It's Not Hip to be Square (Root-shaped)

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  • on September 15th, 2010

As people battle over what the shape of the recovery and whether we are double dipping or full steam recovery, one recovery “shape” that used to be thrown about is being ignored – the square root-shaped recovery.

The square root-shaped recovery was first brought to mainstream attention regarding European recovery in a Merrill Lynch note in May 2009.  From FT Alphaville:

The “square root” scenario is becoming quite popular, with a sharp initial recovery followed by a levelling off halfway down the road. This probably fits our Eurozone scenario best. Except, we do not believe that the initial recovery will be followed by semi-stagnation, as the “square root” implies. We merely look for some modest loss of momentum once the initial mechanical bounce-back has run its course.

Later in September, it started gaining some traction and Schwab’s Liz-Ann Sonders applied it to the US recovery.  Below is a Tech Ticker from September 2009, of her discussing this:

Since this dicussion, the square root-shaped recovery talk has basically died.  This isn’t surprising because as you get up towards the “flattening” part of a square root, its not really too exciting for people to say “we’re going nowhere”.  It’s much more sexy to say we may go back into recession or we are going back to 2006.  But two leading indicators are the stock market, and the Conference Board Leading Economic indicators are starting to look square root in shape.

While it’s somewhat early to tell, many people are debating lagging and coincident indicators but leading indicators are starting to spell out the square root case.  Unfortunately,  it’s not too hip to be square (root-shaped) these days.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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