The rise of cross-border investing in recent decades is not the first time the world has seen a significant burst of financial globalization. Indeed, the Second Industrial Revolution coincided with a new era of capital mobility that extended roughly from 1860 to 1915. Foreign investment assets rose to 55 percent of GDP in the major European economies. But the ending of the first age of financial globalization provides a cautionary tale. Two world wars and a global depression not only brought this period of integration to a halt but also ushered in six decades of tightly restricted capital flows and pegged foreign exchange rates. Today it is unclear whether financial globalization will rebound or whether we will enter a similar period of more insular national financial markets.
Instead of asking the endless question of "who should pay for healthcare?" Time magazine's cover story this week by Steve Brill asks a much more sensible - and disturbing question - "why does healthcare cost so much?" While it will not come as a surprise to any ZeroHedge reader - as we most recently noted here - this brief clip on the outrageous pricing and egregious profits that are destroying our health care quickly summarizes just how disastrous the situation really is. A simplified perspective here is simple, as with higher education costs and student loans: since all the expenses incurred are covered by debt/entitlements, there is no price discrimination which allows vendors to hike prices to whatever levels they want. From the $21,000 heartburn to "giving our CT scans like candy," Brill concludes "put simply, with Obamacare we’ve changed the rules related to who pays for what, but we haven’t done much to change the prices we pay."
The baby boomers now retiring grew up in a high returns world. So did their children. But, as Credit Suisse notes in their 2013 Yearbook, everyone now faces a world of low real interest rates. Baby boomers may find it hard to adjust. However, McKinsey (2012) predicts they will control 70% of retail investor assets by 2017. So our sympathy should go to their grandchildren, who cannot expect the high returns their grandparents enjoyed. From 1950 to date, the annualized real return on world equities was 6.8%; from 1980, it was 6.4%. The corresponding world bond returns were 3.7% and 6.4%, respectively. Equity investors were brought down to earth over the first 13 years of the 21st century, when the annualized real return on the world equity index was just 0.1%. But real bond returns stayed high at 6.1% per year. We have transitioned to a world of low real interest rates. The question is, does this mean equity returns are also likely to remain lower. In this compendium-like article, CS addresses prospective bond returns and interest rate impacts on equity valuations, inflation and its impact on equity beta, VIX reversions, and profiles 22 countries across three regions. Chart pr0n at its best for bulls and bears.
The Real Interest Rate Risk: Annual US Debt Creation Now Amounts To 25% Of GDP Compared To 8.7% Pre-CrisisSubmitted by Tyler Durden on 01/13/2013 17:32 -0500
By now most are aware of the various metrics exposing the unsustainability of US debt (which at 103% of GDP, it is well above the Reinhart-Rogoff "viability" threshold of 80%; and where a return to just 5% in blended interest means total debt/GDP would double in under a decade all else equal simply thanks to the "magic" of compounding), although there is one that captures perhaps best of all the sad predicament the US self-funding state (where debt is used to fund nearly half of total US spending) finds itself in. It comes from Zhang Monan, researcher at the China Macroeconomic Research Platform: "The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP."
There are a plethora of reasons underpinning the fact that manufacturing jobs are not coming back to the USA. Perhaps the simplest is purely economic. As McKinsey notes in a recent report, manufacturings' role in job creation shifts over time as manufacturing's share of output falls and as companies invest in technologies and process improvements that raise productivity. A critical finding is that as manufacturing's share of national output falls, so does its share of employment - following the inverted 'U' curve below. Manufacturing job losses in advanced economies have been concentrated in labor-intensive and highly tradable (read globalizable) industries such as apparel and electronics assembly. Thanks to the increased productivity and a 'high' credit-enabled standard-of-living, the US has simply priced itself out of the global manufacturing business (and so is China as its GDP per capita rises). Unless Americans are willing to put the twinkie (and iPad) down, those jobs will continue to bleed overseas (to India based on the chart below) building the ever-more self-fulfilling vicious circle of a nation dependent on state-aid to survive as only the 'unlucky' few remain employed.
Manufacturing industries have helped drive economic growth and rising living standards for nearly three centuries, and for some developing economies (as McKinsey notes in a recent report) continues to do so. Things are changing, however, as manufacturing output (as measured by gross value added) grew by 2.7% annually in advanced economies and 7.4% in large developing economies (from 2000 up until 2007); the leaders are changing rapidly China, India and Russia rise and Germany, Japan, UK, and Canada are sliding. The following chart simplifies the evolution of global manufacturing economies over the last four decades.
Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?
Courtesy of Bloomberg's Michael McDonough, here is how the end game for demographically defunct, deflationary debt holes such as Japan looks like extrapolated into the future. And for the time-strapped it is condensed into 333 words and 3 charts. "Fewer workers and less labor will reduce the potential output of the Japanese economy, which will increase the country’s reliance on imports as retirees continue to spend, inhibiting GDP growth. The rising number of retirees will strain the government’s welfare programs and the country’s pension funds, which have been major buyers of government bonds. Japan already maintains the world’s second-largest debt load in nominal terms at more than $13.7 trillion and growing."
Because Everyone from the Ultra-Rich to Illegal Immigrants Pay Nothing
The most recent decade of 2000 to 2010 has seen the fastest rate of change in the global economic balance in history. During this period, a recent McKinsey research article notes, the world's economic center of gravity has shifted by about 140km per year - about 30% faster than in the period after World War II when global GDP shifted from Europe to North America. The world’s center of economic gravity has changed over past centuries. But since the mid-1980s, the pace of that shift—from the United States and Europe toward Asia— has been increasing dramatically as China is urbanizing on 100 times the scale of Britain in the 18th century and at more than 10 times the speed. One has to wonder what the difference would be were it not for the flawed economic model adopted since the 1980s that relied on debt and asset price inflation to drive demand (as opposed to wage growth linked to productivity growth).
Darker days ahead from the long deleveraging process that just got started in Europe.
The untouchables are rapidly becoming touchables, as former Goldman director and McKinsey head is found guilty of insider trading.
- RAJAT GUPTA CONVICTED OF INSIDER TRADING BY U.S. JURY
- GUPTA FOUND GUILTY OF FOUR COUNTS AND ACQUITTED ON TWO CHARGES
- RAJAT GUPTA MAY REMAIN FREE ON BAIL UNTIL SENTENCING OCT. 18
- GUPTA FOUND NOT GUILTY ON ONE COUNT, JURY STILL READING VERDICT
Next up: McKinsey issues a case study on the proper way to leak confidential, material non-public information.
Stocks are currently priced for a 10% growth rate which makes bonds a safer investment in the current environment which cannot deliver 10% rates of returns. We are no longer in the era of capital appreciation and growth. The “baby boomers” are driving the demand for income which will keep pressure on finding yield which in turn reduces buying pressure on stocks. This is why even with the current stock market rally since the 2009 lows - equity funds have seen continual outflows. The “Capital Preservation” crowd will continue to grow relative to the “Capital Appreciation” crowd.... According to the recent McKinsey study the debt deleveraging cycles, in normal historical recessionary cycles, lasted on average six to seven years, with total debt as a percentage of GDP declining by roughly 25 percent. More importantly, while GDP contracted in the initial years of the deleveraging cycle it rebounded in the later years.