Europe: Positive Feedback Loop with Very Negative Implications

Writers frequently say “negative feedback loop” when that is not what they really mean. A negative feedback loop is actually a stabilizing mechanism.

by Mish

Variant Perception provides a nice example in its report Negative Feedback Loop in Europe.

While most of the attention post-Brexit has been on the UK, we are far more concerned about Europe. Markets and the economy operate in a feedback loop, and the performance of European banks relative to the stock market points to a fall in lending ahead in Europe. Banking stocks provide a one year lead on lending growth in Europe. The dire trading of banks will do little to improve the debt-deflationary dynamic at play in Europe.

Likewise, the very poor performance of European equities points to lower growth ahead in Europe. As you can see from the next chart, the returns of the Euro Stoxx 600 provides a six month lead on industrial production. Lower prices in European stocks will yield bargains, but we foresee more pain ahead in Europe.

Negative Feedback Loops

Wikipedia comments on Negative Feedback Loops.

Whereas positive feedback tends to lead to instability via exponential growth, oscillation or chaotic behavior, negative feedback generally promotes stability. Negative feedback tends to promote a settling to equilibrium, and reduces the effects of perturbations. Negative feedback loops in which just the right amount of correction is applied with optimum timing can be very stable, accurate, and responsive.
Negative feedback is widely used in mechanical and electronic engineering, but it also occurs naturally within living organisms.

In context, it is quite clear that Variant Perception means positive feedback loops with negative consequences, alternatively feedback loops that reinforce with increasingly negative results.

The engineering error does not take away from an otherwise useful idea.

Mike “Mish” Shedlock

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