Business Cycle Watch: In this week’s Outside the Box from John Mauldin, he gives us a report from GaveKal on how those betting on renewed inflation after the Fed rate cut may be thrown off guard by declining velocity of money. This makes sense given the collapse of the CLO market and the billions of hung LBO financings. It is also something that no economist focuses on or even understands, as far as I can tell.
I am torn. My suspicion is that we will see something similar to what we got in the last cycle: a falling dollar and rising commodity prices (although probably not as much as in the last 5 years), but mild headline inflation due to increasing manufacturing productivity and globalizaiton. The big difference will be dealing with housing deflation instead of inflation. The balance of risks supports the Fed’s move for now, since the cuts can always be taken back.
By the way, I recommend reading Our Brave New World from the guys at GaveKal. Very interesting take on how our economic world has evolved in the information age. Its a short book and well worth the time.