Yellen: “Our Brand Is Crisis”

With the Federal Reserve now indicating they are “really serious” about “normalizing” interest rates, read “tightening” monetary policy, there have come numerous articles, and analysis, discussing the impact on asset prices. The general thesis is based on averages of historical tendencies suggesting equity bull markets never die simply of old age. They do, however, die of excessive Fed monetary restraint. As previously noted by David Rosenberg:

“In the past six decades, the average length of time from the first tightening to the end of the business cycle is 44 months; the median is 35 months; and the lag from the initial rate hike to the end of the bull equity market is 38 months for the average, 40 months for the media.”

So, that analysis would suggest that since the Fed hiked in December of 2015, there is still at least two years left to the current business cycle. Right?

Maybe not.

First, averages and medians are great for general analysis but obfuscate the variables of individual cycles. To be sure the last three business cycles (80’s, 90’s and 2000) were extremely long and supported by a massive shift in financial engineering and credit leveraging cycle. The post-Depression recovery and WWII drove the long economic expansion in the 40’s, and the “space race” supported the 60’s.  You can see the length of the economic recoveries in the chart below. I have also shown you the subsequent percentage market decline when they ended.

Currently, employment and wage growth is extremely weak, 1-in-4 Americans are on Government subsidies, and the majority of American’s living paycheck-to-paycheck. This is why Central Banks, globally, are aggressively monetizing debt in order to keep growth from stalling out.

If the Fed continues to hike rates, and the next recession doesn’t occur for another two years as David suggests, this would be the single longest economic expansion in history based on the weakest economic fundamentals.

Secondly, the above analysis misses the level of economic growth at the beginning of interest rate hiking campaign. The Federal Reserve uses monetary policy tools to slow economic growth and ease inflationary pressures by tightening monetary supply. For the last six years, the Federal Reserve has flooded the financial system to boost asset prices in hopes of spurring economic growth and inflation. Outside of inflated asset prices, there is little evidence of real economic growth as witnessed by an average annual GDP growth rate of just 1.3% since 2008, which by the way is the lowest in history since…well, ever.