The Recipe for the Global Synchronized Recovery

Is more like the recipe for cotton candy than for say a pot roast.  Delicate and prone to collapse at the first sign of stress, the first whisp of breath on it.  Put it in your mouth and it just melts away.  As opposed to a pot roast with vegetables, hearty and hale, and leaves leftovers that last for awhile.

The Global Synchronized Recovery was composed primarily of two thrusts which showed up in the monthly data as a strong global economy.  The first was the pumping and primping done by China in preparation for the Chinese Communist Party confab in November.  In order to assure the appearance that everything is just plain awesome, China created credit here, doctored up some numbers there to provide the strongest background vista possible to achieve its goals at the CCP Congress.  Mission accomplished.  Xi has now wiped away the last impediments to his assumption of the mantle of power for the rest of his life.

The second major element which appeared as a thrust of growth in the numbers was the aftermath of the multiple hurricanes that hit the US last fall.  All those insurance payouts, rebuilding and the need for new cars appears through the lens of the monthly economic data like a big slug of growth.  That is why guys like Paul Krugman espouse the idea of digging holes and filling them in again as sound economic policy.  Bastiat of course famously exposed the idea that breaking windows so they need to be fixed was good for the economy, as a fallacy.  Such reasoning is a sleight of hand.  The problem of course is time shifting and limited accounting of the consequences.  If you limit your gaze to only what happens for a short period of time or only along one or a few vectors of economic activity it appears to be a net plus.  But in the fullness of time and taking account all of the costs, the notion of breaking stuff to fix it as a good idea falls apart.

Now there are other elements contributing to growth domestically, like a reduction in regulation, some reduction in taxes for corporations and some rekindling of animal spirits.  But those will seem small in comparison at the end of the day.

We will soon find that the global economic recovery melts like cotton candy with nothing left over.  In days past that would mean one thing.  Buy long term treasuries or futures.  Today we have the added complication that Mr Market is becoming dimly aware that the pace of marketing of treasury debt has kicked into a new gear, never before seen, scarcely to be believed.  So will long rates fall as they normally would as the monthly data cools off and the Citi Economic surprise index inflects down?  Or will the addition of risk premium to the risk free rate overcome the inflation component?  I am going to buy some just to see.  But it is not as easy a bet as it once was

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