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Attention All 'V' People

Jeffrey Snider profile picture
Jeffrey Snider


  • How bad is it? If we extrapolate the NABE's estimates out further into the future, we get real GDP back to even 13 quarters after it had reached its prior peak in Q4 2019.
  • In other words, the current base case is as long and much deeper than 2008-09.
  • No, far more important: what happens when this disaster begins to dawn on everyone right now expecting way, way beyond the best case?

Around the same time Lehman Brothers and AIG became headline news in the middle of September 2008, none of the mainstream econometric models thought it was possible for the US economy to suffer so severe a shock that it would induce monetary policymakers to unleash ZIRP. Worse, the models all predicted that it would be impossible for anything to force the Fed down to zero and keep the central bank there for two years.

The zero lower bound (ZLB) is a constant bogeyman for Economists, denoting not just difficulties in nominal interest rate measures surmounting it but more so the level of economic damage (and the implied dereliction of duty) it would take for this to happen.

While Ben Bernanke was crafting the narrative of his heroism and courage, hardly anyone dared to ask why he hadn't seen GFC1 coming. The very notion of a global monetary panic had been heartily dismissed, especially with this particular guy at the helm (who had made his academic reputation as some kind of Great Depression scholar; obviously not the right kind). Even after the crisis began showing signs, he most famously ignored them telling everyone subprime was contained.

In the (very) few cases when someone did openly wonder, his dissembling answer would always depend mostly upon the vague notion of "complexity." I'll supply one such example here gleaned from an interview then-Chairman Bernanke gave just two weeks before being forced down to the zero lower bound in December 2008:

I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.

But, damn it, that was your job!

He like every other Economist had fallen into a trap, one they had

This article was written by

Jeffrey Snider profile picture
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process. In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research. Currently, Jeff is published nationally at RealClearMarkets, ZeroHedge, Minyanville and Yahoo!Finance. Jeff holds a FINRA Series 65 Investment Advisor License.

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Comments (58)

turboelec profile picture
Timely article that captures the old joke about economists that fall down a well will always assume a ladder is handy.

We will see how the economist's optimism holds ups in the next few days. Mnuchin and Powell will assemble a star-studded plunge protection team that will certainly put a stop to any decline in financial assets. The retail investors must not lose faith in QE, zero rates and easy credit. Were that to happen, then someone might realize that growth estimates have been cheerily projected in a most unrealistic halcyon manner.

take care
TheLongerView profile picture
Excellent article. There is a deep and well-developed literature on the perils of economic forecasts. It is very easy to go back and look at expert predictions in many areas, finance certainly being one of them, and notice how awful they are. However, nobody gets paid the big bucks, whether they are a financial analyst or the Fed Chair, to admit they don't know diddly about what lies ahead. What is important is the perception. Every day in the Wall St Journal, one can read a very convincing explanation by all sorts of experts as to why the market went up or down the day before. Hindsight is always perfect. Meanwhile we have 100 year bonds being issued recently by Argentina, Tesla over $1000 a share, and Nikola selling at a higher market value than Ford, even though they are nowhere near building their first vehicle. We are also seeing for the umpteenth time in history where certain countries are trying to borrow their way to prosperity. It hasn't ever worked despite many dozens of attempts for over a thousand years, and it is not going to work now.
Jeff: Here we are on June 11 and thank goodness the Waterpark is open--or oops, this isn't the waterslide? Great article (as always) and prescient timing.
Maxwells Demon profile picture
@Jeffrey Snider @Robert P. Balan There is an old saying on Wall Street, "They don't ring a bell at the top." Back in the early 1980's I was selling interest rate risk hedging strategies to banks and the bond market which had been tanking hard for years staged a couple of months rally. I came into work and open the WSJ to find a two page ad in the center by Merrill Lynch that was headlined "Bonds, the dawn of a new bull market!" I kept charts of bond futures in those (done by hand as it was pre computer) and on that day bond futures opened at a new recovery high, and the finished higher but on the lows of the day. The next day they gapped lower, it was well over a year before the bond market even returned to that recovery high making new all time lows in the interim. I kept that "bell" in my desk for years as a reminder that the old saying was wrong.
I'm reading the increasingly arrogant and bullish comments both here and in other threads and today the stock market is putting in a 4 day island reversal top after a long recovery run . And sure enough, there are articles calling this the beginning of a new bull market in stocks.
Been at this game for over 40 years including as the DIrector of market risk management for a Major bracket Wall Street firm, studied all the important technical systems (ultimately, their true value is the discipline they enforce if you actually follow them) and I have two pieces of "wisdom" to impart here:
1. History doesn't repeat, but it rhymes.
2. This sure looks like 1980/81 - as Yogi purportedly said, "Deja vu all over again."
"The zero lower bound (ZLB) is a constant bogeyman for Economists..."

Perhaps in our infinite wisdom we could create a ZLB Vaccine to save us all.
bengalesq profile picture
I try to keep up. I do.
".....these academics only speak gibberish because they long ago gave up on trying to understand the real economy in pursuit of quantifying unicorns and windmills."
The tone is certainly worth the read all by itself.
Love to know when. When will the dawning come home to roost?
Take heed old Wall Street wisdom. Bulls make money, Bears make money, Pigs get slaughtered. Methinks there be a lot of piggies in the market now days. Watch out little piggies.
Soon after WWII Winston Churchill once told an interviewer that when the UK was a colonial power it ran a monstrous capital account deficit for almost 300 years. When asked why no one stopped it, he replied: "We didn't know."
Bears have been writing many similar articles in the last months, yet the market kept rallying.
The Fed and Trump will do everything to keep the market green, at least until the elections...
Salmo trutta profile picture
re: "Not only ZLB, but ZLB at two years and counting."

Bernanke doesn't know a debit from a credit. Bernanke initially claimed that the GFC was a capital crunch (hence TARP and the EESA of 2008, to “stabilize bank capital ratios”), just as he claimed that the Savings and Loan Association Crisis was. The 1980’s and 1990’s S&L crisis was created by the DIDMCA of March 31st 1980 (which turned the nonbanks into banks). The GFC was also created by the DIDMCA (by new money substitutes, new savings’ products, as predicted in May 1980). Greenspan’s put just accelerated the time frame - by dropping legal reserves by 40 percent.

The 1966 Savings and Loan Association crisis, which was precipitated in Dec. 1965 was dubbed the first “credit crunch”. It was due to the bust of disintermediation, an outflow of funds or negative cash flow (from just the nonbanks, who were backstopped by the FSLIC). The commercial banks haven’t experienced disintermediation since 1933 (as they have been backstopped by the FED ever since).

Raising interest ceilings on time deposits, as the Board did on five successive occasions beginning January 1, 1957 and culminating in the disastrous increase to 5 ½ per cent on December 6, 1965, simply allowed the banks to increase their expenses with no concomitant increase in income. It was the first increase that the thrifts couldn’t competitively meet, in their fixed, borrow short to lend longer, savings-investment paradigm.

Bernanke knew that the shadow banks and investment banks (truistic financial intermediaries) were rolling over a large percentage of their wholesale funding in very short-term financial instruments, in short-term debt collateral. However, just as during Dec. 6, 1965, Bernanke introduced the payment of interest on interbank demand deposits (creating an interest rate differential in favor of the commercial banks, the opposite of Reg. Q ceilings which created an interest rate differential in favor of the thrifts), which effectively inverted the entire money market, causing the nonbanks balance sheets to shrink by $6.2 trillion (causing a credit crunch). I.e., Ben Bernanke destroyed the nonbanks, exacerbating the duration of the GFC.

It was an incredibly stupid move in that the NBFIs are not in competition with the DFIs. The NBFIs, e.g., hedge funds, insurance companies, pension funds and shadow banks are the DFI’s (regulated member banks), customers. The DFIs process all of the NBFI’s underlying payment transactions, both clearings, and settlements.

Savings flowing through the NBFIs never leaves the payment’s system as anyone who has applied double-entry bookkeeping on a national scale should already know. By 2011 the remuneration of IBDDs exceeded all short-term funding for clear up to two years out. Ergo, Ben Bernanke bankrupt America.
I’m pretty sure Bernanke knows the difference between a debit and a credit. But I’m not sure he alone bankrupted America. As you mentioned, the DIDMCA changed the ballgame.
Why? As usual, Congress, who make the laws, are heavily influenced by powerful interests who line their pockets, looking to make profits for themselves.
The S&L crisis was caused mostly by bad actors.
TARP - Another program to address fraud when dubious subprime loans were integrated into bonds, then those were approved by rating agencies who were paid by the bond creators to not pay any attention. Some say that was fraudulent. But nobody was ever prosecuted for any of their actions.

Sherlock Holmes couldn’t stop all crime even with his superior powers of deduction. Neither can Fed chiefs while playing whack-a-mole with scammers.
Salmo trutta profile picture
@deeminimus re: "know"

That's impossible. Savings flowing through the nonbanks never leaves the payment's system as anyone who has applied double-entry bookkeeping on a national scale should already know. Savings flowing through the nonbanks increases the supply of loan funds, but not the supply of money (a velocity relationship).

The NBFIs, e.g., shadow banks, are not in competition with the DFIs. The NBFIs are the DFI's customers.

WSJ: "In a letter of March 15, 1981, Willis Alexander of the American Bankers Association claims that: 'Depository Institutions have lost an estimated $100b in potential consumer deposits alone to the unregulated money market mutual funds.' As any unbiased banker should know, all the money taken in by the money funds goes right back into the banks, in the form of CDs or bankers acceptances or other money market instruments; there is no net loss of deposits to the banking system. Complete deregulation of interest rates would simply allow a further escalation of rates by the banks, all of which compete against each other for the same total of deposits."

Written by Louis Stone whom the movie "Wall Street" was dedicated to - Vice President Shearson/American Express

Ben Bernanke should be doing time in Federal Prison. He repeated the mistakes of the Great Depression (which his Ph.D. dissertation was all about, i.e., "cumulative representation of one's entire educational experience").
Salmo trutta profile picture
This is how Bernanke destroyed America:

2006 jan ,,,,,,, 45496 ,,,,,,, 0.04
,,,,, feb ,,,,,,, 43084 ,,,,,,, 0.01
,,,,, mar ,,,,,,, 41242 ,,,,,,, -0.02
,,,,, apr ,,,,,,, 42920 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43648 ,,,,,,, -0.02
,,,,, jun ,,,,,,, 43278 ,,,,,,, -0.01
,,,,, jul ,,,,,,, 43328 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 41162 ,,,,,,, -0.06
,,,,, sep ,,,,,,, 40865 ,,,,,,, -0.08
,,,,, oct ,,,,,,, 40088 ,,,,,,, -0.08
,,,,, nov ,,,,,,, 40543 ,,,,,,, -0.06
,,,,, dec ,,,,,,, 41461 ,,,,,,, -0.07
2007 jan ,,,,,,, 43113 ,,,,,,, -0.11
,,,,, feb ,,,,,,, 41214 ,,,,,,, -0.09
,,,,, mar ,,,,,,, 39159 ,,,,,,, -0.11
,,,,, apr ,,,,,,, 41072 ,,,,,,, -0.09
,,,,, may ,,,,,,, 42699 ,,,,,,, -0.05
,,,,, jun ,,,,,,, 42034 ,,,,,,, -0.05
,,,,, jul ,,,,,,, 41164 ,,,,,,, -0.08
,,,,, aug ,,,,,,, 39906 ,,,,,,, -0.07
,,,,, sep ,,,,,,, 40460 ,,,,,,, -0.07
,,,,, oct ,,,,,,, 40161 ,,,,,,, -0.04
,,,,, nov ,,,,,,, 40331 ,,,,,,, -0.04
,,,,, dec ,,,,,,, 41048 ,,,,,,, -0.04
2008 jan ,,,,,,, 42398 ,,,,,,, -0.07
,,,,, feb ,,,,,,, 41070 ,,,,,,, -0.05
,,,,, mar ,,,,,,, 39731 ,,,,,,, -0.04
,,,,, apr ,,,,,,, 41642 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43062 ,,,,,,, -0.01
,,,,, jun ,,,,,,, 41616 ,,,,,,, -0.04
,,,,, jul ,,,,,,, 42083 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 42055 ,,,,,,, 0.02
,,,,, sep ,,,,,,, 42456 ,,,,,,, 0.04
,,,,, oct ,,,,,,, 46930 ,,,,,,, 0.17
,,,,, nov ,,,,,,, 50363 ,,,,,,, 0.24
,,,,, dec ,,,,,,, 53723 ,,,,,,, 0.30

Note: these monetary flows have been mathematical constants for > 100 years.
Thanks for the great article. I’m an Cath lab/ICU Rn who spent the last 3 months in Covidville making all sorts of OT. I truly feel for those that lost their jobs and hope for a quick recovery for you. You would think healthcare is a safe place to be but they just discontinued our 401K match, no raises, no bonus, and no more PTO. I’m far from an economist but I have no idea where this V theory is coming from. And many businesses are closing by me and most restaurants that I go to are not hiring their staff back. Running skeleton staff. So sad. Stay safe everyone.
@twoboilerfans - From what I read it sounds like healthcare is suffering Covid-19 fall in revenue fall due to everybody *BUT* Covid sufferers avoiding doctor's offices & hospitals like the plague right now in addition to many hospitals discouraging patients coming in except for absolute emergencies. All that income from elective surgeries and much more is gone for the time being.
Aquarama profile picture
I refuse to fly anywhere and I am not going to rent a hotel room for a long time.
While I agree with the premise of this article, I am torn between how massive the FEDs stimulus was/is and how the US might be the most attractive place for the world to invest in... have to keep reminding myself that the market is not rational and can remain irrational for .... decades?

I wouldn't be surprised if we test record highs prior to the election and then see some significant volatility after - like +/- 20% swings in either direction.
Chris Valley profile picture
Speaking as a person who still uses Washington Mutual checks.

Blaming Bernanke for not knowing the derivatives trades of AIG [etc, etc, etc].

Is the same as blaming Jerome Powerful for not knowing every time a bat flaps its wings in the night.

He's Batman. You put up the Bat Symbol. That's how it works.
If the Fed can’t see what is happening in the economy and if they are not responsible for consequences of their ignorance then why do we have a Fed?
Robert Falcone profile picture
If I recall correctly there was only one person working in the derivatives department at the SEC by the time it all exploded. Noone was monitoring those trades.
Chris Valley profile picture
That sounds like the job of Homer Simpson?
lol wut profile picture
I'm going to take the over on NABE's prediction. In the words of someone else, "Parabolic moves don't end sideways."
Algorithmic profile picture
@Jeffrey Snider I/M/H/O solid article. Now how do you invest from this?

The only winners from the March bottom were really the "work from home" technology names. I used this period to eliminate 2 of my MLP oils and ladder into $CSCO and $T.

All dividend payers for this retiree.
10 Jun. 2020
If there’s anything we learned from COVID-19 (many other examples) far out models and projections don’t mean anything... I just ignore them... no one knows what’s going to happen... but everyone pretends like they do... just keep investing in good companies and more times then not you’ll be fine
Salmo trutta profile picture
@MW185 re: "no one knows what's going to happen"

We knew the precise "Minskey Moment" of the GFC:
POSTED: Dec 13 2007 06:55 PM |
The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
10/1/2007,,,,,,,-0.47 * temporary bottom
11/1/2007,,,,,,, 0.14
12/1/2007,,,,,,, 0.44
01/1/2008,,,,,,, 0.59
02/1/2008,,,,,,, 0.45
03/1/2008,,,,,,, 0.06
04/1/2008,,,,,,, 0.04
05/1/2008,,,,,,, 0.09
06/1/2008,,,,,,, 0.20
07/1/2008,,,,,,, 0.32
08/1/2008,,,,,,, 0.15
09/1/2008,,,,,,, 0.00
10/1/2008,,,,,, -0.20 * possible recession
11/1/2008,,,,,, -0.10 * possible recession
12/1/2008,,,,,,, 0.10 * possible recession
RoC trajectory as predicted.
Milkweed profile picture
Reminds me of my favorite joke about economist and politicians taking credit for the economy:

"It's like some guy standing at the end of an airport runway jumping up and down taking credit for planes landing".

The "V" will in fact be a check mark in the short to mid term but we'll eventually fully recover and of course officials will take full credit.
Robert P. Balan profile picture
"No, far more important: what happens when this disaster begins to dawn on everyone right now expecting way, way beyond the best case? Those who are being led to believe this is all one big nothing, sporting no lingering after-effects. The risks of another leg in GFC2 are much, much higher because even hitting these forecasts would leave such a massive scar, a gigantic economic hole."

Why am I getting the impression that this is desperate cry from all the "L People" that have been left behind?
Because you confuse the fed bailout of the stock market with the current economic reality is why you think that.
Robert P. Balan profile picture
So when a hurricane pushes up oil prices, that does not matter? Looks like another L person left holding an empty bag.
Milkweed profile picture
"Why am I getting the impression that this is desperate cry from all the "L People" that have been left behind?"

You mean check mark people and it's because we are right. It AIN'T going back to the way it was before CoV.
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