When you look at what the US has gone through over the last decade, in terms of the job market, what stands out is the total decimation of jobs during the Great Financial Crisis. But something else stands out too — and that’s demographics.
Quick hit here. I have been banging on about lowflation, repeatedly suggesting it is here to stay. The Fed, on the other hand begs to differ and is pre-emptively normalizing rates, as a result. No matter how you look at this, there’s a rub though: We all consume different products, […]
For managers of money, the post-crisis low growth world has had major implications for asset allocation strategies. Assumptions about returns are greatly affected by the both monetary easing used to counteract the slowing and the yield curve flattening indicative of that easing’s ineffectiveness. Recent research on demographic trends and wage growth suggest trends now in place may continue, with grave implications on returns.
Mean Reversion of Wealth is one of the six structural mega-trends that we have identified. As is pretty obvious when looking at chart 2, wealth creation during the great bull market of 1981-2000 was quite extraordinary and, in our opinion, unlikely to be repeated anytime soon. Wealth simply cannot outgrow GDP indefinitely, as it has done in most years since the early 1980s. It is only a question of time before mean reversion kicks in.
The abrupt spike in interest rates from mid-April to mid-May is very unlikely to be the beginning of something much bigger and much more likely to be the sort of occasional panic attack that Japan has seen so many of in recent years.
Going forward, equity markets are likely to have a much bigger impact on the economy than has been the case in the past. This is a simple conclusion derived from the fact that total equity market value today is 1.2x GDP. 35 years ago, when we entered the great bull market, total equity market value was only 0.4x GDP (the numbers are U.S.). No wonder the financial collapse in 2008 had such a dramatic effect on the economy.
Finnish society, like many other European ones, is in the throes of a major transition. More debate needs to be held on what to do to facilitate the transition, and in the meantime deficit spending to make investments in future productivity improvements seems not to be a bad idea. Running deficits in order not to change, in contrast, would be.
It is quite possible that more than one end game will unfold in the months and years to come. For example, we could see a Greek Eurozone exit. Simultaneously, we could have a crisis unfolding across emerging markets, as the strong U.S. dollar begins to do damage to borrowers in those countries, of which there are many. Quite how it will all pan out is very difficult to predict. If I were a betting man, my money would be on the ‘permanent condition’ becoming the generally accepted view of the future economic environment.
We are still in a post-crisis environment, and enough people are still negative on equities, and interest rates are low enough, to provide plenty of purchasing power. We therefore expect it to be an ok period for equities over the next year or two – not outstanding given our modest growth expectations but ok. The trick is to be careful on emerging markets. If the U.S. dollar continues to be strong, it is an accident waiting to happen.
Last night, Japan’s GDP figures for Q3 came in much lower than expected. GDP fell an annualized 1.6% versus expectations for an annualized increase of 2.2%. This is as large a miss as you will see, and it calls into question the economic program administered by the Japanese government and the Bank of Japan. I have not been optimistic about Japan for some time. However, I think the numbers overstate the decline and have some further macro thoughts below.
The Absolute Return Letter, November 2014 “The single most robust and striking fact about cross-national growth is regression to the mean.” -Lawrence Summers and Lant Pritchett Low growth is printed on the wall When financial markets capitulate, many investors lose the ability to keep things in perspective. That is a […]
While there is no definitive answer at this point to the question whether or not what we are seeing is a creeping process of secular stagnation which will gradually spread from one economy to another as the respective working age populations start to contract, there is strong prima facie evidence that the theory is worth examining and that the hypothesis should continue to be tested.