On June 28 last year, I wrote a post titled Important Battle at Four Dollar Copper. Shortly thereafter, copper surged half a buck but then dropped by one-third to $3. With global money-printing picking up and hopes that only a minor European recession and mild Chinese growth slowdown would let the party resume, copper rebounded- but stalled precisely at the $4/pound mark that I tagged last summer as the key price level. It is now heading south today (and recently) along with the main four precious metals. Deflation, anyone?
The lack of hyperinflation and ongoing reversal of deflation-resistant areas of the economy is well shown by a CNNMoney article out today titled Colleges slashing tuition, offering 3-year degrees. Here is the lede:
A growing number of colleges are taking extreme measures to attract more students by cutting tuition or speeding up the rate at which they graduate.
While some private colleges are introducing double-digit percentage cuts in tuition or freezing prices altogether, other schools are offering three-year degree programs or four-year graduation guarantees.
In part, these schools are responding to consumers’ concerns about the rising cost of college, said Tony Pals, spokesman for the National Association of Independent Colleges and Universities. “These types of initiatives have been used to some degree in the past, but have become increasingly prevalent since the economic downturn — and we expect to continue to see them spread,” he said.
This is consistent with the future that was envisioned by Reinhart and Rogoff in their 2009 book This Time Is Different. Their forecast at that time for the next few years looks prescient. They projected the “biflation” that the U.S. has experienced despite the massive ongoing Federal deficits that they said should be expected based on the history of other banking-economic collapses; said biflation involving falling housing prices despite ongoing inflation as a policy measure to escape the crisis.
The market action the past several days supports the ECRI view of a looming U.S. recession, or something close to it. Gold has sold off toward the $1600 level that was resistance last summer. The 30-year Treasury yield backed right back up to the 3.5% level that was the key support level coming out of the bond bull market in early 2009 and again in late 2010. Then in 2011, that level was resistance (peak of rates). If it again is successful as a resistance level, I would take that action as supporting the Japanese hypothesis that I and many others have written so much about.
Reinhart and Rogoff analyzed the history of financial crises. By their objective criteria, the Great, Global Financial Crisis of 2008-9 was the worst since the Great Depression. I have more than once noted that the degree of bank insolvency in the recent crash far exceeded that seen in the U.S. in that Crash and Depression. Given all that and the immense leverage in today’s financial markets, it simply is no surprise to see ongoing price-deflationary pressures despite unprecedented action from the central banks of developed countries.
There are always winners and losers in business and the economy. At various times in the post-2008 cycle, gold and Treasurys have moved together, at other times separately. The only time in the past ten years when Treasurys have been truly strong in price when gold has been in a major bear move was in the second half of 2008, when deflation reared its head as a mild recession turned vicious. Given the structure of the gold and interest rate charts, if the 2012 recession calls for the U.S. prove correct, even if the recession proves mild, we easily could see a reprise of that scenario.
One reason for the above comment is how non-mainstream these recession calls are. Dr. Achuthan of ECRI responded to an interview question a few months ago about the historical accuracy of ECRI’s recession-recovery calls. He claimed it was running 85% accurate. OTOH, the money manager Doug Kass, writing Monday for the Street.com, lowered his 2012 recession risk from 5% to zero.
Given this fundamental divergence of views on the course of U.S. economic activity in the months ahead, even what might prove to be a mild recession may have just as extreme reaction in the financial markets as did the mild 2001 recession. Right now I’m watching to see if $4 copper and 3.5% on the long bond mark the tops. If so, I give ECRI’s and Jeff Harding’s 2012 recession calls lots of respect and in fact have taken the recent bond market sell-off to take some trading profits in the stock market and have moved more toward income vehicles.
Brilliant though Doug Kass clearly is, anyone who in March can confidently say there is no chance of recession for the entire calendar year has a degree of confidence in his forecasting abilities that far exceeds mine in anyone’s, including and especially my own.