“Pre-Recession Levels” – It’s All in the Definition

There’s been a lot of sentiment that’s pointing to an upcoming recession. The pundits count the rather sharp down ticks in a number of markets as proof. There’s a lot that can be pointed to as the impetus for these movements. China’s over-production is one, the under performance of the Chinese market could be another. There’s the explosion of oil on the market that’s either helping or hurting. There is too much easy credit to be had in the US or too little easy credit available in the US. The Middle East is blowing up and then there’s always what whatever is going on (or not going on) in Europe. Playing games of permutations and combinations with these can get you any culprit you’d like.

My thinking is that all of these recession problems are not from whatever sort of immediate geo/financial/political issue we’re seeing currently but it’s more from simply how one uses the term “…pre-recession levels”.

For example, if you use the term as meaning “…pre-2007 levels” your graph of the global price of industrial metals from the St. Louis Fed looks like this:

Global Industrial Materials Index_SM.JPG

But if you were concerned instead with not just the last 10 years but the last 20 years, your graph would look like this:

Global Industrial Materials Index.JPG

The difference from considering ten years to 20 or more years makes a big difference in how things look, huh?

What’s the problem with using this term as meaning from 2005-ish on? The problem is for nearly everyone using it, the graph looks like a typical recession/correction graph and gives perhaps false hope that the bubble of 2003-7 could be attainable again, and quickly at that. If one has a look at many of the easily available indicators including this minerals index, they show a similar rather swift uptick starting around 2003 to a level that’s at least twice the amount of the last ten years. I’m no economist, but I’m thinking the speed at which that jump took place and the distance it covered would indicate that the period between 2005 and 2007 – and by extension, the first part of 2015 – would be an unsustainable high, but certainly not a new normal.

If this is true (and only time will tell) then what we’re probably going to see is a return to the relative band of production and pricing seen prior to 2003. That would make this drop not a recession, but a correction to the band that things were moving in prior to 2003. We would return to not a ‘new normal’ but after the excess is driven out of the markets, we would fall back to the old normal that we had been in all the way back to the disco era.

The culprits for this jump section are probably the coming online of China as an industrial power and ridiculous credit availability in the US. One could be argued as a sort of false demand as it was created mostly by the Chinese government synthetically stimulating the market and more importantly, convincing the rest of the world into believing that this focus of stimulation would go on forever (a new normal). China doesn’t need to continue building that area of their economy and therefore we have reached the end of “forever”.

If things must have to return to pre-2003 levels. The world will have to right-size not just have to wait out a recession.

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