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Whither “Animal Spirits”?

Whither "Animal Spirits"?

Submitted by Elliott Middleton

According to the Michigan Consumer Sentiment Series, confidence is at record lows….



Whither "Animal Spirits"?

Submitted by Elliott Middleton

According to the Michigan Consumer Sentiment Series, confidence is at record lows. But a measure of confidence or “animal spirits,” as Keynes called it, that I developed in the 1990s — that was featured on the front page of the Wall Street Journal, February 20, 1998 — is now showing very healthy “animal spirits.” So which one is right?

Only time will tell. Read on to learn more.


In graduate school in the ‘Seventies I became fascinated with the implications of psychology for economics. I had been an English major at Yale as an undergraduate, and found the “psychology” of neoclassical utility theory ridiculous, at least when it came to things like the mood of the markets and consumers. Economics was in the grip of rational expectations theory at this time.

A Stanford economist by the name of Tibor Scitovsky had written a book called The Joyless Economy which explored the implications of adaptation level theory for economics. Our perceptions are always judged in the context of what we have experienced. The legendary Wundt curve showed that the pleasantness of stimuli followed an inverted U-shaped curve with respect to how novel a stimulus is to the subject. Moderate levels of subjective novelty are pleasant; very high levels unpleasant. Scitovsky harped on the then popular theme of the boringness of mass consumption. The importance of subjective novelty is now generally recognized in product design and marketing.

I spent some time on the complicated mathematics of subjective novelty before realizing that, in the majority of instances, some form of moving average of the relevant variable was all you needed to construct a measure of adaptation level, and of current variable value subjective novelty.

I had rediscovered moving averages! Traders feel good when the price is above the moving average, and they start to worry about losses one it veers below.

The next step was to apply this to the macro economy to solve the problem of “animal spirits.” What macro variable did people really care about? Stock prices? No, most people don't own enough stock to worry that much about stock prices. Industrial production? No, only economists are aware of that.

How about the unemployment rate? Given the rather tenuous attachment many people feel they have to their jobs, I thought this was a good candidate variable, sort of a personal unemployment risk indicator. Labor has never had much bargaining power with American business, and in the past few decades what it used to have was decimated.

Elliott Middleton says the main determinant of consumer confidence is the gap between the current unemployment rate of 4.6% and the rate that people consider normal. What's normal, according to Mr. Middleton, a professor at Metropolitan State University in Minneapolis, is a moving average of past unemployment rates, which he puts at about 5.2% now. The 4.6%-to-5.2% gap is what makes people euphoric, he contends, and if that gap closes, if the jobless rate goes above 5%, say, Americans would lose confidence. []

The recession began in April 2001 with the unemployment rate at 4.4% and adaptation level both at about 4.3%.

The editor of the European Journal of Economic Psychology had suggested using an exponential moving average whereby more recent observations are weighted more heavily than those more distant in the past; I used an exponential moving average over the past four years. An updated graph of the unemployment rate and adaptation level I proposed in “Adaptation Level and ‘Animal Spirits’” [1] is shown below.


As you can see, whenever the unemployment rate has risen above the adaptation level, a recession has ensued. I am counting the double dip recession in the early 1980s as one instance.

To create an "animal spirits” index I subtracted the unemployment rate from the adaptation level, so if unemployment was below the adaptation level, "animal spirits” would be positive; and conversely if the unemployment rate rose above the adaptation level. I ultimately abandoned attempts to scale this metric by the volatility of unemployment.

Fig. 3

Figure 1 also includes the Michigan Sentiment series, showing the current divergence. The two measures track closely, and preliminary causality testing showed causality running from the “animal spirits” metric to the Michigan series.

So what is going on? The labor force participation rate suffered a huge involuntary blow during the pandemic that appears to have contributed to a “great resignation” from the labor force. Other things equal, this lowers the unemployment rate. The massive spike in the unemployment rate to over 14% in 2020, helped to raise the adaptation level, which peaked in the summer of 2021 at 5.7%, and is now at 5.3%, above the unemployment rate of 3.6%.

From the perspective of my model, recession becomes inevitable when the unemployment rate rises above the adaptation level, which is the same as the “animal spirits” index falling below zero. Because confidence is a form of psychological wealth, obeying the neoclassical precept that losses are discounted more steeply then gains, a form of self organized criticality sets in in the psychology of the labor market — as well as in the board rooms where investment decisions are made — and a self-reinforcing downward spiral of consumption and production decisions follows. At some point businesses stop laying off workers; the adaptation level rises to its peak with a lag; and as businesses hire workers back on, the unemployment rate drops below the adaptation level and “animal spirits” (confidence levels) become positive again.

It’s simplistic, but it works, which is why the academic economists have paid it no mind.

The problem facing the policymakers today is keeping the unemployment rate below the adaptation level. If we have a recession, and the unemployment rate jumps two percentage points, it will leap over the adaptation rate, engendering self-organized criticality. Keynes spoke direly about “the state of long-term expectation” as a critical determinant of an economy’s health, of its intrinsic “animal spirits.”

I believe the globalists want the West to give up hope, so we can all be happy owning nothing; that much of current policy is bent on self-destruction. Should the US be lucky enough and wise enough to rebalance national income toward labor with low-tax, hands-off policies for small business, always our greatest job producer, the spurt in domestic demand might be considerable. There are now more job openings than there are unemployed persons!

Fig 4

I believe the firehose of insulting, race-baiting woke propaganda about America emanating from the Democratic Party [CCP/WEF] has the majority of the country profoundly depressed about the prospects for their lives and businesses. This is why the Michigan index is at record lows. These feelings are strongest among small business people who have seen their businesses deemed “non-essential” and subject to termination upon the whim of a bureaucrat. A serious recession now might have very damaging effects on Americans’ long-term expectations.

I’m hoping that Americans are expressing more despair than they are demonstrating economically. Businesses may need to pay them more!

Ultimately, the West must deal with its long-term fiscal position that will involve some sort of bankruptcy negotiation with the rest of the world, that in its turn should also favor a domestic rebalancing to reduce inequalities, but that is another question.

Congress, not just the Fed, has the ability to begin revitalizing the economy with tax reductions on small business and energy production.

And instead of taxing excess profits and giving them to government, which will waste them, why doesn’t Congress require business to share profits with their employees, so they go back into the spending stream and the whole economy grows?

The forecast: the economy will enter recession when the unemployment rate reaches about 4.5%.

However, from psychophysical point of view, “animal spirits” may be stronger than the Michigan index suggests, meaning that appropriate stimulus now might reengage the engine of optimism and forestall the next recession.

[1] Middleton, E., Adaptation level and ‘animal spirits’, JEconPsych, Volume 17, Issue 4, August 1996, Pages 479-498.

Tyler Durden Tue, 06/21/2022 - 15:44

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Spread & Containment

China Suggests It Could Maintain ‘Zero COVID’ Policy For 5 Years

China Suggests It Could Maintain ‘Zero COVID’ Policy For 5 Years

Authored by Paul Joseph Watson via Summit News,

China has suggested it will…



China Suggests It Could Maintain 'Zero COVID' Policy For 5 Years

Authored by Paul Joseph Watson via Summit News,

China has suggested it will maintain its controversial ‘zero COVID’ policy for at least 5 years, eschewing natural immunity and guaranteeing repeated rounds of new lockdowns.

“In the next five years, Beijing will unremittingly grasp the normalization of epidemic prevention and control,” said a story published by Beijing Daily.

The article quoted Cai Qi, the Communist Party of China’s secretary in Beijing and a former mayor of the city, who said that ‘zero COVID’ approach would remain in place for 5 years.

After the story prompted alarm, reference to “five years” was removed from the piece and the hashtag related to it was censored by social media giant Weibo.

“Monday’s announcement and the subsequent amendment sparked anger and confusion among Beijing residents online,” reports the Guardian.

“Most commenters appeared unsurprised at the prospect of the system continuing for another half-decade, but few were supportive of the idea.”

Although western experts severely doubt official numbers coming out of China, Beijing claimed success in limiting COVID deaths by enforcing the policy throughout 2021.

However, this meant that China never achieved anything like herd immunity, and at one stage the Omicron variant caused more more coronavirus cases in Shanghai in four weeks than in the previous two years of the entire pandemic.

Back in May, World Health Organization Director General Tedros Adhanom Ghebreyesus suggested that China would be better off if it abandoned the policy, but Beijing refused to budge.

As we previously highlighted, the only way of enforcing a ‘zero COVID’ policy is via brutal authoritarianism.

In Shanghai, children were separated from their parents in quarantine facilities and others were left without urgent treatment like kidney dialysis.

Panic buying of food also became a common occurrence as the anger threatened to spill over into widespread civil unrest.

Former UK government COVID-19 advisor Neil Ferguson previously admitted that he thought “we couldn’t get away with” imposing Communist Chinese-style lockdowns in Europe because they were too draconian, and yet it happened anyway.

“It’s a communist one party state, we said. We couldn’t get away with it in Europe, we thought,” said Ferguson.

“And then Italy did it. And we realised we could,” he added.

*  *  *

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Tyler Durden Tue, 06/28/2022 - 18:05

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No sign of major crude oil price decline any time soon

Bullish pressure on crude oil markets doesn’t seem to be easing Crude oil prices fell last week, notching their second weekly decline in the face of…




Bullish pressure on crude oil markets doesn’t seem to be easing

Crude oil prices fell last week, notching their second weekly decline in the face of concern that rising interest rates could push the global economy into recession.

Yet the future of crude oil still seems bullish to many. Spare capacity, or lack of it, is just one of the reasons.

The global surplus of crude production capacity in May was less than half the 2021 average, the U.S. Energy Information Administration (EIA) reported on Friday.

The EIA estimated that as of May, producers in nations not members of the Organization of Petroleum Exporting Countries (OPEC) had about 280,000 barrels per day (bpd) of surplus capacity, down sharply from 1.4 million bpd in 2021. It said 60 per cent of the May 2021 figure was from Russia, which is increasingly under sanctions related to its invasion of Ukraine.

The OPEC+ alliance of oil producers is running out of capacity to pump crude, and that includes its most significant member, Saudi Arabia, Nigerian Minister of State for Petroleum Resources Timipre Sylva told Bloomberg last week.

“Some people believe the prices to be a little bit on the high side and expect us to pump a little bit more, but at this moment there is really little additional capacity,” Sylva said in a briefing with reporters on Friday. “Even Saudi Arabia, Russia, of course, Russia, is out of the market now more or less.” Nigeria was also unable to fulfil its output obligations, added Sylva.

Recent COVID-19-related lockdowns in parts of China – the world’s largest crude importer – also played a significant role in the global oil dynamics. The lack of Chinese oil consumption due to the lockdowns helped keep the markets in a check – somewhat.

Oil prices haven’t peaked yet because Chinese demand has yet to return to normal, a United Arab Emirates official told a conference in Jordan early this month. “If we continue consuming, with the pace of consumption we have, we are nowhere near the peak because China is not back yet,” UAE Energy Minister Suhail Al-Mazrouei said. “China will come with more consumption.”

Al-Mazrouei warned that without more investment across the globe, OPEC and its allies can’t guarantee sufficient supplies of oil as demand fully recovers from the pandemic.

But the check on the Chinese crude consumption seems to be easing.

On Saturday, Beijing, a city of 21 million-plus people, announced that primary and secondary schools would resume in-person classes. And as life seemed to return to normal, the Universal Beijing Resort, which was closed for nearly two months, reopened on Saturday.

Chinese economic hub Shanghai, with a population of 28 million-plus people, also declared victory over COVID after reporting zero new local cases for the first time in two months.

The two major cities were among several places in China that implemented curbs to stop the spread of the omicron wave from March to May.

But the easing of sanctions should mean oil’s price trajectory will resume its upward march.

In the meantime, in the U.S., the Biden administration is eying tougher anti-smog requirements. According to Bloomberg, that could negatively impact drilling across parts of the Permian Basin, which straddles Texas and New Mexico and is the world’s biggest oil field.

While the world is looking for clues about what the loss of supply from Russia will mean, reports are pouring in that the ongoing political turmoil in Libya could plague its oil output throughout the year.

The return of blockades on oilfields and export terminals amid renewed political tension is depriving the market of some of Libya’s oil at a time of tight global supply, said Tsvetana Paraskova in a piece for

And in the ongoing political push to strangle Russian energy output, the G7 was reportedly discussing a price cap on oil imports from Russia. Western countries are increasingly frustrated that their efforts to squeeze out Russian energy supplies from the markets have had the counterproductive effect of driving up the global crude price, which is leading to Russia earning more money for its war chest.

To tackle the issue, and increase pressure on Russia, U.S. Treasury Secretary Janet Yellen is proposing a price cap on Russian crude oil sales. The idea is to lift the sanction on insurance for Russian crude cargo for countries that accept buying Russian oil at an agreed maximum price. Her proposal is aimed at squeezing Russian crude out of the market as much as possible.

So the bullish pressure on crude oil markets doesn’t seem to be easing.

By Rashid Husain Syed

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.

Courtesy of Troy Media

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WTI Extends Gains After Unexpected Crude Draw

WTI Extends Gains After Unexpected Crude Draw

Oil prices are higher today following relatively positive news from China (easing some of its…



WTI Extends Gains After Unexpected Crude Draw

Oil prices are higher today following relatively positive news from China (easing some of its COVID quarantine restrictions), Macron-inspired doubts over the ability of Saudi Arabia and the United Arab Emirates to significantly boost output, and unrest in Ecuador and Libya helped lift prices.

“We’re in the crunch period, it’s hard to see any meaningful price relief for crude,” said John Kilduff.

There’s a lot of strength with China relaxing its Covid restrictions and starting its independent refiners, “we’re going to have another chunk of demand for crude oil,” as China relaxes its Covid-19 restrictions.

With no EIA data released last week due to a "systems issue" (they have issued a statement confirming that the data - and the newest data - will both be released tomorrow), the only guidance we have for now on the past week's inventory changes is from API...

API (last week)

  • Crude +5.607mm

  • Cushing -390k

  • Gasoline +1.216mm - first build since March

  • Distillates -1.656mm

API (this week)

  • Crude -3.799mm

  • Cushing -650k

  • Gasoline +2.852mm

  • Distillates +2.613mm

Crude stocks unexpectedly fell last week, almost erasing the major build from the week before (according to API). Gasoline stocks rose for the second straight week

Source: Bloomberg

WTI was hovering around $111.75 and pushed up to $112 after the unexpected crude draw...

Finally, we note that the tight supply situation in oil (especially European) is revealing itself in the WTI-Brent spread, grew to $6.19, the widest in almost three months.

“European demand will remain robust, especially as natural gas supplies run out, while the North American demand for crude is weakening,” said Ed Moya, senior market analyst at Oanda.

This is not good news for President Biden as prices are rising...

And his ratings are hitting record lows.

Tyler Durden Tue, 06/28/2022 - 16:37

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