One of the more persistent hopes and dreams of officials, politicians and investors since the GFC is that we’re in some aberrant period and, so long we keep doing what we used to do, it will pass before too long. This can be seen in the general treatment of falling interest rates, which are always about to rise, in the discussions around asset prices, which are always on the verge of recovery, in the optimistic forecasts for fiscal policy, which are always set to benefit from the rebound.
It’s all based around the same false assumption. That the GFC was a cyclical event and we’ll be back to the good old days before you know it. Wrong.
The GFC was and is the pivot point in a structural adjustment that has only just begun, probably has decades yet to run, and before it’s over will likely change our world to something that looks more like the nineteenth century than our super fast modern version (in the sense of slower moving capital not widespread typhous!).
Put simply, we’re in a long term develeraging phase for the global economy following a long term leveraging phase. What this means is that pretty much for the rest of your working life, the world is going to be regularly convulsed as its debts are saved against, inflated away, defaulted upon, and even sometimes repaid! It will shake both private and public sectors repeatedly and will afflict both developed and developing economies.
This is neither good nor bad. It is neither bearish nor bullish. It just is.
I’m not alone in this diagnosis. In fact, outside of MSM commentary, which bizarrely maintains that planet earth is something outside of Australia, households know it already. That is why their savings habits have so fundamentally altered. No longer is there a free pass in “buying the dip” in any asset class. All assets are now equally unreliable. Simple stores of value like cash and gold are structurally on the rise.
Don’t get me wrong. This does not mean there aren’t business and asset price cycles to trade. We’re in one right now. In Australia it’s taking the form of financial repression which has both accelerated debt repayment and increased borrowing by speculators. It’ll run for a while but then either peter out or hit a wall much sooner than it would have in the past, like such surges will everywhere else. It is, like just about everything else these days, a cyclical pulse within a larger structure that will always return to the same basic constraint, that most of the world’s major economies are past the point of debt-saturation, including ours.
I’m focussed on this today because the passing of the US debt-ceiling debacle has refocussed the world’s best thinkers on this topic and there are a couple of important dissertations for you to absorb. The first we published on the weekend was the video of Martin Wolf explaining his view of where the global economy is at and heading. The second, yesterday, was the fantastic interview by Chris Joye with Matthew McLennan.
Today there is more from FTAlphaville:
Fresh from having made $1bn impeccably timing the putative US recovery in the first half of this year (and Japan, natch), Andrew Law of Caxton Associates – one of the world’s most successful macro traders – has now turned bearish, and in quite a big way.
Caxton, a hedge fund named after the printer (its now-retired founder Bruce Kovner is a billionaire bibliophile), believes the Fed will keep running its presses:
We have been expecting the US economy to reach escape velocity led by housing and corporate capital expenditure… but for whatever reason that just hasn’t happened…tapering is off the table for the foreseeable future.
Caxton is long across the US yield curve (the debt debacle has been a good buying opportunity, if nothing else). Mr Law has spoken extensively with us about his view on the global economy and the state of the hedge fund industry. Tree-based publishing issues mean those thoughts came in truncated form. Below are some extended excerpts from him.
(Background: most people haven’t heard of Andrew Law. So go read our interview. Or, briefly: Mr Law runs Caxton Associates, the hedge fund founded by Kovner three decades ago that can lay some claim to being one of the most successful macroeconomic investors ever. Law has been running trading at the firm since ’08, when his own portfolio notched up a triple-digit gain, putting Caxton in the black for the year, and has been running the whole firm since 2011. By way of Caxton’s record: 15 per cent average annual return with half the vol (roughly 7 per cent) of the S&P 500. One losing year: 1992, -2 per cent.)
On the US economy/debt ceiling
People blamed the government debt negotiations last year for growth falling and no doubt they will blame them again this year… I just don’t see how the economy is going to accelerate in the foreseeable future. We’ve got more budget negotiations to come – what happened [last week] is just another can kicking exercise. It’s a disappointment to anyone who was expecting the US economy to grow and recovery. The problem has not been solved and the hopes for a grand bargain are in tatters… the lack of visibility is very damaging.
But Mr Law believes it’s not just Washington’s errors which are to blame. Caxton, which had been short US bonds in the first half of the year, went neutral as soon as Larry Summers dropped out the Fed chair race — a move that proved timely given the non-tapering decision weeks later. The FOMC minutes from that meeting, though, convinced Mr Law that tapering wasn’t happening any time soon.
Growth has averaged 2.2 per cent for the last 4 years. We have had zero rates and hugely stimulating bouts of QE and growth has not accelerated beyond that. So why now is it going to? Tapering is off the table for the foreseeable future. I think the Fed came to that decision at the last FOMC meeting – they saw that this economy was not standing up to the [then] prevailing interest rate conditions.
Data from the housing market and the corporate world were crucial.
There are no incentives for the corporate world to go out and spend – that, and housing, are critical. In the last few days alone we have seen earnings release statements from companies mentioning shutdown as a reason for a dropoff in orders. Sequester spending cuts have taken a toll and there is uncertainty about how plans for long term deficit reduction are going to prevail.
The Fed is very clearly now seeking to lower interest rates… Keeping rates low to keep the economy going is just another way of saying that the economy cannot be in a self-sustaining recovery.
There will be no self-sustaining recovery for the US unless it allows new bubbles to form in its asset markets, which is…oxymoronic.
A more esoteric take on the world’s structural position is available at this week’s episode of the Renegade Economist, which includes an interview with Anne Pettifor:
The bottom line is, the GFC was not an event, it was a doorway to a new world. The best investors know this, they are hedged for both deflationary and inflationary bursts, and are ready to move at the drop of a hat. Are you one of them?
