Comments on: How to Play The New Normal

By: Myr

Myr — Sun, 27 Sep 2009 23:04:44 +0000

“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.

By: Eric Davis

Eric Davis — Sun, 27 Sep 2009 20:24:10 +0000

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.

By: Sunday links: plain vanilla plans Abnormal Returns

Sunday links: plain vanilla plans Abnormal Returns — Sun, 27 Sep 2009 18:34:30 +0000

[...] Debating the “new normal” for the economy. (Big Picture) [...]

By: dougc

dougc — Sun, 27 Sep 2009 15:09:31 +0000

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

By: zell

zell — Sun, 27 Sep 2009 14:06:44 +0000

SB: Title- When Debt Became GDP.

By: scepticus

scepticus — Sun, 27 Sep 2009 14:01:26 +0000

“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?

By: Steve Barry

Steve Barry — Sun, 27 Sep 2009 13:52:03 +0000

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?

By: Steve Barry

Steve Barry — Sun, 27 Sep 2009 13:44:28 +0000

“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

By: Steve Barry

Steve Barry — Sun, 27 Sep 2009 13:15:43 +0000

@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.

By: Bob_in_MA

Bob_in_MA — Sun, 27 Sep 2009 13:04:59 +0000

“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.