Few if any commentators understand what is happening in the US today. The reason for this is that the vast majority of investment professionals believe that what they’ve experienced in their lifetimes is the norm.
Put another way, an entire generation of investment professionals has:
1) Never witnessed a secular economic change
2) Never witnessed or invested during a bear market in bonds
3) Hasn’t studied enough history to know about either of these items
I firmly believe that what’s happening in the US today is not a cyclical recession, but a one in 100 year, secular economic shift.
See for yourself. Here’s duration of unemployment. Official recessions are marked with gray columns. While the chart only goes back to 1967 I want to note that we are in fact at an all-time high with your average unemployed person needing more than 20 weeks to find work (or simply falling off the statistics).
Here’s the labor participation rate with recessions again market by gray columns:
Another way to look at this chart is to say that since the Tech Crash, a smaller and smaller percentage of the US population has been working. Today, the same percentage of the US population is working as in 1980.
Here’s industrial production. I want to point out that during EVERY recovery since 1919 industrial production has quickly topped its former peak. Not this time. Despite spending TRILLIONS in stimulus industrial production is well below the pre-Crisis highs.
Again, what’s happening in the US is NOT a garden-variety cyclical recession. It is a STRUCTURAL SECULAR DEPRESSION. And the reason is that we are currently witnessing the collapse of the greatest debt bubble of all time.
Going into this recession, total US credit market debt was at its highest level of all time: over 350% of GDP. In comparison, during Roosevelt’s New Deal during the Great Depression we hit only of 300% total GDP.
Debt is absolutely endemic in our financial system. The average non-financial corporation in the US is sitting on a debt to equity ratio of 105%. Bank leverage, while relatively low compared to Europe (13 to 1 vs. 26 to 1), is still high enough that an 8% drop in asset prices wipes out ALL capital.
Debt is absolutely endemic in our financial system. The average non-financial corporation in the US is sitting on a debt to equity ratio of 105%. Bank leverage while relatively low compared to Europe (13 vs. 25) is still high enough that an 8% drop in asset prices wipes out ALL capital.
The situation is even worse for the US consumer. During the housing boom, consumer leverage rose at nearly twice the rate of corporate and banking leverage. Indeed, even after all the foreclosures and bankruptcies, US household debt is equal to nearly 100% of US total GDP.
To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).
Again, this is not a garden-variety recession. This is a structural secular DEPRESSION. And we’re nowhere near the end of it. Indeed, if anything, we’re about to enter the second and worst round of the Great Crisis: the sovereign debt round.
Folks, we’re not out of the woods yet… not by a long shot. The same problems plaguing Europe today are coming to the US’s shores. And when they do, everyone will realize what I’ve been saying since 2009: that 2008 was the warm up… the REAL Crisis is when the US defaults and we face systemic collapse.
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