Economic data usually provide a clearer view in retrospect than at the time the data points occurred. Partly that is simply due to the fact that many economic data series are not available for one to three months after their occurrence. Data must be obtained, cumulated, calculated, updated, revised and published, and this takes a lot of time for large series such as GDP (Gross Domestic Product), and others, in all its varieties and state local subsectors. Thus we are often looking at data series which are from one week old to three months old. Market data and some economic series--unemployment benefits claims-- are instantaneous to one week old. It is only when all data from three months ago and earlier are examined that we can get a clearer picture.
Market data that can give us early clues, as well as long term clues, include nominal (actual) and real (inflation-adjusted)interest rates and the prices of economically sensitive commodities.* Nominal and real interest rates fall when economic conditions are weaker and rise when economic conditions are stronger. Short term rates, such as the 91 day US T-Bill, are strongly influenced by but not set by the Federal Reserve. they also reflect current economic demand Longer term rates such as the 20-30 year US T-Bond rate largely reflect long term demand.
Three widely used commodities in most sectors of the economy are crude petroleum, copper, and aluminum. They are used in many consumer products from homes and autos to food packaging and pharmaceuticals. And of course they are primary industrial commodities for a wide range of products and services. http://www.martincapital.com/chart-pgs/Ch_comod.htm
Important Commodities demonstrates that copper and aluminum made their initial price tops in the second quarter of 2006, and cash copper never went higher although it made secondary tops in 2008. Copper is often called the commodity with a PhD. The copper top in 2006 was an early warning that economic expansion was or soon would be slowing.
Much of the discussion and analysis from then to today was on gold and crude petroleum oil which made lows in later 2006 and accelerated their climbs into early to mid 2008. Debate raged and still does on the causes for gold's and oil's amazing races: US dollar weakness, peak oil and gold world production exhaustion, or rampant speculation. Regardless of cause, the effect of gold and oil spikes was to add a burden to economic production and confirm the copper and aluminum tops of 2006.
CPI, CPI Core & PCE Core Deflator shows that twelve month rates of change for the various measures of CPI (Consumer Price Inflation) also topped from late 2005 to the third quarter of 2006, and only basic CPI made a modestly higher rate of change in the summer of 2008. http://www.martincapital.com/chart-pgs/Ch_infl2.htm
In my own work I correctly called the 2006 tops and corrections in commodities, and I anticipated but didn't "nail" the 2008 tops and "vacation from inflation". This was based largely on "Dr. Copper" and general commodity pricing and Kondratieff Long Wave analysis.
If we go back now and look at delayed economic data series, we see that many or most of them also put in rate of change tops in 2005 or 2006:
Personal Income & Spending http://www.martincapital.com/chart-pgs/Ch_peris.htm
Consumer Confidence (if we average the University of Michigan and Conference Board data.)http://www.martincapital.com/chart-pgs/Ch_conco.htm
Jobs & Employment http://www.martincapital.com/chart-pgs/Ch_jobs.htm
Initial Unemployment Claims Filed Weekly
http://www.martincapital.com/chart-pgs/Ch_unemp.htm
http://www.martincapital.com/chart-pgs/Ch_unemp.htm
Labor: Workweek
http://www.martincapital.com/chart-pgs/Ch_labwk.htm
http://www.martincapital.com/chart-pgs/Ch_labwk.htm
Industrial Activity http://www.martincapital.com/chart-pgs/Ch_indus.htm
Institute for Supply Management Indices
http://www.martincapital.com/chart-pgs/Ch_ism.htm
http://www.martincapital.com/chart-pgs/Ch_ism.htm
Sales Activity
http://www.martincapital.com/chart-pgs/Ch_sales.htm
http://www.martincapital.com/chart-pgs/Ch_sales.htm
Manufacturers' New Orders
http://www.martincapital.com/chart-pgs/Ch_mnord.htm
http://www.martincapital.com/chart-pgs/Ch_mnord.htm
Economic Growth
http://www.martincapital.com/chart-pgs/Ch_gdp.htm
http://www.martincapital.com/chart-pgs/Ch_gdp.htm
Inflation Measurements Done on a Quarterly Basis
http://www.martincapital.com/chart-pgs/Ch_inflq.htm
http://www.martincapital.com/chart-pgs/Ch_inflq.htm
Labor: Efficiency
http://www.martincapital.com/chart-pgs/Ch_labef.htm
http://www.martincapital.com/chart-pgs/Ch_labef.htm
Also note Martin Capital's Leading Economic Indicators at the bottom of this page http://www.martincapital.com/main/econ_cyc.htm
Despite all the added costs of rampant commodity price increases and the slowing of consumer demand, it took until 2008 to produce actual recession. This shows there was tremendous demand pressure driving the economy, not only in the third world but also in the first world of the Americas and Europe and East Asia.
So that is where we've been and where we're headed right now. How does the current financial melt down and credit crunch impact the economy and markets. Obviously we do not and cannot know with real certainty. If the credit markets truly freeze up, then an extremely severe recession will occur. My long term views are and have been that we are in an inflationary era of ~25 years following the disinflationary years of the late 1970's to 1999-2003. This long term alternation of about 25-30 years of inflation followed by 25-30 of disinflation is usually called the Kondratieff Long Wave of Economics, and I have written a lot about it at this blog.
An even longer economic era is that which is dictated by the predominant world political movement of the time. The predominant political regime sets the tone or "color values" for the economic long wave. The predominant regimes of the past 300 years were the Monarchial, Landed and Mercantilist Regime, up to the American and French Revolutions; then the Bourgeois, Reactionary and Tight Credit (gold standard) Regime from the defeat of Napoleon (1815; Council of Vienna) in Europe and of the U. K. in North America (War of 1812) up to Presidents Wilson and Franklin Roosevelt; and then the Social Democrat Easy Credit Regime (fiat currency, social spending and price inflation) since 1934.
Briefly, these two longer waves, the 50-60 year Kondratieff Wave and the Political Regime Wave, interact to make either the Kondratieff disinflationary half cycle more severe (Bourgeois Reactionary Tight Credit Regime) or make the inflationary half cycle (Social Democrat Easy Credit Regime) more severe. Thus in the 19th century under the tight credit regime up to 1934 the disinflationary periods of the Kondratieff Wave were severely deflationary, and since 1934 the inflationary periods of the Kondratieff Wave have been the most severe: 1950-1980 and 2003-recent present. The PPI chart from the late 18th century to 1996 makes this quite clear. For nearly 200 years PPI "traded" in a narrow band with frequent deeper corrections. After 1934 it is hard to discern even a slow down during recessions or entire Kondratieff disinflation, unless one does rate of change calculations. Since the point here is to talk about the very long term Political Regimes, I'll save the rate of change charts and discussion for another time.
Barring a change of the long term Political Regime, we will continue to have inflation as a preferred course of action and credit will flow freely. President Nixon said a long time ago that "we're all Keynesians now" and that has continued. Even under President Reagan, in association with Congressman Tip O'Neill, social spending and free credit flowed throughout the 1980's disinflationary slowdown, and credit bailouts predominated in the 1990's as well as now.
Could the current financial melt down lead to a Political and Credit Regime change world wide which would upset the Social Democrat Easy Credit apple cart and lead to a regime change which would reverse course and be less democratic, less socialist, and with tighter credit rules overall? I think that is the only event which would prevent or moderate inflation going forward. The central banks and governments of the developed, and developing, world are working and praying that doesn't happen, and historical odds favor them. It's not hard to imagine that a system could emerge somewhat similar to China's or Russia's: administered quasi-capitalism with tight dominant political class control of the economy and the people.
It took some years for the changes initiated by the American Revolution (1776) and French Revolution (1789) to result in the beginning of the Bourgeois Reactionary Tight Credit Regime (1813-1815). Likewise it a long time too from the founding of the US Federal Reserve System and Bank (1913) and the beginning of the Social Democrat Easy Credit Regime (1934). In both cases an inflationary run up completed and disinflation began before both regime changes were effectuated. In then absence of total disintegration of the current regime, my bets are on continued inflation after a "rest period" or "vacation from inflation" for the next six to twenty four months while it all gets sorted out.
*The charts in this post are from the Martin Capital Advisors website http://www.martincapital.com/index.html
Martin Capital makes the following statement regarding the data and charts: "Martin Capital Advisors, LLP is not responsible for the accuracy of the data contained in any of these charts or indicators. This information is provided for informational purposes only."
I am only providing URL links to Martin Capital which are available to the public on their own at their site. Regrettably, the post editor at my weblog is not reliably inserting URL's along with their hypertext titles, so I am posting the entire URL address art this time.
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