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Blanchflower Responses

David R. Kotok
Thu Apr 21, 2022

We thank readers for their notes and replies to “Blanchflower & Recession,” the commentary we offered with Danny Blanchflower about recession and with the help of Philippa Dunne on labor force data. For readers who missed it, here’s the link: https://www.cumber.com/market-commentary/blanchflower-recession. Please note that the original piece mixed in fishing with economics. So have the replies.

Blanchflower Responses



With our priorities in the right order, we will share Ed’s questions for Danny first. We have passed the information request on to Danny, and we look forward to his answers.


Editor's Note: In a virtual event, Danny Blanchflower and David Kotok along with Peter A. Gold, Esq., Principal of TheGoldGroup LLC will explore "Workforce Development" and the role of central banks relating to this topic on Thursday, June 2, 2022. Details at the Global Interdependence Center website: https://www.interdependence.org/events/browse/ccb-institutional-alignment-project-event-series-workforce-development/




Ed wrote:

Re Danny's Snook:

1. Average weight?
2. Bait – Live finger mullet? or other? – Fly on the flats?
3. Pound test of line?
4. Reel?

Steve chimed in:

Blanchflower, always one of my favorites... I agree, I’ve seen this movie before. Thx again.

 

Fred addressed the perennial problem of timing a recession:

I agree that consumer sentiment logically and necessarily leads free enterprise economics in republican democracies, but timing is everything.

Curtin, who has headed the U Mich Survey Research Center “forever,” did a very thoughtful job on the consumer data earlier this year. Sentiment looked miserable then, and I see little prospect for improvement now.

However, the timing of recessions is tricky. You or I might have placed “big shorts” on mortgages as we saw underwriting standards collapse in 2004, but we would likely lose our shirts to do that because the cost of the hedges would make us insolvent by the time that market actually tanked in 2008.

Between 2004 and 2008, rising home prices combined with deferral of reality by “financial engineering” and sustained the boom for far longer than anyone might reasonably expect.

Today, two factors combine to make me pause on Mr. Blanchflower’s fine work. First, we spent so much so quickly in response to the COVID collapse of employment in Q 1 of 2020 that we now have a reported 10 mm (or more) job openings and just 7 mm people looking for jobs. That tells me [we] will have strange impacts compared to past episodes (e. g., there were no programs of similar consequence for the 1918 flu and world economics rapidly collapsed as a result, before a counter-reaction created the roaring 20s). Second, while this can change at any moment, as of right now market spreads for private sector US corporate bonds remain at an unprecedented low level for all the bad news out there. IT IS WIDENING OF THOSE SPREADS THAT HAS CAUSED GIGANTIC CONSEQUENCES RECENTLY IN BOTH RUSSIA AND CHINA (though neither actually have data worth a farthing on the point).

If either or both of those factors suddenly change, my present “calm” will disappear. As Bill Dudley noted yesterday, the longer we wait before slamming brakes on inflation, the worse the “end” will become. On the other hand, however, Bernanke and Greenspan still seem to agree on one point — we now have an understanding of how the marvelous machine that Keynes said we broke in 1929–33 actually operates. THUS, we can fix it and investors will win as we do.

If that’s so, then no matter how badly we “blow it,” we CAN recover.

In the end, therefore, Buffett seems correct, do it wisely, but just keep on investing.

David wrote:

When you’re at full employment, it’s hard to improve, so increasing employment becomes increasingly difficult.

Chances of recession in 2022: low (unless Putin, etc.).

Chances of 2023 recession: higher than 2022, but less than 50% (it takes time for tighter monetary policy to work), but maybe toward year-end.

Chances of a 2024 recession: now you’re talking!

 

Paul wrote:

This is a weird one. 50 years showing profits fall as inflation rose — a great margin squeeze. Until now. This cycle is utterly different. Profits are RISING as inflation RISES. I’m scratching my head. Federal Reserve data.

 

Chart 1

 

 


Danny Blanchflower added a reply from one of his students:

Look at this... for Japan from a student of mine.
 

Chart 2



https://www.esri.cao.go.jp/en/stat/shouhi/shouhi-e.html
 

 

Thanks again to Danny, Philippa and all who commented and continue to comment.
 

David R. Kotok
Chairman & Chief Investment Officer
Email | Bio


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