Bill Ackman Takes Lead In Redefining ‘Recession’
For months, I've suggested the only way for the US economy to avoid a recession is for analysts, economists and, importantly, the White House, to redefine the word.
By definition, Q1's contractionary GDP print raised the odds of a US recession. You need two consecutive quarters of negative growth using the BEA's preferred methodology, and absent a reason to unequivocally rule out a negative print in a subsequent quarter, one negative print materially increases the chances of a downturn.
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We’ve been told there’s a ton of leverage in the system — and unwinding it, necessary as that may be, is likely to have unforeseen consequences. I expect something pretty major will break before we get to Ackman’s 4%-5% on rates.
“The answer I believe is largely due to some misunderstanding about what a recession is”
The boldest type of claim to make about anything in financial markets is that the market got it wrong. Not that this never happens, but because often time is more likely to prove that person wrong.
Also, I feel like I’m missing something as I most likely do not understand economics as much as Ackman, but how is real GDP distorted due to high inflation? Doesn’t the fact that real GDP is an inflation-adjusted measure already take into account whatever the level of inflation is? Am I missing something?
Appreciate some clarity from smarter minds.
It’s not that real GDP is distorted by high inflation, but rather real GDP growth will be negative (by definition) if inflation is higher than nominal growth. With negative real growth in two consecutive quarters we enter a recession (again, by definition).
You’re right that real GDP takes inflation into account. Perhaps the disconnect is that you interpret Ackman’s point as “inflation is altering how the economy grows and distorting measures of economic growth such that real growth is artificially lower”, which would require a lot more explanation by Ackman.
His point is a little simpler: “while real growth will be negative, economic dynamism remains strong, so entering a technical recession won’t be causing economic distress any time soon.”
I see this as an attempt by Ackman to explain why his losses on paper (he bet on higher rates) are widening and is telling investors to be patient with his strategy. He explains the decrease in rates as not necessarily a sign of imminent economic distress (hence his point about a technical recession not being that bad) but rather a short squeeze caused by our entering the technical recession. In other words: “the Fed will keep tightening, and the obvious trade is still alive”.
I guess I fail to understand why negative real GDP growth can be “explained away” by high inflation, or how this combination results in a technical recession but which somehow isn’t comparable to a normal recession.
To me, the logic sounds similar to a company saying: “Our profits went down, but that’s only because our costs increased more than our revenues.” Of course no company would say this as an excuse (rather more as an explanation).
It is more accurate to say a company might announce that European sales are down in dollar terms, because of the strong dollar, but European sales are actually up in local currency. Hence, European sales ARE growing, they just are down when translated into dollars. I think Ackman is just saying that in the day of lazy analysis, be careful for flawed logic.