Worst Recession in 150 Years
The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.
But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.
This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…
My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.
The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.
The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.
Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.
Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.
Not the Early 19th Century Anymore
It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).
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