Wirecard und Thyssen als Renditeknaller - Seite 3

Second, the global expansion over the past decade has been remarkably uneven and asynchronous in nature. Not long after a sharp global recovery coming out of the 2008-2009 Great Recession, the euro area experienced a crisis and a renewed recession. Then, around the middle of the decade, many Emerging Market economies experienced a recession. More recently, the slowdown in China and Europe from early 2018 provided a counterweight to the fiscal boost to U.S. growth. These global drags helped to prevent a potential overheating of the U.S. economy and thus prolonged the expansion.

The third defining feature of this expansion is that whenever the economy was a risk slipping into a recession, the Fed stood by to add additional stimulus – initially in the form of QE2 and QE3, later by putting a series of planned rate hikes on the backburner during most of 2015 and then, after a first hike in December 2015, again during most of 2016. And this year, the Fed completely reversed course by cutting rates three times and expanding the balance again. What made Fed support possible was that there was no conflict with the inflation objective – on the contrary, virtually every monetary easing operation during this expansion was justified not only by recession risks but also because inflation was running below target.

So what does the experience of the past decade tell us about the remaining life expectancy of the expansion? 

For starters, both U.S. households and U.S. firms have been relatively prudent in their consumption and investment behavior. This lack of spending excesses to date, viewed in isolation, bodes well for a continuation of the expansion in the foreseeable future. Note however, that corporate leverage has increased sharply during this expansion, which could serve as an accelerator of a future downturn caused by other factors.

Second, a vigorous synchronized global acceleration of growth – if it came to pass – could ironically sow the seeds for the next recession. The reason is that a global boom could give rise to global inflation pressures and would likely induce central banks to tighten. To be sure, a vigorous synchronized expansion does not look particularly likely for the time being, but if it came to pass, I would view it as a bearish rather than a bullish medium-term signal.

Third, the longer this expansion runs, the lonelier it gets (hat-tip to Alan Sillitoe’s 1959 short story, which I read in high school and which inspired the title). This is because in a world of very low equilibrium real interest rates, low inflation and already low actual nominal interest rates, there won’t be much room for significant additional stimulus if and when the next major adverse shock comes along. True, fiscal policy would have room to ease given low interest rates and given the Fed’s proven ability and willingness to take more federal debt on its balance sheet. However, it is at least doubtful whether the political constellation in Washington D.C. at that particular moment will be such that timely and sizeable fiscal action will happen. 

In summary, there are good reasons why this expansion has become the longest ever. There are also some good reasons – the lack of domestic spending excesses and the asynchronous nature of the global expansion to date — to expect it to last longer. However, high corporate leverage increases the vulnerability in the case of adverse shocks and, most importantly, monetary policy makers will find themselves with limited options to spur on the expansion if and when it gets tired in the legs. Go Eintracht!