You Keep Using That Word
Europe, mired in debt, confusion and hostility has been dethroned - however temporarily - as the king of political theater. The title has been usurped by the once perennial bell weather, the United States. The news media has classified the proceedings up until present as a can-kicking episode.
There is a debate about what the revenue increases and budget cuts really mean. How will they affect the markets and will it throw the United States into recession? How about a brief excursion into some available data from the past?
I don't like making predictions (except in the case of Europe), I prefer to anticipate events. So I want to know: will the fiscal calamity lead toward a stagnant stock market? And will that lead toward a recession?
I Do Not Think It Means What You Think It Means
|Historical budget balances from 1792 to present. Some trends are interesting, some what predictable and somewhat dubious as far as future correlation is concerned. Budget balance as a % of GDP (red) and the nominal dollar value (blue).|
Will we really see a budget balance of -50% within our lifetime? Analysis from the above chart seems to indicate that we will. I don't think it will happen, at least in the next few years, talk to me after 2015. There is a post-WWII trend I refer to as the Military Industrial Complex. Actually, that wasn't me, that was Dwight Eisenhower who stated that historically the United State military contracts after each major war - except in the case of WWII.
|1957 to 1982 - budget balance as % of GDP (blue) and S&P 500 (red). The two seem to correlate between the post early-1960s recession to the inflation ridden late-1970s.|
|1982 to present appears to have a strong trend between the budget balance as a % GDP (blue) and the S&P 500 (red).|
My analysis, from the above data, is that the US will not slip into recession on account of a fiscal contraction. I am anticipating stock market volatility over earnings and projections, and I anticipate that the bond market will remain in its yield-depressed state. But if the contraction in government issued debt happens, where will investors go?
If I were to make a prediction, I would say that we are already in recession (the video in the link is from 2011). I would also say that China is going to experience a real-estate deflating recession, and Europe, of course, will soon regain its title as king of the political theater.
|Recession probability has picked up.|