Citibank analysts have come up with an interesting stat on recoveries. They looked at post-WWII recessions and compared the drop in GDP against the size of the recovery through measuring their correlation. They concluded that there is an 80% correlation between the size of the drop and the size of the recovery. The faster you go in, the faster you come out.
Numbers never lie, but do they do not tell the truth. The analysis would be correct if we were in a normal recession. A normal recession, if there is such a thing, would be one that has a negative supply shock which leads to higher inventory levels which require a slowdown in order to work out the excess.
Is this the problem with the current recession? The answer is very much no. This is a banking crisis liquidity event which generally does not fit the normal behavior of recessions. We actually have a fair amount of information on the behavior of banking crisis and this data suggests that the recession is much more long-lived. There is usually much more government deficit financing and there is a longer time for banks to work off their bad loans and actually lend at previous levels. Now we may have a recovery which is stronger than some other bank crises given the size of the stimulus but this has nothing to do with the fast in fast out theory.
We would argue that it is good to be more defensive because the data suggests that the crisis will take some time to work out, green shoots or not.
Numbers never lie, but do they do not tell the truth. The analysis would be correct if we were in a normal recession. A normal recession, if there is such a thing, would be one that has a negative supply shock which leads to higher inventory levels which require a slowdown in order to work out the excess.
Is this the problem with the current recession? The answer is very much no. This is a banking crisis liquidity event which generally does not fit the normal behavior of recessions. We actually have a fair amount of information on the behavior of banking crisis and this data suggests that the recession is much more long-lived. There is usually much more government deficit financing and there is a longer time for banks to work off their bad loans and actually lend at previous levels. Now we may have a recovery which is stronger than some other bank crises given the size of the stimulus but this has nothing to do with the fast in fast out theory.
We would argue that it is good to be more defensive because the data suggests that the crisis will take some time to work out, green shoots or not.
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