Tags: Deutsche Bank | Market | Larry Summers | Gloomy View

Deutsche Bank: The Market Is Saying Larry Summers' Gloomy View Is Right

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Larry Summers

Thursday, 26 Nov 2015 07:09 AM

Larry Summers might just be right.

That's the conclusion stemming from a Deutsche Bank analysis of economists' meager expectations for America's growth and the market's view of where short-term U.S. Treasurys will be in four years.

Summers, the Harvard professor, one-time front-runner to succeed Ben Bernanke as Federal Reserve chair, and former U.S. Treasury Secretary, brought the term "secular stagnation" back into the economic parlance of the day. Essentially, Summers argued that a deficiency of demand entailed that full employment would only be achieved with significant risks to financial stability — meaning that advanced economies would probably end up stuck in an environment of low interest rates and growth.

"Secular stagnation, at least as defined by low growth expectations and low rates seems to now be pretty consensus," wrote FX Strategist George Saravelos, who himself floated the controversial 'quantitative tightening' thesis earlier this year.

The strategist points to two metrics — the consensus estimate for U.S. economic growth in 2016 and the four-year one-year U.S. swap rate — as proof that economists and market participants are starting to price in secular stagnation:

"Economists are looking for 2.5 percent year-on-year growth in 2016, well below the 3 percent expectations people had heading into 2014 and 2015," wrote Saravelos. "[The predicted one-year rate in four years' time] is still very close to its record lows, despite recent Fed repricing."

In other words, the market expects 12-month Treasuries to yield barely more than 2 percent four years from now.

But what this really implies, notes Saravelos, is that depressed sentiment makes it more difficult for U.S. economic performance to meaningfully miss consensus estimates. Moreover, there are multiple reasons to hope that the first quarter — frequently a rough patch for U.S. growth—won't be overly lackluster in 2016.

Thanks to El Nino, the absence of cold weather means that builders will be able to engage in more construction activity than during similar periods in previous years. In addition, the Bureau of Economic Analysis is making steps to correct the "residual seasonality" that has artificially skewed first- quarter growth to the downside in recent years. This offers another avenue by which growth could surprise in the opposite direction.

The tendency since the financial crisis, however, has been clear: Heading into the year, economists are far too optimistic on the U.S. economy's growth prospects. Citigroup's economic surprise index shows this proclivity clearly. Since 2010, it's displayed a hammock-like trend throughout the year driven by underwhelming data in the first half, as The Globe and Mail's Scott Barlow has observed:

Low expectations and some one-off factors that could kick- start first quarter growth provide cause to think this trend may be broken in 2016, Deutsche Bank notes.

However, the more analysts coalescing around the view that "this time is different," and the U.S. is destined to start off the year on a stronger note, the greater the risk that we're in for yet another serial disappointment on growth.


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Larry Summers might just be right.That's the conclusion stemming from a Deutsche Bank analysis of economists' meager expectations for America's growth and the market's view of where short-term U.S. Treasurys will be in four years.Summers, the Harvard professor, one-time...
Deutsche Bank, Market, Larry Summers, Gloomy View
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2015-09-26
Thursday, 26 Nov 2015 07:09 AM
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