John Cochrane on Larry Summers on economic stagnation.
It’s a good post and there are many good comments in response.
What it comes down to is that no one yet knows the extent to which current economic weakness results from tech-driven structural changes in the economy, and demographic changes, as opposed to bad govt policies.
The stock market keeps going up. Is this mainly a result of easy money or is the market telling us something about future growth? My hunch is that the longer it keeps going up, the more likely it’s discounting future growth. The fact that this is an unpopular idea makes me more confident that it’s valid.
Maybe it’s a combo of structural change and anticipation of the lifting of Obama’s boot from the economy’s neck. Time will tell. It may yet turn out to be mostly an inflationary bubble.
Disclaimer: The above is not investment advice. Your cat may understand this stuff better than I do.
UPDATE: Here’s a good presentation of the alternative case.
I only skimmed it, but there are some things in the article that strike me as pretty simplistic…”Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars”….”It took a lot of money to build railroads. It doesn’t take a lot of money to build apps”
The entire economy is not a function only of consumer-facing Internet shopping and social media. Plenty of money is indeed being spent on railroad expansion; total capex of US railroad runs somewhere around $20B per year, IIRC. Pipelines require considerable capex, LNG liquification facilities are very expensive, as are the tankers that transport the LNG.
The apps, that can indeed often be created by a startup funded initailly with a few hundred thousand $, run partly on data centers, which require brick-and-mortar construction, elaborate air conditioning systems, and backup generators, in addition to the racks of servers, routers, and switches.
Those are very good points. They support the thesis that the experts favored by the political class do not have a good handle on what is going on.
Looking at the current situation in a contrary light, there is a drumbeat of gloom, bad news, bad policy, corruption, monetary mismanagement, etc. Asset prices are going up. Unemployment is not quite as bad as it was. Taking all of this into consideration, it seems possible that things are actually getting better.
Zero Hedge made the point that the biggest BUYERS of corporate stock were the companies themselves. I can see this if they can do so with before-tax profits since it would reward shareholders with capital appreciation rather than dividends, saving taxes on for both parties.
The lack of yield elsewhere has always seemed a prime driver to me of high stock prices. Once the overall prices started rising from the in-rush of liquidity, it became a structural bubble.
So the current overall P/E ratio is around 20 – that would have to be some optimism!
Things are definitely getting better in some areas despite what the Fed has been doing.
The only sensible part of the Summers article says it all:
History has shown again and again that the only real sustainable growth, the kind that propels the progress of humanity forward, is supply driven. Innovation and production unhindered is what we need. Build it and they will come.
Trying to raise demand only blows up bubbles, creates Too Big To Fail firms, and enriches cronies masquerading as populist benefactors.
> Is this mainly a result of easy money or is the market telling us something about future growth? <
The Fed Bubble?
They support the thesis that the experts favored by the political class do not have a good handle on what is going on.
How could they?
CAPE says that Wall St is expensive.
I agree with Casey Mulligan. I think a lot of this is due to the destruction of work incentives by welfare programs which have exploded under Obama. It might be possible to construct a welfare state which is not so destructive of work incentives but the Democrats obviously don’t care.
As far as the stock market, where else do you put your money? Bonds are very risky due to loose money policy at the Fed. Low returns and a huge downside if interest rates increase. Everyone expects those policies to have an eventual consequence.
Personally, I think that established businesses are doing better than the overall economy, which is driving markets higher than you would expect from just the macroeconomic data. Earnings growth for larger companies has been quite substantial over the last few years (which is where the cash for stock buy-backs is coming from). This is a natural consequence of the current administration’s regulation-happy style of governance, which is crippling smaller businesses and start-ups in particular. The data on business formation is reasonably clear on this.
This only speaks to the official economy of course. It is entirely possible that a lot of the micro-scale businesses (particularly in services) are moving underground in reponse to the above trends (which can be even worse in some areas due to similar problems with local government). Strictly conjecture on my part.
It is easy to confuse the stock market with the broader economy, but it really is only a small subset of overall wealth in the US (the bond market is MUCH bigger). It is entirely possible for stocks to outperform the broader economy, you just need to see larger companies grabbing market share.
Stock markets are inflated and are inflated to a greater extent than the general marketplace(s).
This makes sense since wealth is unevenly distributed and the dollars of lower income folks aren’t (comparatively speaking) competing for the equities, but there is a goodly number of people and a vast amount of dollars that are competing (is this a great country, or what?) for equities.
My view is that stocks (and, I hope, that high value equities especially) will be rewarding because of some small increase in real value and a large increase in stock price due to general inflation.
This ought to be the case as long as deficit spending and wealth redistribution (not to mention TARP-like programs) continues and the bad Black Swan doesn’t fly.
A good thinker on the markets, and especially on valuation, is John Hussman of Hussman funds:
http://www.hussmanfunds.com/
There’s a lot to be said for trailing stops.
I’ve followed Hussman here and there over the years. He’s been consistently cautious for a long time now, but in the short term he is usually right.
His work is interesting because his economic analysis is a variation of a signal processing technique called ensamble methods.
Besides his hedge fund, he also has an autism foundation. He uses the same types of statistical methods in his genetic research.
His method basically gathers past data and assigns it certain weights and probabilities to filter out what doesn’t matter and keep in what does matter. Then he compares it to past market performance and determines prospective returns. I don’t check his reports as often as I used to, but his data has consistently flashed warning signs, usually extreme warnings. I guess that’s what you would expect in a bubble.