Wednesday, April 12, 2017

Pent up demand and optimum compression

Mish quoting a research article on future bond yields . We get a discussing of demand shifts in time, Instead of time think of pricing loops, how many events needed to push the demand bulge through the economy after a downturn.  The problem is best understood as the queuing problem. The solution is optimum queuing, we want a bit more demand queuing than we want supply queuing. We get periodic recession because government bets time and the economy executed optimum congestion, the currency insurance payouts accumulate. Optimum congestion causes pricing 'orbits'or  pricing probability surfaces, the ongoing, non-stationary two sided Black-Scholes. It isthe essence of equipartition, to meet Ito's condition [to be in deja vu] we have to have motion.  We have a general result; when we remove the empty space conditions of Newton and end up with local, finite extent motions.
The Federal Reserve has initiated the fifteenth tightening cycle since 1945 (Chart 1). Conspicuously, in 80% of the prior fourteen episodes, recessions followed, with outright business contractions being avoided in just three cases. What is notable today is that the economy is in the 93rd month of this expansion, a length of time that is well beyond periods in prior expansions where soft landings occurred (1968, 1984 and 1995). This is relevant because the pent-up demand from the prior downturn has been exhausted; thus, the economy is extremely vulnerable to a shock, which could lead to recession. Regardless of whether there was an associated recession, the last ten cycles of tightening all triggered financial crises.

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