James Grant in WSJ 9/19

[MichaelB]

A James Grant essay in the WSJ today is worth reading. He is an author and bond adviser and has been bearish for years - yet is tone now is uncharacteristically optimistic.

Read the article here From Bear to Bull: James Grant on Recession and Recovery - WSJ.com

Quote:

Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

[audreyh1]

Wow - that is indeed uncharacteristically cheery for Grant!

ECRI keeps predicting zippier and zippier numbers for the recovery too!

I believe one reason the downturn was so sharp (well, in addition to the extraordinary market shorting that drove the averages down) was that companies turned on a dime, cut way back, laid off probably too many people, because they expected the worst (probably due as much to the extreme drops in the market averages as to concerns over availability of future credit to fund operations). As a consequence, the surviving companies are super lean and it takes very little upturn in demand to generate large profits.

Audrey

[wolfbay]

If Grant is right and we have a sharp recovery what happens next will be interesting.Can the fed act in a timely manner to restrict liquidity and raise rates(risking a down turn) or are we headed for another bubble and more inflation? If history is any guide they'll wait to long and put off the day of reckoning as long as possible.Look out when that bubble pops.

[ziggy29]

Quote:

Originally Posted by wolfbay If Grant is right and we have a sharp recovery what happens next will be interesting.Can the fed act in a timely manner to restrict liquidity and raise rates(risking a down turn) or are we headed for another bubble and more inflation? If history is any guide they'll wait to long and put off the day of reckoning as long as possible.Look out when that bubble pops.

Historically (at least during and since the Greenspan era), the Fed has been (a) too late to start reacting to changing conditions and (b) tending to "overshoot" when it finally does start easing and tightening.