Out-Talked: MIM3 Macro Panel Recap
The thing that struck me on the panel was that there was no debate going on, there were two discussions...
As I realized the macro panel had just ended and that I hadn't said anything I came to two conclusions:
First, the macro panel must go longer. Kevin and Todd assured me next year it will last an hour and a half.
Second, I didn't really have to say anything.
Scott Reamer, Stephanie Pomboy, and Greg Weldon explained the bearish case very well, but more importantly, Michael Thompson and Tony Dwyer did not dispute their case. In fact, this is the crux of the matter: those bullish on stocks point to correlated indicators that have worked in the past; those bearish on stocks don't dispute these indicators, they are telling you why they won't work.
The long economic expansion is really a long credit expansion. True economic expansion gave way to Fed induced credit expansion probably first back in 1995 (with some roots back in 1987)and has accelerated since 2000.
Scott, Stephanie, and Greg described an asset driven economy where only new debt for debt's sake induces higher nominal asset prices. That is until the economy can no longer support that debt. Greg showed debt service is an all time high of disposable income.
Something is bothering Michael and Tony. It was evident in Michael's speech (What is the market saying when it does not respond to traditional correlations to earnings?) and evident in Tony's "pick-em" stance on recession or not (he picked no, but I know Tony and something is bothering him in this admission).
The thing that the bears are really shouting about is not if, when, what...but why. We are describing the U.S. economy as going from income driven (sustainable investment coming from sustainable savings) to asset/debt driven where growth is a function of increasing credit, the physical fact that there is a limit to debt before it crumbles and the economy.
Monetarists do not believe in a limit to debt and montetarists run the country. Will they run it into the ground?
Our current situation is very similar to 1920's expansion and 1930's destruction. Monetarists argue that 1930 never would have happened (or Japan's 1990s) if central banks had added enough liquidity (more debt). This simply is not true.
Monetary policy usually works in a normal business cycle because easing simply undoes de-facto tightening that had already occurred. Easing releases the pent up demand created by tightening.
But in an asset based economy there is no pent up demand. Years of debt induced consumption is a cumulative process ending in an exhausted and debt ridden consumer. Easing does nothing to induce demand because there is none. Overcapacity is already there. The market continues to tighten because of the very high level of debt.
The thing that struck me on the panel was that there was no debate going on, there were two discussions: bulls are still talking about earnings where the bears are talking about a significant structural change in the economy that cannot be sustained.
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