The One Topic No One Is Discussing

Earlier, Deutsche Bank's iconoclast Jim Reid dared to point out the painfully obvious: that something has drastically changed since the Great Financial Crisis (what that "something" is, is clear to all those whose year end bonus does is not contingent on never pointing out the printerphant in the room). This time around, instead of looking back, he looks forward, to the year 2014, and brings up the two questions nobody dares to ask: i) what happens if 2014 is the year when the recession can no longer be delayed, and ii) how will the Fed, already having doubled down on every last "bullet" in its arsenal, use monetary policy to provide a burst of growth when even $85 billion in flow per month is no longer enough...

From Deutsche Bank's Jim Reid

The curveball for 2014 – A US recession

One topic no-one is really discussing is a US recession in 2014. We should start to at least consider the risk given the maturity of this cycle. By the end of 2013 this expansion will be 54 months old which is longer than the average of 39 months (median 30) since data started to be compiled on US business cycles in 1854. The average in the 100 years since the Fed was formed in 1913 is 50 months (median 42). This cycle is now the seventh-longest of the 34 cycles since 1854. Economists will explain that recessions don’t die of old age but because of imbalances that they might argue are not yet present. However consensus never forecasts a recession in advance so one has to find other ways to help us identify the end of the cycle. Across most other regions, business cycles have shortened post the GFC with many economies experiencing a dip into negative territory again sometime between 2011 and 2013 after the recovery in 2009 and 2010. A lack of policy flexibility (fiscal and monetary) post crisis is our main explanation. The US has just about escaped this due to extraordinary monetary and fiscal stimulus. However with both likely on the retreat at the same time in 2014 it’s prudent to acknowledge the already mature length of this cycle.

So the most obvious driver of financial markets in 2014 does seem likely to be how the Fed, the global economy and the market manage to handle the question of the QE taper. Whether the ECB need to implement negative deposit rates or introduce QE will also be a big driver. However experience teaches us that it’s not usually the obvious theme that ends up dominating in the following 12 months.