanced reading for Q3 GDP growth (due at the end of next week) pointing towards another sub-2.0% figure, there doesnt seem to be much momentum picking up just yet. Why does all this matter? Well it matters for a number of reasons it matters for the trajectory of US fiscal deficits and how the next administration is going to get a control on the spiraling government debt. It matters for asset prices over the next 2, 5 and 10 years. And it matters for unemployment, which is likely to stay uncomfortably high for several (many) years to come more of which in the next newsletter.


Some Final Thoughts..

October 2012 Vol. 1 Issue 1

Final thought (1) Investing in Europe

Its interesting to note that given all the headlines about Europe, all the statistics testifying to a renewed slowdown in growth, all the fears about the impact of a euro-zone break-up despite all this, the DAX has rallied by a very nice 25% since the beginning of 2012. Even the MSCI EMU Index, which includes such luminaries as Greece, Portugal and Spain (on a market capitalization-weighted basis), has returned an impressive 12.5%. Admittedly its been a bumpy ride though, with swings between heavily positive and heavily negative territory, on more than one occasion during the year. However, on an overall basis, not bad returns in an investment world which is searching for decent yields. If you were a dollar-based investor, and didnt panic when the euro headed towards 1.20 youd also be making small positive gains right now from your euro currency returns (around 1%) on a year-to-date basis. But if you missed out on some of that rally, you can console yourself by (hopefully) having missed out on being invested in another part of Europe in Cyprus, which has seen a loss of 50% year-to-date. Have a read of the quote in the box below and think about when it was published.

, the reliability of the Libor fixing mechanism, was increasingly questioned by market participants. Suspicions were voiced to the effect that some banks in the Libor panel had been reporting rates lower than their actual borrowing costs. It was alleged that they did so in order to appear less vulnerable than they actually were.

What are you thinking? Maybe a few months ago just before the Libor scandal broke in June of this year when Barclays admitted misconduct'? In fact this quote appeared in the Bank for International Settlements Quarterly Review in June 2008. Thats amazing 4 FOUR! - years ago someone had done their homework and actually pointed out that Libor was being manipulated. And yet, for another four years the markets continued to merrily place however many trillions of dollars worth of contracts on this fixed rate, until finally the penny dropped earlier this year.

Final thought (2)

If youre one of my readers who are a member of the Occupy Wall St. protests (probably not a large segment of this readership) then youll especially like the following short clip which shows that even monkeys know fair pay is worth kicking up a fuss about. Definitely worth two minutes of your time: