Where are we in the cycle?
In many ways, that’s the only question that matters for market participants, but thanks in no small part to the post-crisis monetary policy regime, it’s been nearly impossible to answer for years.
Round after round of central bank asset purchases and the concurrent suppression of risk premia killed price discovery, turning some corners of the financial universe into the Walking Dead in the process. The cycle has been extended and re-extended, as misallocated capital is never purged. Given central banks’ express desire to generate inflation, an ironic side effect of their policies has been a disinflationary “zombie” dynamic.
Given the above, there have been any number of false dawns for those looking to call dusk on the expansion.
It’s also possible that the conversation no longer makes much sense – or at least not vis-à-vis developed economies. “My thinking is that this is probably the end of [the] traditional business cycle – no more big and ‘frequent’ amplitudes, but more like undulations around a flat line”, one strategist we spoke to in March suggested. It could be that there are no more recessions in the traditional sense. Just more or less of stagnation, this person said.
Of course, recession fears are running high in the US thanks in no small part to the ongoing trade war. The data has been frustratingly ambiguous. The services economy and the consumer seem healthy (top pane below).
But US manufacturing contracted in August, the labor market is decelerating and consumer sentiment crashed to a Trump-era low before blipping back higher in the preliminary read on September University of Michigan sentiment.
Unfortunately, all of the above leaves one with little to go on. Market prices are hopelessly distorted and the macro data is inconclusive.
Well, for what it’s worth, BNP is out with a study that imputes a cycle clock from asset prices.
“The conventional approach is to gather and sort out economic variables to determine the phase of the cycle, but what if data could be modeled to infer the phase of the cycles from market prices?”, the bank asks, in a note dated September 18.
BNP’s model “uses the performance of select financial assets to extract the implied stage of the economic cycle” and the bank is keen to emphasize that “unlike the standard approach to economic cycles, we have only used asset prices to measure the stage, pace and duration (actual and projected) of the current cycle for each country”.
Skipping straight to what readers doubtlessly want to know, the model shows the US is “less than a month” from a “bottoming out” phase.
“Our current value indicates that the US is in a late stage cycle, where the peak of the current cycle was reached during the second half of 2018”, the bank says.
They get a bit more granular with the analysis, extracting a “monitor” and a table with historical data.
“The US is in the end of its late stage cycle, currently at 85.8% of its duration”, the bank remarks, adding that their results indicate that the US economy “may enter a bottom-out cycle in less than a month, that should last approximately eight months, according to the historical average”.
BNP also compares what the market price model is saying versus what the economic data conveys. Unfortunately for the US, both the macroeconomic model and the market-based index show the end is probably nigh.
Amusingly, BNP observes that while “economic data still show China as going through a deceleration cycle, markets are ahead of the data, suggesting that investors see recent stabilization as a turning point, placing China in an early-cycle”.