David Rosenberg Goes In Search Of A Positive Exogenous Shock

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From Gluskin Sheff's David Rosenberg

In Search Of A Positive Exogenous Shock

The 1950s and 1960s were influenced by a major positive shock to the nation's capital stock via the ramping out of the interstate highway network. This massive build-out of transportation infrastructure led to massive improvements in productivity, allowed for huge cost cuts for the business sector and led to a secular rise in labour mobility.

The 1970s was spent largely fighting inflationary imbalances in the economy but then the 1980s and 1990s came around and the facts that Microsoft went public in 1986 and Netscape in 1995 were huge inflection points. This was not transportation in the classical sense, but the positive shock to the capital stock from the massive technological improvements that occurred that was the prime reason for the nearly uninterrupted two-decade growth phase in the real economy and bull market in equities. The expansion in the P/E ratio was based on a real structural shift in productivity growth, not an artificial financial skew from the heavy hand of the Fed's balance sheet. Back then, tax rates were going down, not up. Success at the margin was being rewarded, not penalized (about half of American households, in classic European fashion, now are recipients of at least one form of government assistance).

The focus was on income and wealth creation, not redistribution. Compromise, not rancour, was the order of the day in Washington. Interest rates were high and on their way down, not the other way around. The median age of the boomer was in her 20s, not the mid-50s. Labour force participation rates were on a secular increase, adding to secular growth trends in the real economy, not in a secular decline. Government was getting out of the way, not in the way. Credit creation was also in a secular positive growth phase, deleveraging was nowhere to be seen or heard. Europe and Japan were strong. And in the U.S.A., we had policy that understood the benefits of underpinning the supply side of the economy — even Bill Clinton understood that in the 1990s and that is why all the defense cuts at the time in California merely blazed the trail for the boom in Silicon Valley. Cisco Systems owes its long-term success as a private company contributing to the downsizing in the military back in the early to mid-1990s.

It's time to stop living in the moment, roll up our sleeves, and get serious about discussing the future of the economy which, by the way, is not about relying on residential real estate and the impact of home prices or the consumer's willingness to go out and buy one more iPhone.

The reason why the past four years has been so dismal, over and beyond the failure of the labour market to fully recover among other things, is that we have gone through the weakest period in the post-WWII era in terms of growth in the private sector capital stock. We invented the Internet and spent years after spreading its applications and co-mingling the technology with labour so as to bolster multi-factor productivity. But that golden age was 10-15 years ago. Despite some really impressive stuff going on in the biomedical field to be sure,  and what Apple has done in terms of introducing its array of impressive consumer gadgets, growth in the private sector capital stock since 2009 has been the softest on record.

The implications this stagnation will have on that key supply-side component of the economy, otherwise known as productivity, are not good at all — it is amazing that there is such little attention being played to the Q4 contraction in real nonfarm business output per hour worked. And coming at a time of deteriorating demographic trends, it would not be a surprise to end up seeing the U.S. non¬inflationary growth potential, once seen at over 4%, to come in at 2% or lower. How this ends up fitting into expanded fair-value price/earnings multiples would be interesting to see.