The Echo Chamber Of Elite Economists: Often Wrong, Never In Doubt

Tyler Durden's picture

Authored by Michael Lebowitz via 720Global.com,

Since the U.S. economic recovery from the 2008 financial crisis, institutional economists began each subsequent year outlining their well-paid view of how things will transpire over the course of the coming 12-months. Like a broken record, they have continually over-estimated expectations for growth, inflation, consumer spending and capital expenditures. Their optimistic biases were based on the eventual success of the Federal Reserve’s (Fed) plan to restart the economy by encouraging the assumption of more debt by consumers and corporations alike.

But in 2017, something important changed. For the first time since the financial crisis, there will be a new administration in power directing public policy, and the new regime could not be more different from the one that just departed. This is important because of the ubiquitous influence of politics.

The anxiety and uncertainties of those first few years following the worst recession since the Great Depression gradually gave way to an uncomfortable stability.  The anxieties of losing jobs and homes subsided but yielded to the frustration of always remaining a step or two behind prosperity.  While job prospects slowly improved, wages did not. Business did not boom as is normally the case within a few quarters of a recovery, and the cost of education and health care stole what little ground most Americans thought they were making.  Politics was at work in ways with which many were pleased, but many more were not.  If that were not the case, then Donald Trump probably would not be the 45th President of the United States.

Within hours of Donald Trump’s victory, U.S. markets began to anticipate, for the first time since the financial crisis, an escape hatch out of financial repression and regulatory oppression.  As shown below, an element of economic and financial optimism that had been missing since at least 2008 began to re-emerge.

Data Courtesy: Bloomberg

What the Federal Reserve (Fed) struggled to manufacture in eight years of extraordinary monetary policy actions, the election of Donald Trump accomplished quite literally overnight. Expectations for a dramatic change in public policy under a new administration radically improved sentiment. Whether or not these changes are durable will depend upon the economy’s ability to match expectations.

Often Wrong, Never in Doubt

The institutional economists searching for a coherent outlook for 2017 are now faced with a fresh task. President Trump and his cabinet represent a significant departure from what has come to be known as “business-as-usual” Washington politics over the past 25 years.  Furthermore, it has been 89 years since Republicans held control of the White House as well as both the House of Representatives and the Senate. The confluence of these factors suggests that the outlook for 2017 – policy, the economy, markets, geopolitical risks – are highly uncertain.  Despite what appears to be an inflection point of radical change, most of which remains unknown, the consensus opinion of professional economists and markets, in general, are well-aligned, optimistic and seemingly convinced about how the economy and markets will evolve throughout the year.  The consensus forecast based upon an assessment of economic projections from major financial institutions appears to be the result of a Ph.D. echo chamber, not rigorous independent analysis.

Economic Outlook – Consensus Summary

After a thorough review of several major financial institutions’ economic outlooks for 2017 and market implied indicators for the year, below is an overview of what 720 Global deems to be the current consensus outlook for 2017.

  • The consensus is optimistic about economic growth for the coming year with expectations for real GDP growth in the 2.0-2.5% range
  • Recession risks will remain benign
  • The labor market is now at or near full employment
  • Wage growth is expected to increase to the 3.0-3.5% level as is customary for the economy at full employment
  • Inflation is expected to reach and exceed the Fed’s 2.0% target level
  • The Fed is expected to raise the Federal Funds rate in 25 basis point increments two or three times in 2017
  • The Fed will maintain the existing size of its balance sheet
  • Some form of fiscal stimulus will occur by the second half of the year
  • Fiscal stimulus is expected to be modest and unlikely to have a big impact on fiscal deficits
  • Tax reform will occur by the second half of the year and is viewed as highly supportive of corporate profits
  • Regulatory reform will begin to take shape in the first half of the year
  • Trade will be affected by some form of border tax adjustment, the economic impact of which is expected to be low
  • The combination of fiscal stimulus, tax reform, and regulatory reform in conjunction with an economy that is growing above trend and at full employment easily offsets Fed rate hikes supporting the optimistic outlook for economic growth

Despite the low probability of accuracy, the consensus outlook for 2017 is the starting point from which a discussion should begin because it is reflective of what markets and investors expect to transpire. Markets are pricing to this set of outcomes for the year.

Deviations

Having established a consensus baseline, further attention is then paid to those areas where the consensus may indeed be wrong. Will inflation finally exceed the 2.0% level as expected? Will growth for the year end in the range of 2.0-2.5%? Can the new administration negotiate a fiscal stimulus package this year? These and many others are important questions that will dictate the strength of the U.S. dollar, the level of interest rates and the ability of equity markets to sustain current valuations.

If economic growth for the year is stronger than current projections and inflation is higher than forecast, then the Fed will appear to be behind the curve in hiking interest rates. In this circumstance, the Fed may begin to telegraph more than three rate hikes for the current year and a higher trajectory for rates in 2018. The interest rate markets will likely front run growth expectations and push interest rates higher. Given that investors have so little coupon income to protect them from price changes, such a move could occur in a disorderly manner, which will tighten financial conditions and choke off economic growth.

If, on the other hand, economic growth for the year falters and continues the recent string of disappointing, sub-2.0% readings, then fears of recession, and likely an abrupt change in confidence, will re-emerge.

This exercise undertaken each year by economists is akin to a meteorologist’s efforts to predict the weather several weeks in advance.  The convergence of high and low-pressure systems will produce a well-defined outcome, but there is no way to ascertain weeks or even days in advance that those air masses will converge at a precise time and location, or that they will converge at all.  It does in fact, as they say, very much depend on the “whether.”  Whether consumers borrow and spend more, whether companies hire and pay more or even whether or not confidence in a new administration promising a variety of pro-growth policies can fulfill those in some form.

The Lowest Common Denominator

Interest rates have already risen in anticipation of the consensus view coming to fruition.  Although higher interest rates today are reflective of an optimistic outlook for growth and inflation, the economy has become dependent upon low rates. Everything from housing and auto sales to corporate buybacks and equity valuations are highly dependent upon an environment of persistently low interest rates.  So, when the consensus overview expects higher interest rates as a result of higher wage growth and inflation, it is difficult to reconcile those expectations with the consensus path for economic growth.

Investors and markets continue to give the hoped-for outcome the benefit of the doubt, but that outcome seems quite inconsistent with economic reality. That outcome is that policy will promote growth, growth will advance inflation and interest rates must therefore rise.  The problem for the U.S. economy is that the large overhang of debt is the lowest common denominator.  The economy is a slave to the master of debt, which must be serviced and repaid. The debt problem is largely the result of 35 years of falling interest rates and the undisciplined habits and muscle memory that goes with such a dominating streak.  Marry that dynamic with the fact that this ultra-low interest rate regime itself has been in place for a full eight years, and the economy seems conditioned for an allergic reaction to rising rates.

Episodes of rising interest rates since the 1980’s, although short-lived, always brought about some form of financial distress. This time will likely be no different because the Fed’s zero-interest rate policy and quantitative easing have sealed the total dependency of the economy on consumption and debt growth.  Regaining the discipline of a healthy, organic economic system would mean both a rejection of policies used over the last 30 years and intense public sacrifice.

Summary

Given the altar at which current day politicians’ worship – that of power, influence, and self-promotion – it seems unlikely that this new Congress and President are inclined to make the difficult choices that might ultimately set the U.S. economy back on a path of healthy, self-sustaining growth.  Rather, debt and deficits will grow, and the enthusiasm around overly-optimistic economic forecasts and temporal improvements in economic output will fade as has been the case in so many years past.  Although a new political regime is in store and it brings hope for a new path forward, the echo chamber reinforcing bad policy, fiscal and monetary, seems likely to persist.

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Looney's picture

 

If money is created out of thin air, why not skip the PAPER gimmick and use AIR as the medium of exchange?

BTW… Fort Knox has been storing AIR for a long time. I think?  ;-)

Looney

Jubal Early's picture

(((Michael Lebowitz))) 

Funny how Jews can never name the Jew. Most  (((Economists))) are selected for positions at central banks because of their tribe.  Period.  They are never right because they don't have to be.  They were selected to keep makeing the tribe richer until they own everything as is describer in the Torah, Talmud, Protocols and in the international Jew conference in Basel in 1903.

PoasterToaster's picture
PoasterToaster (not verified) Mar 22, 2017 1:58 PM

What the fuck is an Economist anyway?

barysenter's picture

recent subclass of astrologers

A. Boaty's picture

An economist refuses to sell his children because he can get a higher price later.

SallySnyd's picture

Here is an article that explains why the Federal Reserve will find it increasingly difficult to prod the economy back to life during the next recession:

 

http://viableopposition.blogspot.ca/2017/03/federal-funds-rate-no-room-to-manuvre.html

 

The Fed’s lack of maneuverability could result in a European-style negative interest rate policy.

P Rankmug's picture

Fed funds rate hikes are a market head fake.  It's a new monetary environment.

http://manonthemargin.com/fed-rate-hikes-ii/

bankbob's picture

Economics is the Science of Predicting the Past.

 

Econ theories are only as good as how they explain what has already happened.  They don't predict the future. Just the past.

Phillyguy's picture

In 2008, US financial markets experienced the largest collapse since the Great Depression- a direct consequence of decades of tax cuts for the wealthy, job out-sourcing, financial deregulation and $ multi-trillion wars in Iraq and Afghanistan. Since that time, Wall St has been sustained by a circa $4 trillion infusion of ultra-cheap money from the US FED (begun by Bush II, continued by Obama and Trump) for stock buybacks and MA deals (in the words of David Stockman an “orgy” of corporate debt). As regular readers of ZH are well aware, despite this FED largess, none of the structural problems giving rise to the 2008 financial crash have been resolved but rather, the FEDs actions have completely distorted our economy. Exhibit A being the recent sharp rise in share prices, while underlying business activity is slow- Caterpillar sales have declined for 50 consecutive months (Link: www.zerohedge.com/news/2017-02-17/caterpillar-records-50-consecutive-mon...) yet CAT shares are currently a lofty $92.

The precarious economic state for the average working person is reflected in the fact that the majority of Americans have little or no savings and thus, are one expensive car repair or medical emergency away from financial disaster- not being able to afford rent, buy food for their family, etc. (See: www.usatoday.com/story/money/personalfinance/2016/10/09/savings-study/91...). The Trump/Republican budget will only intensify this process, with cuts to programs, including health care which directly benefit poor families. Bottom line- the average American working person is facing a very grim economic future.

Chippewa Partners's picture

Phillyguy.   It's America.  Trade what is in front of you.  If you are any good you will make a bundle.  The meek don't want it anyway.   

Or just move out of Philly for another perspective.   Detroit, Baltimore, Shreveport come to mind.

 

 

whatisthat's picture

I would observe institutional economists have no credibility for their statements or predictions about the corrupt manipulated markets and commodities.

Macavity's picture

Commodities are stupid...let anyone insert themselves as a synthetic middle man--take from both sides, push suppliers' prices down, jack up buyers' prices.  And that's why the aluminium in a can of coke costs 10p instead of 2p.  Let's let everybody play in all markets all the time!!!  Yippee!

Batman11's picture
The Echo Chamber Of Elite Economists

 

2008 "How did that happen"

Pay attention arseholes.

This is the build up to 2008 that can be seen in the money supply (money = debt):

http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg

Everything is reflected in the money supply.

The money supply is flat in the recession of the early 1990s.

Then it really starts to take off as the dot.com boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands (money = debt).

The theory, which relies on understanding money and debt.

Irving Fisher produced the theory of debt deflation in the 1930s.

Hyman Minsky carried on with his work and came up with the “Financial instability Hypothesis” in 1974.

Steve Keen carried on with their work and spotted 2008 coming in 2005.

You can see what Steve Keen saw in the graph above, it’s impossible to miss when you know what you are looking for.

The hidden secret of money.

Money = Debt

Money is created from loans and destroyed by the repayment of those loans.

https://goldsilver.com/hidden-secrets/episode-4/ 

From the BoE if you don’t believe it:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

If you paid off all the debt there would be no money.

Money and debt are opposite side of the same coin, matter and anti-matter.

The money supply reflects debt/credit bubbles.

Batman11's picture

As our elite neoclassical economists don't understand money or debt they don't know the problem with neo-liberalism.

Can neo-liberalism survive higher interest rates?

Debt has been used to paper over all the cracks, debt based consumption and deficit nations running on debt.

The new debt of housing booms has created money that has flooded into economies giving false booms across the West, which are little more than the money creation of new debt.

Hardly any of that debt has gone into productive investment as bankers have been allowed to follow their short termist instincts and lend into real estate and other financial speculation.

As debt repayments over-take new debt, money gets sucked out of the economy and debt deflation beckons.

Neo-liberalism only worked as long as more and more new debt could be added.

The tide is going out and we will see who has got their trunks on.

The previous Keynesian capitalism re-cycled the surplus from the rich to the poor on the personal and national level to provide a sustainable system, neo-liberalism used debt to maintain consumption which was never sustainable.

When interest rates rise, neo-liberalism breaks.

Payday loan anyone?

 

Batman11's picture

“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.

Idiot.

2008 - "How did that happen?"

It's just way over your head mate, you need to understand money and debt.

Just like those clowns Bernanke and Greenspan.

"What do these rising money supply figures mean anyway?"

Hopeless.


Macavity's picture

Mostly the same posts as always, but as always right on the...money = credit. Do you think that will be apparent next crisis? With QE? TPTB are generally good at obfuscating data for obvious systems.

Batman11's picture

The world is saturated in debt that hasn't gone into productive lending to business and industry but to maintain consumption and blow asset bubbles, mainly real estate globally.

What can possibly go right?

Bankers even know what they are supposed to do.

We need to be bailed out to lend into business and industry.

They just don't do it, 80% of lending goes into non-productive lending (Michael Hudson US figure).

Lending into business and industry generates the money to make the repayments, but they haven't done that.

It's all money borrowed from an impoverished future.

Add derivatives to the mix and there should be one hell of a bonfire of the vanities.

If those at the top are as ignorant as they appear, they won't have a clue on how to get out of it.

 

 

 

 

Macavity's picture

Govt, corporate and personal household debt are funny things in what they monetise, what they buy, what they forfeit, and later what happens where they've gone. 

It seems epically stupid to me that economics is NOT the study of the flows of cash, ownership, debt, power, people, etc.  But if it were, I guess we'd be studying the world as it actually is with the goal of finding the truth.

Do you think Krugman, Rogoff et al are actually clueless?  I've been on a voygag of discovery for about a year now, and I reckon I've got a decent understanding of most components of macro/micro/national/international economics.  Do you reckon their goals are so fucked that they simply can't see other stakeholders' perspectives?

Sledge-hammer's picture
Sledge-hammer (not verified) Mar 22, 2017 11:21 PM

What?  Do they mean these echoes:  (((economist)))

whosyerdaddy's picture

No, not Milton Friedman, short economists.