Meeting someone you've lost touch with for some time and discovering that they now wear glasses, or have lost their hair, or find it graying. Tell him that he has remained the same and think instead that he now has wrinkles, that he walks hunched over or hears little. In short, it has had what the French call a coup de vieillesse, a sudden aging.
The effect, at first glance, is alienating and a little depressing but it doesn't last long. The new image soon overlaps the old one and everything is back to order. People lived carefree in the financial markets until a few weeks ago. The positive economic cycle, which started in the spring of 2009, did not show its five years and four months of life at all, which for cycles, as for large dogs, corresponds more or less to 50 years for humans. She looked much younger. He appeared frail, thin and vaguely ephebic as only a teenager can be. He doesn't have a performing physique like that of a fit adult but, in exchange, the prospect of a very long life ahead of him. He seemed to behave, this cycle, like lab mice fed half the usual calories. Thin, small, free of free radicals, resistant to tumors and able to live almost twice as long as mice able to sit at the table and help themselves freely. A matter of metabolism and hormones.
The smooth skin, thick hair and fresh features were the result of low growth and almost imperceptible inflation, which in the spring actually looked set to fall below one percent. The low-calorie diet, it was said, had ensured that the food supplies available for this cycle, gigantic in 2009, were still practically intact. Food supplies made up of available but unused resources, unemployed people on one side and sheds full of machinery still standing still from the times of the crisis on the other.
As long as there are such ample unused resources, the thesis was, there will be no inflation for years and years to come, there will be no reason for central banks to seriously raise rates, and therefore there will be no reason to sell bonds or so as not to buy shares when companies, albeit with low growth, have increasing profits. Within a few weeks, however, it was discovered that our mice have less muscle (growth) and more fat (inflation) than previously thought. The drop in GDP in the first quarter, that heavy annualized minus 3 percent, was hastily dismissed as the effect of bad weather and the mini-cycle of inventories, but on second examination it was also found to be due to a drop in productivity.
The second quarter, initially expected to show a very strong recovery, certainly turned out to be good, but less brilliant than expected. Europe, which finally had to get back on track, can only show very modest results for now. The outlook for the second half of the year has also been downsized. In the end, this 2014 initially given to 3 abundant growth, will turn out to be the umpteenth confirmation of that 2 that we have seen in these five years. The problem, strategically, is not low growth per se, but the fact that weak growth is already kick-starting prices. The issue is not the absolute level of inflation, still acceptable, but what lies behind it and that is the possibility that what we have been telling each other for so long, the existence of large unused resources, is at least in part an illusion. After all, it is not only highly qualified job positions that are difficult to fill, if not by leveraging on salary. It is now a great effort to find truck drivers, even to pay them 120-150 thousand dollars a year, as has been done for some time in the mining areas.
The markets celebrated the acceleration in the creation of new jobs, but did not notice how this is happening only in part-time (which serves among other things to circumvent the costs and obligations of Obamacare). These jobs are paid slightly above the unemployment benefits and negative taxation that are lost by returning to the world of work. They therefore generate little additional consumption and do not give that feeling of solidity and confidence that can lead to applying for a mortgage to build a house. Markets also tend to forget that employment has two sides. On the one hand, the macroeconomic one, Krugman is right when he states that a poorly paid underemployed person is still more productive than an unemployed one.
On the business side, an employee hired at a high stage of the cycle (with less precautions than those used in times of crisis) is however a cost that tends to erode margins. Low productivity growth, the first tensions on the labor market, the fast approaching of full employment, the exit from the labor market of a continuously growing number of elderly people and the reduced entry of immigrants are not yet factors capable of bring about the end of the US expansionary cycle. The life of this cycle is still very long (at least another three to four years, probably) but today it appears less extensive than what was thought three months ago. And even less intense, at least until companies decide to invest in productivity and not just in their own shares. Europe is certainly not at risk of overheating, except in some areas of the German economy. But the fact that there aren't multitudes of unemployed young Europeans who want to be truck drivers in America (which itself doesn't want many immigrants) shows that labor markets remain heavily segmented.
The great reservoir of global unemployment is actually a collection of small regional lakes that don't communicate with each other as they should. This too, over time, lowers the productivity of the system. The European risk is therefore not overheating but slow asphyxiation. The German model for the Eurozone hasn't changed and the disconsolate Praet, a Belgian member of the ECB, says we are at the same point as a year ago.
The great maneuvers of the ECB fail to weaken the euro (for which there is still a strong backlog of demand from Asian central banks that want to reinsert it into their reserves) and are barely enough to bring the monetary base back to the level of two Years ago. Bonds and stock exchanges don't seem particularly concerned about the general situation. Bonds are indifferent to inflation because they have seen Japanese consumer prices rise by two percentage points in one year (not counting the VAT increase) and 12-year JGBs remain practically immobile. Ironically, after two years of worldwide advice not to go into distant maturities, 24-XNUMX month bonds are the ones that risk the most (in the dollar area) in the near future.
Stock exchanges, for their part, can still count on some growth in earnings (more financial than operational, but that's okay at this stage) and they don't seem too disturbed by the warnings from central banks not to go overboard, which for the moment sound they are benevolent and harmless. The diabolical Birinyi, who makes very few mistakes, foresees 2100 for the SP 500 at the end of the year. Autumn will bring a bit of turbulence but it won't necessarily be the classic fateful moment when stock markets notice the imminent rate hike and react badly. That time will come, but later.
