"We think that something structurally has changed since the GFC, a change that seems destined to continue to hold back growth in the near-term and more worryingly has lowered the longer-term trend rate of growth. In the absence of structural reforms, a lack of appetite for debt restructuring and no ability to pursue more aggressive fiscal policy, the temptation will be strong globally to continue to throw liquidity at the problem which is likely to continue to have more impact on asset prices than the actual economy. Bubbles could easily form which could ultimately be the catalyst for the imbalances that will likely lead to the next recession or crisis... Our base case is that the world needs low yields and high liquidity given the huge amount of outstanding debt that we’re still left with post the leverage bubble and the GFC. There’s still too much leverage for us to believe that accidents won’t happen with the removal of too much stimulus. If we’re correct, we may see a reaction somewhere to tapering and this in turn may force the Fed into a much slower tapering path than it wants."
Much is made of the expected hockey-stick - any quarter now - in US GDP growth (whether it's a lower fiscal drag or rise in CAPEX or any range of miracle-driven hope factors). Credit Suisse is not so sure; not just in the short-term, but in the long-term of the potential for US GDP growth. They note that basic growth accounting provides links between potential GDP to the size of the labor force, its productivity, and the capital assets – both public and private – it has available to work with. The problem - longer-term for the US, is, as CS notes, the following four exhibits collectively speak to the recent slowdown in potential, and do not augur positively for future growth.
Forcing young workers to pay into a Ponzi Scheme is generational injustice on a vast scale.
"The major themes are unchanged – anaemic global growth/mediocre fundamentals, what I consider to be extraordinarily and dangerously loose (monetary) policy settings, very poor global demographics, excessive debt, an enormous misallocation of capital driven by the state sponsored mispricing of money/capital, and excessive financial market/asset price speculation at the expense of any benefit to the real economy. As I expect marginal higher highs before the big reversal, and while my target for this high in the S&P over the next five months remains anchored around 1800, an ‘extreme’ upside target could see the S&P trade up to 1850. Put it another way – before we see any big risk reversal over 2014 and 2015, we need to see more complacency in markets. I am looking – as a proxy guide – for the VIX index to trade down at 10 between now and end Q1 2014 before I would recommend large-scale positioning for a major risk reversal over the last three quarters of 2014 and over 2015.... Beyond Q1 2014, the longer term will all likely be driven by the growth data and the credibility of policymakers and what seems like an all-in ‘bet’ on QE as the solution to our ills."
How do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world? History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world - at least not yet - but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of youth. Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion..
We have long discussed the 'hidden' and not-so-hidden inflations that are impacting the standard of living for all but the wealthiest in America... and it is hardly new to anyone that the USA faces a demographic dilemma as aging boomers draw down on an ever-shrinking base of entitlement provisions... However, when we saw this slide from Kimberly-Clark's latest earnings call, we were surprised at just how clearly these two trends showed up...
Some confidence tricks have characteristics that don’t quite fit the Fonz. Take the swindles known as Ponzi schemes. These are tricks that need an endless supply of participants to sustain confidence and stay alive. Once the participant pool depletes as it eventually must, the tricks are revealed as scams. Whereas Fonzies can persist indefinitely (at least in theory), Ponzis eventually collapse. Note that the U.S. has already passed its Ponzi point by Minsky’s definition. According to Minsky, borrowing qualifies as Ponzi finance whenever fresh issuance is needed to fund interest on existing debt. Based on the common assumption that the U.S. would miss its interest payments without regular increases in the statutory debt limit, this is indeed the case
There is a profound disconnect between the Higher Education cartel and the economy and what higher education should cost in a world where information, instruction, and knowledge have fallen to the cost of bandwidth; i.e., near zero. What was once costly and scarce (knowledge and instruction) is now nearly free and abundant, readily available on any digital device anywhere in the world with a connection to the Web. There is no need to concentrate students in a campus with a library; every web-connected digital device is a library and university combined. The Higher Education cartel is perfectly happy to encourage degree inflation (at enormous expense, of course), but this zeal for issuing student-loan-funded diplomas fails to address two structural disparities: the one between the skills needed to prosper in the emerging economy and the skills colleges are providing students, and the widening income/wealth/education gap between the wealthy and the non-wealthy.
Structural declines in miles driven, middle and working-class income and rising competition from dollar stores may be leading to Peak Walmart. Walmart's model of superstores built on the edge of town with an inventory/distribution system based on high turnover may have reached the point of diminishing returns. Peak Walmart may also presage Peak Mall Shopping and Peak Retail in general. The poaching of competitors' customers appears to be replacing real growth, and perhaps the impending demise of JC Penney is simply the first of many such victims of the retail shark pool.
Last week we destroyed in detail the fallacy that the plunging participation rate in the US was related to demographics. Despite Ben Bernanke's comments during his press conference last week that demographics play a role, it seems Fed's Dudley and Lockhart have a different view - in line with ours.
- *DUDLEY SAYS UNEMPLOYMENT RATE DECLINE `OVERSTATES' PROGRESS
- *LOCKHART SAYS A NUMBER OF EXPLANATIONS FOR PARTICIPATION RATE (as we covered here)
- *U.S. FED'S DUDLEY SEES 'HOLLOWING OUT' IN LABOR MARKET INCLUDING FACTORY WORKERS
- *LOCKHART: LOWER PARTICIPATION MAY MEAN LOWER ECONOMIC POTENTIAL, WHICH IS A CONCERN
What now? Instead of demographics (the aging of America fallacy), it is a 'hollowing out' of our manufacturing base and this leads to lower economic growth potential. It seems Stockman's 'born-again jobs scam' is very real.
Why aren't rising stock markets being greeted with wild celebrations? We think the study of socionomics may offer some clues.
Since the global economic crisis began in 2008, Italy’s GDP has declined by about 8%, nearly a million workers have lost their jobs, and real wages have come under increasing pressure. The most striking aspect of Italy’s recent turmoil is what has not happened: citizens have not poured into the streets demanding reform. Indeed, throughout the crisis, Italian society has remained uncharacteristically stable. Japan’s experience – characterized by more than 20 years of economic stagnation – offers important lessons for crisis-stricken democratic countries with aging populations. During Japan’s “lost decades,” successive Japanese governments allowed public debt to skyrocket and refused to confront the economy’s deep-rooted problems, allowing sclerosis to take hold. In fact, Japan’s leaders had little incentive to pursue bold reform, because voters consistently failed to demand it. The question now is what kind of shock would be required to motivate Italians to demand similar action.
The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.
Today's TIC data showed something disturbing: for the fourth month in a row, foreigners were net sellers of US Treasury paper in July , as total foreign holdings declined from $5.600 trillion to $5.590 trillion which represents 49% of total marketable debt (including the debt owned by the Fed of course). In other words, since peaking at $5.724 trillion in March, foreign-held debt has declined by $134 billion, at a time when yields have surged on fears the Fed's tapering of its own purchases of bonds will mean less Fed frontrunning opportunities. However, it is only when broken down by gross purchaser, that we see just who is to thank for this surge in buying of Treasury paper in the month of July. One look at the chart below should explain it...
The number whispered on Wall Street is $10 billion (or $14-$15 if you ask The Saudis), but potential investors in the micro-blogger’s IPO will need more to go on than simple valuation math and guided judgment. As ConvergEx's Nick Colas notes, Tech firms are particularly dependent on innovation and human capital for their viability. So while Twitter may come out with a double-digit billion dollar IPO, Colas points out the most important question – Is it actually worth buying there? The bottom line to the success of thriving tech companies (historically names such as Amazon, Google and Apple) is that they consistently and reliably build products that people want to purchase and use. Colas explores multiple avenues to determine whether Twitter has the engine to do this, or whether it could emerge more “Groupon” than “Google” in the public company tech arena – and the answer lies in how you weigh the pros and cons of our top 10 points related to the social network’s IPO.