MacroVoices #363 Lakshman Achuthan: Immaculate Disinflation Debunked
ECRI's Lakshman Achuthan maintains his recession call from last summer, arguing that despite market rallies and slowing Fed hikes, leading indicators are at depths not seen since 2008, suggesting a global recession is underway driven by cyclical factors rather than Fed policy alone.
Summary
In this February 2023 MacroVoices interview, ECRI co-founder Lakshman Achuthan stands by his recession prediction from the previous summer, emphasizing that his call was based on cyclical economic drivers rather than Federal Reserve policy. His 21-country long leading index has declined to levels comparable only to the 2008 financial crisis depths, indicating broad-based global economic weakness affecting over 80% of world GDP. Achuthan argues that the current recession is different from Fed-policy-driven downturns, as it's rooted in fundamental cyclical deterioration in goods production, manufacturing, and construction sectors. He notes that China experienced its first recession since 1989 (Tiananmen Square period) and recently emerged mechanistically but lacks cyclical follow-through for sustained growth. On employment, Achuthan explains that during inflationary periods, job losses often lag recession onset by several months due to 'money illusion' where businesses are misled by nominal revenue growth while real activity contracts. He expects goods sector job losses to dominate despite services comprising 85% of employment. Regarding inflation, Achuthan warns against declaring victory over a mere cyclical downturn, drawing parallels to the 1970s when Fed Chairman Burns faced political pressure to ease prematurely, leading to structurally embedded inflation that required Volcker's severe tightening. He argues that structural factors like onshoring, geopolitics, tight labor markets, and weak productivity growth could prevent inflation from returning sustainably to 2% targets. Achuthan connects geopolitical tensions to economic weakness in China and Russia, suggesting that poor economic performance in these nations may contribute to conflict as a distraction from domestic issues. He acknowledges AI's potential productivity benefits but notes that even technological revolutions haven't eliminated business cycles historically. Finally, he reminds clients that market rallies during early recession periods are common, citing examples from 1973-75, 1980, 2001, and 2007-09 recessions.
About this episode
MacroVoices Erik Townsend welcomes ECRI co-founder Lakshman Achuthan to the show. They revisit Lak’s recession call from last summer, which he’s still committed to. They also examine the growth, business and inflation cycles along with ECRI’s leading indicators which are plumbing lows never seen before except during the depths of the 2008 crash.https://bit.ly/3YAp6aT Download ECRI charts: https://bit.ly/3S2NWO0 Download Big Picture Trading chartbook 📈📉https://bit.ly/3EaZ7yo ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/2JjZR7J Check out Nick's YouTube channel: https://www.youtube.com/c/Optionfinity Join OptionFinity discord: https://discord.gg/Rvnsv6Y Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
Key Insights
- Achuthan's 21-country long leading index has declined to levels only seen during the 2008 financial crisis depths, indicating severe global economic weakness
- The recession call is based on cyclical economic drivers rather than Federal Reserve policy, distinguishing it from other forecasters' Fed-focused predictions
- China experienced its first recession since the 1989 Tiananmen Square period and has only recovered mechanistically without cyclical follow-through
- During inflationary periods, employment can continue growing for months after recession onset due to 'money illusion' affecting business decision-making
- Goods sector job losses typically account for 77-134% of total recessionary job losses despite representing only 15% of employment
- The breadth of global central bank rate hikes is at near all-time highs, with monetary policy effects hitting the economy with long and variable lags
- A cyclical downturn in inflation alone may be insufficient to achieve lasting price stability, as seen during the 1970s Burns era
- Structural factors including onshoring, geopolitical tensions, tight labor markets, and weak productivity growth pose upward pressure on long-term inflation
- Stock market rallies of 10%+ during early recession periods are historically common, including notable examples in 1973-75, 1980, 2001, and 2007-09
- Global recessions tend to be more severe and longer-lasting than domestic recessions, with historical examples lasting well over a year
- The fundamental long-term problem facing developed economies is declining trend growth due to weak productivity and shrinking workforce populations
- Geopolitical conflicts may serve as distractions from poor economic performance in countries like China and Russia facing demographic and productivity challenges
Topics
Transcript
Thank you. Eric Townsend and Patrick Ceresna. Macrovoices episode 363 was produced on February 16th, 2023. I'm Eric Townsend. This episode of Macrovoices was made possible by Respect Energy, a leading European trader of renewable energy and a one-stop shop for all green energy investors. Mr. Cycles himself, ECRI co-founder Lakshmana Chuthan returns as this week's feature. interview guest. We'll revisit Lakshmana's recession call from last summer, which he's still committed to. We'll also examine the growth, business, and inflation cycles, along with ECRI's leading indicators, which are plumbing lows never seen before, except during the depths of the 2008 market crash. And I'm Patrick Ceresna. Listeners, be sure to stay tuned for our post-game segment after Eric's feature interview…
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