2016/11/19 Commentary: Welcome Back to ‘Normal’

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COMMENTARY: Saturday, November 19, 2016

Welcome Back to ‘Normal’

As noted in our emailed note on this pending post, that is as distinctly different from the ‘new normal’, which never really was normal in the first place. That there was a pressing need for the central banks to take a disproportionately large role in stemming the worst-case possibilities in the wake of the 2008-2009 Credit and Housing Bust crisis is not in dispute. Where the system failed was the degree to which the pollical class completely failed to fulfill its obligation to provide essential structural reforms that had followed all previous crises or recessions.

As our regular readers know, we have been increasingly critical of that failure since our dual January 2015 (on the 19^th & 24^th) It’s Lack of Reform, Stupid! posts. It was obvious that political class failure was going to guarantee that all of the Brobdingnagian central bank accommodation and Quantitative Easing efforts were NOT going to revive the robust pre-Crisis growth. It became increasingly obvious this was true into the middle of this year when negative base rates started creating more problems than solutions, especially for Japan and the Euro-zone that actually pursued negative rates.

In fact part of getting back to real ‘normal’ from the distorted and inadequate ‘new normal’ will be rejection of the received wisdom that there wasn’t much that could be done about a shift back to stronger growth. Prior to discussing what this return to ‘normal’ means for economies and the markets (and even the intermarket influences) we feel the need to debunk that rather pessimistic view. In the first instance, scraping along the bottom and hoping the same policies would somehow evolve into a stronger situation was daft.

As we noted in our October 1^st Dual Dystopia? post, the previous Friday’s Financial Times Comment column by the estimable Mohamed El-Erian (chief economic adviser to Allianz) laid out that Yet more years of low but stable growth is unsustainable (our mark-up.) His conclusion is, “The ‘new normal’ is coming to an end. The reason is simple: it has lasted for so long that it is now breeding the causes of its own destruction.”

Americans had their fill of economic weakness, and were going to react. It explains a lot about the surprise results in the US election. Specifically, the glaring non sequitur in Secretary Clinton’s campaign mantra was (paraphrased), “We’re going to raise taxes, increase regulation and create a lot of great jobs.” It seems Trump garnered more votes than expected from the upper middle class college-educated entrepreneurs who knew that was a false narrative. Maybe not a lot, but enough to tip the tables his way.

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