Financial markets turned ugly in the springs of 2010 and 2011 as stimulus from policymakers wore off—and it looks like we are in for a repeat this spring. The anxiety now appearing in the form of stock-market pullbacks and rising eurobond yields seems destined to build until policymakers once again panic themselves and issue further rounds of stimulus.
The Economic Cycle Research Institute (ECRI), which has a stellar forecasting record, has steadfastly held to its recession call made just before Christmas. It says the U.S. economy is weaker than the headline numbers indicate because the sharp recession of 2008-2009 has thrown seasonal-adjustment factors out of whack and they are inflating the smoothed, annualized growth numbers for output, employment, income and sales. The ECRI is looking at year-over-year growth rates (not impacted by seasonal-adjustment formulas) and seeing a much weaker picture of the U.S. economy. For further explanation, see “Why our recession call still stands.”
The Eurozone crisis could be ended tomorrow if the European Central Bank (ECB) announced it was going to launch a mammoth campaign to continue buying the bonds of troubled members of the European Community (EC) until growth in EC output and employment bailed them out of their debt burdens. But this is the Anglo-Saxon approach. The German-dominated European approach is to avoid easy fixes and seek real, long-term solutions, notably deep cuts to government spending.
And so the ECB will continue to keep the pressure on profligate EU members by letting their sovereign bond yields drift upward—whenever the financial system isn’t teetering on the edge of chaos. For more on this dynamic, see “What’s happening in the European Union.” The upshot? The EU isn’t on the edge of the financial precipice yet (like it was last fall when the ECB made 3-year loans to euro banks), so macroeconomic and financial conditions in Europe are set to slide further until the ECB mounts its steed and rides to the rescue. Financial markets in the meantime likely need to brace for another period of unnerving volatility.