How to Play The New Normal
I sort of challenge Bill Gross on the new normal here:
“Every decade or so, investors are told to heed a new megatrend, whose chief appeal is, well, its newness. In the ’90s, investors were sold on the notion of a New Economy that wasn’t subject to the old laws of gravity and, among other things, could support higher stock valuations. And one of the best-selling investing books of the past decade was The New Investment Superstars, a tome that canonized a new breed of fund wizards, some of whom later proved to be mortal. Now comes the latest investment fad, the “new normal,” the idea championed by Pimco bond guru Bill Gross that the U.S. has entered a period of diminished expectations that requires investors to rethink their long love affair with stocks.
There’s a certain Biblical undertone to the new normal orthodoxy: After decades during which consumers lived beyond their means, the nation must now endure a long stretch of lean years during which consumers pay down debt. In the minds of Gross and Pimco colleague Mohamed El-Erian, the prospect of a period of no growth means investors should hold as little as 30% in stocks, vs. the 60% long deemed the proper mix. They also recommend holding more fixed-income assets like bonds and bank loans, as well as commodities.
The risk for investors is that the new normal proves to be merely the latest investment fad, and by moving into bonds they miss future rebounds in stocks. “The new normal is just a different way of saying ‘It’s different this time,’ and that’s often a recipe for disaster,” argues Barry Ritholtz, chief executive officer of Fusion IQ, a quantitative research firm. “The mathematician in me says we’re just reverting to the mean.” Ritholtz believes the U.S. will recover, but it may need years to work off its 25-year debt binge. He sees “a lot of parallels” between now and the 1973-74 recession, a downturn he says that serves as a good composite of the 19 previous bear markets. Then and now, the market fell more than 45%, then rebounded 60% to 70% (chart). If past is prologue, Ritholtz thinks there could be another leg down, a few years of treading water—and a powerful bull market starting around 2012 or 2013.”
Its not really a ‘It’s different this time’ — its mroe along the lines of “This is a normal secular Bear market trading range. That’s what happens.”
>
Source:
How to Play It: The New Normal
Dean Foust
Business Week, September 24
http://www.businessweek.com/blogs/personal_finance/archives/2009/09/new_normal.html
September 26th, 2009 at 4:37 pm
I’m not anyone could know what the new “normal” really is at this point.
Right now we have a government spending/borrowing our nation to the extreme that govt defaults/insolvency must surely be part of the “what if” forecasting.
How could anyone recommend investing in UST at this point??
I can’t remember who posted the link the other day….but this is really a must see….
Julian Robertson offers his take of the possible outcome of our current “policy”/madness.
http://www.fundmymutualfund.com/2009/09/julian-robertson-us-may-face-armageddon.html
September 26th, 2009 at 4:40 pm
“If past is prologue, Ritholtz thinks there could be another leg down, a few years of treading water—and a powerful bull market starting around 2012 or 2013.”
Sigh. Why do markets never price in demographics? It’s not like the information isn’t there, or anything.
The risk of a demographic ‘minsky moment’, at some point in the next 2 years, probably triggered by something bernanke or some other monetary wizard says regarding unfunded government liabilities is high.
That doesn’t mean we can’t have a nominal bull market of course, but a bull nominal, bear real market is continuation of the status quo, not ‘a new bull market’.
September 26th, 2009 at 4:53 pm
The new normal will (eventually) be the story of global economic growth resulting from above average consumption growth in emerging markets balanced with no/slow growth in the USA, Japan and old Europe. Stocks that will do well are those that are positioned to excel in this new normal.
September 26th, 2009 at 4:58 pm
bsneath, does the above imply growth, or does it net out to zero, especially when existing debt is factored in?
’sides, emerging markets in asia will be old and grey within 20 years. Plus, china wuill have vast excess of young men with no young women to match.
All sounds like a bad case of confirmation bias to me (looknig over shoulder at 300 years of population growth history).
September 26th, 2009 at 5:10 pm
scepticus brings up a good point-
the demographics all point to less consumption- not more- regardless of people hunkering down to pay off debt-
pretty much trumps everything- less people paying for more and more people partaking of SS and Medicare-
colossal drain on the economy- not saying it’s a bad thing to look after the seniors- but it will be a determining factor in growth
September 26th, 2009 at 5:30 pm
this is the first time in history i have agreed with PIMPCO and bill gross. i see nothing that resembles the 1970’s period. i see nothing that resembles any period in history. it is far worse this time around
September 26th, 2009 at 5:39 pm
I think the safe bet here is to go with multi-nationals as bsneath implies. Though the US will undoubtedly struggle going forward, the rest of the world will ‘emerge’ to a new level. I think we are witnessing a global leadership change, not a global slowdown. With that new leadership will come new freedoms and economic dynamics. Those that try to hold on to the last 20 years will probably see their hands bloodied
For other US stocks, we may get stagnation but I doubt the money men will have us do it without volatility. If they can’t make their money pushing things up, they will probably then make it shaking things violently side to side
September 26th, 2009 at 5:57 pm
“i see nothing that resembles the 1970’s period.”
I do. 1975-1985s was the decade boomers enter the workforce. 2010’s are the decade they leave it, all over the world.
1975: stagflation, 2010: stagdeflation.
Compare: rich western boomer leaving workforce with penniless indian entering workforce. Hardly a quid pro quo.
1970’s western boomer kids had the advantage of western infrastructure and education behind them, not to mention recent destruction of industrial capacity as a result of WWII. The new population growth regions are still farming rice paddies and have little use for blackberries (unless they can be eaten) and face huge world industrial overcapacity.
The refusual to consider fundamentals begs the minsky moment, in which fundamentals finally and quickly get priced after being ignored by TA types for far too long.
September 26th, 2009 at 6:11 pm
@HH 5:30
I was going to say that same thing.
September 26th, 2009 at 6:13 pm
Deflation is only dangerous to borrowers. For the poor it is actually a benefit that enables them to compete and save money. I’m glad I became debt free because I can now make a wage that has a 5% – 12% premium that the average worker now demands in order to meet his debt obligations. Plus, if you actually have an emergency fund or are saving in order to purchase your durable goods and transportation, you get yet another premium in the form of interest on those savings. It amounts to swimming with the current instead of swimming upstream.
That is what a lot of workers in those emerging markets are doing now so their rise to leadership will happen a lot quicker than anyone expects
September 26th, 2009 at 6:16 pm
@ scepticus
“I do.” Then you proceed to contrast the two periods. Hey, I agree with everything you are saying except that you used semantics to say that the two periods are the same when your analysis proves why they aren’t. Anyway, nice analysis, including the possibility of a continued “nominal bull market” which we’ve seen since 2001, as measured by gold.
September 26th, 2009 at 7:11 pm
does anyone know a good source where i can read about japanese lost decade?
from what i know it seems like they went into a super asset inflation ponzi scheme….which collapsed bringing all the banks down…and the government only option was to support the banks…due to which even today real estate over there is not affordable.
i have heard that japanese population age also entered a change at that time leading to lower consumption and higher savings.
USA real estate is nowhere super inflated right now….in most places its pretty affordable…..except the fear of losing job
USA consumer maybe too leveraged with falling wages, does anyone know about any source where we can look at data about consumer indebtness?
india and china have the right population to start consumption growth….but i am a bit wary of their political system(not to mention the asset inflation in these two countries is crazy)
we are definitely in defaltionary period….with no sign of growth in usa. but i am kind of thinking that maybe the USG will take all the debt off the balance sheet of private industry and consumers into its balance sheet…and reflate our way out. need to do more analysis…anyone know some source on this?
September 26th, 2009 at 7:20 pm
You’ve ridden a culture of debt and liquidity your entire life, Barry.
Boomers are retiring soon and they ain’t buying stocks. Young’uns are face soaring education costs, job-competition with the un-retired boomers, high house prices, no wage growth for most classes in the past decade, zombie banks and malinvested businesses being propped up by government. Good luck with that saving and scrimping, kids, especially when we (i.e. you) have to start servicing your parents’ debt payments and unfunded entitlement liabilities. Our manufacturing base has decamped to the periphery or is “Designed in California, Assembled in China”, our military is overextended in two fruitless wars (with hints of a third in the offing), our political discourse has mangled itself into two hyperpartisan factions and a third disinterested disillusioned rabble.
I’m sure the Rapa Nui thought the gods of Easter Island would bring back the trees, as they cut the last one down for the new house extension that would totally make the neighbors jealous.
September 26th, 2009 at 7:24 pm
Doug Noland knocks it outta the park:
“the worst-case scenario at this point would include a robust global rejuvenation of Credit and asset Bubbles, rapid synchronized economic recovery, and a rebirth of bullish expectations.”
http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10279
September 26th, 2009 at 7:25 pm
“Ritholtz believes the U.S. will recover, but it may need years to work off its 25-year debt binge.”
BR is on the right track, but holy understatement…it’s a 55-year debt binge that has taken total credit from 130% of GDP to 370%. May take decades to work off, unless you want to rip the band-aid right off.
~~~
BR: Look at this chart: The Debt to GDP Ratio was rising since 1950s, but it went near vertical starting in 1981 . . .
September 26th, 2009 at 7:26 pm
Barry Ritholtz says …
Its not really a ‘It’s different this time’ — its more along the lines of “This is a normal secular Bear market trading range. That’s what happens.”
… maybe … but from an economic perspective, this is a LOT different than any previous downturn. The stock markets may well play it as just another bear-bull market swing, but if the US Treasury defaults on its debt or is forced to radically devalue the USD, then it’s a whole new ball game, in waters that this nation has never before traversed. Just look at the levels of debt relative to the GDP, relative to any metric you want to consider. There is a limit to a dying economy’s ability to make the payments on sufficient levels of debt.
Maybe we have hit rock bottom back in March, and there will be an excruciatingly slow and lengthy period of recovery going forward. But with the Fed at zero, and our lines of credit tapped out, and the Congress and President unwilling to blink when it comes to cutting spending, I think there is another side to the coin worthy of consideration.
We’ll see where things go, when in the weeks and months ahead, the Fed is forced to unwind its monetary support of All Things and the recovery begins to unravel. I’m thinking that we have not yet come anywhere close to the valuation levels previously seen in severe recessions — those would be single-digit PEs.
Of course, it’s possible that things really are “different this time”, and we will not see a bottom in the stock markets comparable to the bottoms in ‘49, ‘73, ‘80, ‘83 — and so long as rates are sitting around zero, these ridiculous valuations CAN be supported.
But the Fed will not be able to keep rates at zero indefinitely … just ask the folks in Zimbabwe. Printing money as the only policy is a bad idea. Eventually the rest of the planet stops taking dollars without a sufficient interest premium, and when that happens, the equity markets are going to try to drill, baby, drill — all the way to China.
If unemployment begins to recede, and foreclosures abate, then consumer confidence will return and the low rates will become effective. But that does not appear likely in the near term (2-3 years, at least), and it sure seems to me that Bernanke is going to run out of tricks long before the consumer returns. At least that’s the perspective from out here in the Real World. Over the next few months, the world of finance may get introduced to the Real World, we’ll have to watch the numbers and see.
September 26th, 2009 at 7:27 pm
oops … forgot to append the link to this Classic Big Picture item …
http://www.ritholtz.com/blog/2009/08/chart-of-the-day-sp500-pe-ratio/
September 26th, 2009 at 7:29 pm
This graphic today Floyd Norris in the NYT shows what I mean about an uninterrupted 55 year debt orgy that must be delevered. The delevering has barely started and you see the problems it has caused.
September 26th, 2009 at 7:39 pm
I agree with the reversion comment of Barry… except that for most people they are so short term that they have no idea what mean we are reverting to. It is much more simple to explain that this is the “new normal” than to try to explain mathematically what reversion is to a society with a 5th grade reading level…
September 26th, 2009 at 7:40 pm
One way to look at things in a reversion-to-the-mean way is to have a chart that compares average and peak annual compensation in the US, the rest of the “developed” world, and the “emerging nations” over the past 50 years of so.
If Tom Friedman is correct about the global landscape being flattened by globalization, we should see the emerging nations rising to meet the falling US compensation. That should give an idea of how far along that path we are.
Of course, it’s possible that Friedman is wrong about everyone converging to globally competitive wages, or that the predicted convergence will not arrive for another 50-100 years, or that we can have periods of upward movement on a generally downward-sloping path (downward-sloping for the “richest nation on earth”) on the way there.
September 26th, 2009 at 7:49 pm
The demographics and the plight of the children of the baby boomers, not to mention many boomers who are in dire straights themselves, will be a huge factor in any recovery. Real wages have been stagnant for 20 years and many boomers have lost huge amounts of net worth in real estate and stocks. Health care is a crushing expense for many and getting more expensive by the year. I know of few boomer children who are really doing well, many are being crushed by huge student loans, low wages, college degrees that mean little, and many work at jobs that offer zero benefits. And everyone knows people or family members who are facing un and under employment, foreclosures, bankruptcy, and little hope for the future. I know many boomers who lost their best job years ago and never found one that paid nearly as much, and are working at jobs they sneered at in their 20’s.
I do not see a great deal of economic progress for decades. A normal recession takes years to overcome, this nuclear bomb will take decades of lower standards of living, paying off debt, and reduced career expectations.
Investing? What money will be left to invest? Unless Gross is only talking about the privileged 1%, the rest of the folks are looking for ways to cut their expenses. After the bloodbath of the combined collapse in stocks and housing prices, who has much left to invest?
September 26th, 2009 at 7:50 pm
“between now and the 1973-74 recession”
Yes. Perhaps savers will begin reaping the benefits of higher interest rates on their money, soon. As that’s what followed in the late 70s and earlier 80s.
September 26th, 2009 at 7:57 pm
@Steve Barry 7:29 pm
Denninger has a rant about the Fed growing debt (or feeding a growing debt via cheap money) that has a couple of charts that make the point a bit clearer than Floyd Norris does … esp. the “Ponzi Finance Indicator” chart
http://market-ticker.denninger.net/archives/1465-HR1207-Audit-The-Fed.html
September 26th, 2009 at 8:08 pm
Meet the New Normal. Same as the Old Normal.
I get Gross’s point about the consumer, but…
Too Big To Fail Banks are still too big, even bigger! Government printing presses are still printing $$$ like mad, this time in an effort to reflate the credit bubble and prevent an economic death spiral. Government still spending money like a drunken sailor. GSE’s still engaged in irresponsible behavior with a backstop by the US Taxpayer. Big Business and Politicians (public servants LOL!) still colluding for the benefit of Big Business. “Banks” still acting like gamblers in a casino, again with a backstop from the US Taxpayer. Rating agencies still being paid off for ratings. Pay-to-play crap still dominates the programming on BubbleVision.
Our society is nowhere near “broken” enough to result in true reform. The Old Guard is still in charge.
September 26th, 2009 at 8:20 pm
@ constant
“There has been much made of whether a Fed Audit would “compromise” Fed independence”.
No, it would simply confirm what most of us already believe so that’s why it doesn’t happen. Great article, he absolutely nails the reasons and I completely agree that the FED should be audited, but….
September 26th, 2009 at 8:20 pm
how to play the new normal…
reversion to the mean will not be without overshoot
we have a lightly damped system, perhaps with negative feedback – it can’t be nailed perfectly
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6234939/Money-figures-show-theres-trouble-ahead.html
September 26th, 2009 at 8:22 pm
…make that negative feedback
September 26th, 2009 at 8:22 pm
…err…POSITIVE feedback
September 26th, 2009 at 8:47 pm
United States of Airlines, that is my playbook, how are they doing since 9-11? IMHO, one of the problems is the mass memory of the deprssion is from black and white photo’s and stories. Things do not look bad on the surface, my street is still clean the lawns are all cut, and the planes are very similar, they are big an shiny and on time, now what is going on behind closed doors…….no growth, saving every penney, charging every dime they can and struggling with the reality of a nation who for 30 years have been trained to fly round trip anywhere in the usa for 400 bucks, they will not pay 5 or 6, so the price is entrenched and they have volatile oil as a best friend…….not a comfy place to be, yet, they soldier on, as we most all will
September 26th, 2009 at 9:37 pm
Why isn’t this bailout villain in prison!!??
September 26th, 2009 at 9:41 pm
Look how this polecat Bill Gross fleeced the U.S. taxpayers and investors:
Gaming the Bailout: How Washington Continues Making The Saudi Arabia of Bond Funds Ever Richer
September 26th, 2009 at 9:47 pm
I guess… out of all the things I have read and heard about, the thing that absolutely blows my mind is the obvious criminal and near-criminal activities that took down the global financial system, that we find ourselves here in a world 1 year later where no one saw it coming, no one did anything wrong and furthermore have done nothing to prevent it from happening again. Have we gone completely mad?
It is not unlike a functioning alcoholic who thinks he is different and he can handle his problem without ever coming clean and without ever changing his ways. It’s all in the allusion, the persona, the appearance until reality overcomes the stages of deception.
How could our leaders be so stupid and so corrupt as to look into the eyes of the devil only to spit and laugh in his face?
If you take into consideration, the financial back-drop, the massive government debt, the unfunded social programs, the demographics, the loss of jobs and the general malaise already being experienced by most of the middle-class, one begins to realize that there is no source or means in which to pull out of this decline. I hate the term “perfect storm”; but, that is what it looks like to me.
And if there is any truth to China becoming a net importer any time in the next 10 years, then we’re all fucked….we really are.
September 26th, 2009 at 10:00 pm
““That’s much worse than not buying,” he said. “The other thing is, they’re buying almost exclusively short-term debt. And that’s what we are offering, because we can’t sell the long-term debt. And you know, the history has been that people who borrow short term really get burned.”
from: Julian Robertson offers his take of the possible outcome of our current “policy”/madness.
via Christopher @ 16:37, above.
Not many have had the Brass to point out that tell-tale tidbit.
Many have asked: ~”With the 30-yr in the 4’s, Why aren’t we selling more of them?”
Hard to Sell what they aren’t Buying.
~~
cn,
Freidman is a paid Carnival Barker in the employ of the CFR. Similiar, in function, to Gross, et al. from PIMPCO. Their ‘new Normal’ forecast is nothing more than predictive programming softening up the ‘Cained Peep for lower standards of living..
“Globalization”, as we’ve come to know it, is an Economic Fraud, and a smoke-screen to obscure the Financial raping of, primarily, the U.S., and, also, W. Euroland.
see: “When the first triennium of the Trilateral Commission was launched in 1973, the most immediate purpose was to draw together—at a time of considerable friction among governments—the highest-level unofficial group possible to look together at the key common problems facing our three areas. At a deeper level, there was a sense that the United States was no longer in such a singular leadership position as it had been in earlier post-World War II years, and that a more shared form of leadership—including Europe and Japan in particular—would be needed for the international system to navigate successfully the major challenges of the coming years.
The “growing interdependence” that so impressed the founders of the Trilateral Commission in the early 1970s has deepened into “globalization.” That interdependence also has ensured that the current financial crisis has been felt in every nation and region. It has fundamentally shaken confidence in the international system as a whole. The Commission sees in these unprecedented events a stronger need for shared thinking and leadership by the Trilateral countries, who (along with the principal international organizations) have been the primary anchors of the wider international system. Doubts about whether and how this primacy will change do not diminish, and, if anything, have intensified the need to take into account the dramatic transformation of the international system. As relations with other countries become more mature—and power more diffuse—the leadership tasks of the original Trilateral countries need to be carried out with others to an increasing extent…”
http://www.trilateral.org/about.htm for starters (if you can find an older, cached, version of that piece, it is much more lurid in its details)
LSS: “Globalization”, going fwd:, if it does, will not continue via Economic choice, but will be coerced by Financial dictate..
for, further: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=trilateral+commission+CFR
past that, re: Real Wages: From 1830 through 1970 real wages for workers rose every decade. But real wages are not rising now. http://www.econbrowser.com/archives/2005/12/declining_real.html
Correlation is not Causation?
September 26th, 2009 at 11:01 pm
Meet the New Normal. Same as the Old Normal.
September 26th, 2009 at 11:11 pm
OT:
Rep. Alan Grayson tees-off on the head of the Fed’s lead lawyer. I’m never disappointed by Grayson.
http://www.youtube.com/watch?v=mXmNpdYpfnk&feature=player_embedded#t=32
September 27th, 2009 at 1:30 am
@scepticus
You have your boomer generation off by a few years. The first boomers were born in 1946, they entered the work force in 1964, not 1975, just as the last boomers were being born. This is a huge generation which covers 1/3 of the total American native born population. Plus, the rate for college graduation, which was skewed by the the Viet Nam war, was much less than it is today was about 25% at most, and many degrees were finished after the traditional college years. The Viet Nam war spending combined with the spending on the War on Poverty, New Medicare and Medicaid programs was the reason for the stagflation of the 70’s, not to mention the early and late oil shocks. Not to mention the terrible bear markets of the 70’s and early 80’s. We had inflation because the government was printing money to pay for the war, and the other government programs, combined with a terrible economy, oil shocks, stock bear market and high real interest rates.
Other nations had baby booms that did not coincide with our, like Ireland.
Your analogies about the boomers entering and leaving the work force don’t make sense to me.
The 70’s had huge inflation, we have huge deflation. The 70’s and early 80’s had high interest rates, now we have very low interest rates. Boomers are leaving the workforce, true, but many are way too young to retire, the youngest boomers are only 45-46. The leading edge are just now starting to retire, as they will turn 65 in 2011.
The 74-75 bear market was about as brutal as anything in the modern era. Normal recessions take a few years to get the economy growing again, this one will be like the 1930’s where it will take a decade or more to come out of this mess.
This economy is nothing like the stagflation of that era. Huge inflation does not equate to the huge deflation that we face now.
September 27th, 2009 at 3:05 am
Picking up on a few ideas posted above:
“55 year debt binge…”
I don’t buy this. Bear in mind that an economy which is investing in the future is an economy in debt. An economy with no debt is simply consuming all its output.
If it is growing very fast, debt levels will be very high. Secondly, look at the rise in home ownership. That increase results in an increase in debt, but one wouldn’t refer to that debt as a binge or as ponzi debt. I think the debt binge can be measured from when house prices started exceeding underlying economic growth.
September 27th, 2009 at 3:08 am
@constantnormal re wage arb and globalisation, I think we need to ask what output will be in demand in 20 years. In my view we shift in demand from consumer goods and housing to healthcare, old age care, energy, local transport.
That kind of demand shift is a de-globalising force since most of this output must be produced and consumed locally. What effect that has on wage arb I’m not sure, but personally I’m betting against an acceleration of globalisation.
September 27th, 2009 at 3:14 am
@dss. Your points about the width of the boomer bulge are spot on. The dates I gave corresponded to the peak of that bulge. You are right that the effects of the wave manifest eearlier and hang round later than the dates I gave.
“The leading edge are just now starting to retire, as they will turn 65 in 2011.”
Right. But that leading edge passed peak spending when they were 50, or perhaps 55. This is where the problems have come from – these people moderated their profligate spending.
In another 15 years we’ll have a new problem when they are all dis-saving and consuming their savings. Investment will plummet, and overall real output of the economy could go into a long secular decline.
September 27th, 2009 at 8:17 am
It’s the jobs , stupid!
http://www.nytimes.com/2009/09/27/business/economy/27jobs.html?th&emc=th
September 27th, 2009 at 8:25 am
http://www.cnbc.com/id/33042119
China Launches Probe into US Chicken Imports
I, being of sound mind and boomer age, agree with most of the thoughts above. I think that we are now in a period of “time compression” if you will, which has changed China much faster than anyone thought could happen. I posted a little about that the other day.
I think risk has been increased by this time compression. The tariff snowball is just now gathering steam, and what have we seen in the last few weeks? Tires, paper, metal products in Europe, now chicken, and who knows what else….I seems to me that the era of Greedy Bankers has spawned a general distrust of things outside your sphere of comfort…outside your neighborhood. Melamine in the milk, tires that don’t work, chicken as an economic tool. Governments that spend generational money without enough regard for long term consequences…
As for me, I plan to hike today…
September 27th, 2009 at 9:04 am
“Ritholtz believes the U.S. will recover, but it may need years to work off its 25-year debt binge. He sees “a lot of parallels” between now and the 1973-74 recession…”
Barry is one of the few people I’ve read who can undermine his own argument made in one sentence in the very next sentence.
Debt wasn’t a problem in 1974, inflation was the problem. Private debt levels as % of GDP were HALF what they are today, and inflation was over 10%! Debt holders had a huge tail wind then.
September 27th, 2009 at 9:15 am
@Scepticus:
The figures I always cite are normalized for GDP. Sure the economy grew astoundingly well from 1950 through 2007…and if debt had grown equally astoundingly, at the same pace, debt per GDP would have been flat, correct? Instead it takes more and more debt, mainly from financial engineering, to produce increases GDP…almost 3 times as much debt per dollar of GDP. The economy can’t service all this debt…like a sub-prime borrower.
September 27th, 2009 at 9:44 am
“BR: Look at this chart: The Debt to GDP Ratio was rising since 1950s, but it went near vertical starting in 1981 . . .”
I know the chart way too well, having cited it here dozens of times. A drill down chart to private, non-financial GDP from Ned Davis, with a different scale, shows this craze started in the 1950s. I agree though that the sheer insanity didn’t begin until the early 1980’s and lasted through the Maestro’s term unabated. Whatever caused Americans on the road to this debt addiction, like any addiction, started out controllable at first in the 1950s. Just a few social drinks you know..now a full blown alcoholic.
http://www.comstockfunds.com/files/NLPP00000/290.pdf
September 27th, 2009 at 9:52 am
Might make a good book to trace the roots of the American debt addiction in the 1950s…was it the dawn of TV ads blasting us all hours…was it a fear of getting blown up in the cold war…was it a government conspiracy?
September 27th, 2009 at 10:01 am
“The economy can’t service all this debt”
Two kinds of debt. First – money created by banks. Created as asset/liability pair double entry book-keeping style. Nets to zero, total stock of which equal to M3 minus M0. (M0 is money with no liabilities).
Secondly, bank money re-lent by a non-bank-financial institution. e.g. bank A creates $100 and loans to B. B relends that to C. This has multiplied the debt levels to $200. B here is taking risk from A, but the economy only needs to find the money for C to pay B and then B can pay A. Total stock of this debt in US$ is some 48tn I think.
Now, looking at M3 vs M0 over the last 50 years, M3 has gone up but so has M0, the ratio between seems fairly constant. The overall debt level has sky-rocketed, which has not altered the money supply situation one jot, but has spread risk about. What it has also done, is upped the veolocity of money, which has for a time made up for lack of real growth.
Now that financial game based on relending bank money (derivatives mainly) has blown up veolocity is falling, and the game exposed. However, the debt can be serviced by upping the veolocity sufficiently. Like I said, the overall amount of debt bearing money as a ratio to M0 base hasn’t really changed.
So, which kind of debt are you talking about?
September 27th, 2009 at 10:06 am
SB: Title- When Debt Became GDP.
September 27th, 2009 at 11:09 am
All this debate about debt levels, devaluation, inflation, deflation does nothing for me except cause headaches and doubt and confuses my investment philosophy.
If you are considering an investment horizon of 5 or 10 years, then pondering inflation/deflation makes sense. I personally think we will have both.
if you believe we are in a secular bear/bull market, then invest accordingly but I believe we will see significant movement in both directions and the ability to make sufficient returns will require the ability to buy/sell short at turning points. Market cycles will repeat and optimism/pessimism will reach unrealistic expectations
On a certain level it is satisfying to cuss our leaders and their flunkies but it does nothing to make money in the market. Let’s be real , the people that control the economy and our politics aren’t going to care what we think. Invest wisely, even in 3rd world economies, with inflation, there is money to be made and an upper class
September 27th, 2009 at 2:34 pm
[...] Debating the “new normal” for the economy. (Big Picture) [...]
September 27th, 2009 at 4:24 pm
You mean latest investment fad like Emerging markets and that the back end of the cycle has become the front end? that kind of Investment Fad?
but your assumption is the secular market range is going to be significant.
Let me also mention the unmentionable, it’s not 2003, it’s not 93,it’s not 75 it’s not 29 it’s not 32 or 34. it’s 2009 things don’t repeat, they rhyme.
It’s good that you have decided to Troll Upstream and go after Bill Gross, instead of the fun and games with Misch, it’s a much better game for you.
September 27th, 2009 at 7:04 pm
“BR: Look at this chart: The Debt to GDP Ratio was rising since 1950s, but it went near vertical starting in 1981 ”
BR, that very same chart shows that our current environment is most similar to the period around the Great Depression and nothing like the ’70’s.