How Far Along We Are In The Current Business Cycle?

This article originally appeared on Moneyball Economics.

If we’re talking about length of business cycles, you could say we’re in the midst of a near 30-year long one right now.

Except for the interruptions of the Dotcom bust and the credit madness of 2006-7, there’s a case to be made that the business cycle started in 1991.

All because of internet and computers.

Here’s how the internet contributed to this long business cycle:

• Unleashed capital: less inventory needed in the supply chain
• Accelerated market efficiencies: the retail structural change, among other things
• Enabled a China super-cycle with its additive consumption
• Enabled deflation & disinflation without sacrificing production (by bringing China, India and other economies into the global economy and by creating just-in-time supplies)
• Enabled the Cloud which brought additional market efficiencies and further reduced capital requirements

Less Inventory Volatility  = Less GDP Volatility

If we look at the business cycle from a 30-thousand foot view, the impact of the internet is evident in the:

• Longer GDP cycles;
• Shallower GDP swings;
• And smoother inventory buildups

Barring any external shock, GDP can continue to coast along at a 1~2 percent y/y clip for a while longer. 

Eventually though, it’ll translate into a recession.

The Fed & The Dollar

The Fed's current rate hike agenda is out of step with the economy.  (Rate hikes were much more appropriate in 2014 or so.) 

At this point the Fed is likely to live up to their reputation of making bad situations worse.

Global macro is another factor that will come into play. The slower macro growth is a global phenomenon.

In fact, if not for the massive liquidity injections by the People's Bank of China, global growth would be even slower. 

Compared to the EU and China, the US private sector is better positioned for a slowdown.

Dollar strength is completing a round trip: Euro/USD went from 1.10 (One Euro can buy $1.10 worth of U.S. dollars) in November, to 1.04 as Trump took over. It is now back to 1.10. 

As Vincent Cignarella from Bloomberg pointed out, the Trump trade has to be flushed out. 

Looking further out, dollar strength will return again (stronger economy in the midst of a global slowdown, Fed rate hikes, and a possible China meltdown).

China is the spoiler in the works. They can just as easily stimulate the global economy as they can bring it down. But the incremental gains from their flood of liquidity is achieving only marginal gains: the GDP isn't budging.

The sectors responding to the massive cash infusions are speculative: home prices and commodities like iron ore. Both of which are now slowing down again as China taps the brakes on the money machine.

Key Takeaway

Business cycles (like bull markets) don’t die of old age. However, the trillions of dollars of liquidity injected around the world is no longer fueling growth. In fact, it has a declining marginal utility (every dollar injected produces less GDP growth). China - the biggest liquidity injector - pretty much runs the show of how long the world can last without a global recession. The U.S., however, is best equipped to handle the downturn. When that happens, the dollar will continue to get stronger.