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The ‘V’ Recovery: Not Exactly As We Originally Thought

By Steve SavilleMarket OverviewMay 05, 2021 12:34AM ET
www.investing.com/analysis/the-v-recovery-not-exactly-as-we-originally-thought-200577546
The ‘V’ Recovery: Not Exactly As We Originally Thought
By Steve Saville   |  May 05, 2021 12:34AM ET
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In an article in May of last year we explained why the US economic rebound from the H1-2020 plunge into recession probably would look like a ‘V’. Our conclusion at that time was:

There will be a ‘V’ shaped recovery, but due to the destruction of real wealth stemming from the lockdowns the rising part of the V is bound to be much shorter than the declining part of the V. This will lead to a general realisation that life for the majority of people will be far more difficult in the future than it was over the preceding few years.

This assessment was close to the mark, but not totally correct.

During the few months after we posted the above-linked article, our views regarding the likely strength and longevity of the economic rebound—as outlined in our commentaries—shifted. Specifically, in commentaries we published on our blog between June and November of last year we began to anticipate a longer rebound with an acceleration of economic activity during the first half of 2021.

This was due to a) the central bank’s promise to maintain accommodative monetary conditions for years despite the emerging evidence of an “inflation” problem, b) the eagerness of the US federal government to continue showering the populace with money, c) the expected natural release of pent-up demand as COVID-related restrictions were removed and d) the likelihood of the US government approving a multi-trillion-dollar infrastructure spending program regardless of the November-2020 election outcome.

Due to this combination of factors, a full ‘V’ recovery has occurred when measured in GDP terms. This is illustrated by the following chart.

GDP Chart
GDP Chart

The GDP rebound does not reflect sustainable progress. Due to the way that GDP is calculated, a dollar of counterproductive spending is the same as a dollar of productive spending. For example, if the government pays people to dig holes in the middle of nowhere and then fill them in, the payments will add to GDP even though the process wastes resources and adds nothing to the economy-wide pool of wealth. Over the past 12 months there has been a lot of counterproductive spending.

The popular economic indicator called “GDP” actually reflects money-supply growth more than it reflects economic progress. By simultaneously giving the money supply a hefty boost and pretending that the purchasing power of money is essentially unchanged, the impression can be created that the economy is moving ahead in leaps and bounds while the total amount of real wealth actually shrinks.

When speculating and investing, however, it’s important to take advantage of the artificial boom and not fritter away your personal wealth betting against the monetary tide. Such bets will become appropriate at some point (as determined by various leading indicators), but they haven’t been appropriate over the past six months and they are not appropriate today.

The ‘V’ Recovery: Not Exactly As We Originally Thought
 

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The ‘V’ Recovery: Not Exactly As We Originally Thought

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Comments (4)
Investing Man
Investing Man May 05, 2021 6:48AM ET
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End of the world people are funny.
Kim BT
Kim BT May 05, 2021 6:48AM ET
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Lol, its the opposite of “end of the world” though.. Its more like … a cautionary ying to the ridiculous yang (the ones who run @ crypto w pants on fire w every 25$ left over after groceries) ying to the yang? Balance? Not so much? ✌️
Bull Power
Bull Power May 05, 2021 2:49AM ET
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Creepto proves beyond doubt that the market is a gamblers' haven with actual utility and value being completely unrelated to the commodity price, you can see this in nasdaq as well with absurd p/e on every other company.
Kim BT
Kim BT May 05, 2021 2:14AM ET
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This sentiment indicates one of two: people HAVE lost their minds- w blind eye toward the GDP/and relief spending compounded by “real” economics- /maybe as matter of convenience (lining pockets or politics) regardless- values and ignorance are once again aligned)… OR you too are in “the wrong” box, subject to cancellation for having an opinion. Either/or- im just stoked to know .. i have company. Over here.. sit by me!
Kim BT
Kim BT May 05, 2021 2:14AM ET
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“Commenting” at 2:00 am is as silly as the idea of resuming a steady upward trend - Apologies for that oncomplete feedback. Was attempting to express appreciation and support for this read. Well presemted you, epic-fail me. *retreating back to my corner
William Bailey
William Bailey May 05, 2021 1:43AM ET
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Well said! Its a looming disaster much like the titanic
 
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