Predicting the Short-Term Trend

Back in 2008 when it looked like Obama would be president and the economy languished in recession, I predicted that his election would indicate a bull market. The suggestion met with much disagreement from short-term analysts who were expecting the deflationary trend to be like all the others but with an Obama adminstration worsening the trend.

That was wrong. The bull market occured with a worsening deflationary trend because the money was there to support it and the Obama administration added to the money available to drive the bull market to its current level.

Probable deviation of the short-term cycle was indicated by the unprecedented amount of money accumulated into the top income class. This meant that the Obama administration was likely to add quick liquidity in an unprecedented amount (a gamma-risk distribution). The result was to support the contradiction of no purchasing power and too big to fail (the classical contradiction of the declining rate of profit caused by accumulation of the capital rather than a competitive disinflationary and distributional pressure on profits).

The support for equities is a false positive, however. The gamma-risk distribution has been focused mainly to manage the systemic risk, leaving the fundamental risk to continue accumulating with continued support for the accumulation phase of the business cycle.

An accumulating lack of purchasing power, of income consolidation, supports the deflationary trend. Stimulus funds have been largely captured by firms with earnings power; the funds did not trickle down, but were earned by firms big enough to survive this deeper-than-usual recessionary phase of the business cycle. The fundamental, alpha risk of supporting the deflationary trend, however, will eventually present as a declining rate of profit, precipitating another crash led by commercial real estate defaults which result from a lack of retail purchasing power (continued accumulation and consolidation of income). The pressure will then be overwhelming for a gamma-risk distribution targeted at the fundamentals, signaling a secular recovery.