The New York Times Doesn’t Include All the News That’s Fit to Print! My News!
On Saturday, August 25, 2018, a day that will live in infamy (OK, maybe not), The New York Times published an editorial entitled “Inviting the Next Financial Crisis”. I disagreed with a core argument in the editorial, so I wrote a concise, and dare I say brilliant, letter to the editor explaining my position.
I never heard back. Someone you know (Never been captured? In perfect physical shape? Rated himself A+ at his job? Sounding familiar at all?) said that “The failing @nytimes wrote a Fake piece today…” I won’t go there, but let’s say that if I didn’t enjoy the Times’ crossword puzzle so much…
What was my beef with The Times? This comment:
“The per capita gross domestic product of the United States is about $70,000 smaller over the average person’s lifetime than it would have been had the economy stayed on the trajectory it had been on before the [financial] crisis, according to a recent analysis published by the Federal Reserve Bank of San Francisco. The authors of that report — Regis Barnichon, Christian Matthes and Alexander Ziegenbein — conclude that the economy is ‘unlikely to regain’ that lost ground, a stunning acknowledgment of the permanent and significant costs of avoidable financial crises.”
The NYT accompanied the editorial with this chart from the Frisco Fed article:
Source: Federal Reserve of San Francisco (“The Financial Crisis at 10: Will It Ever Recover?”, Barnichon, Matthes and Ziegenbein, August 13, 2018)
Looks hard to argue with, right? But I do, and I believe my disagreement is important.
In the chart above, the Frisco Kids assumed, and The Times agreed, that the GDP growth rate from 1998 to 2006 was normal, and therefore the slower growth since then was by definition abnormal. Very wrong. The US economy from 1998 to 2006 was far from normal. It contained one of the biggest debt bubbles in US history.
Tell me you don’t remember subprime mortgages. Or CDO². They generated unsustainable consumer spending that screeched to a halt when subprime and other mortgage defaults exploded. A history of cash-out mortgage volume makes this point crystal clear. Homeowners took advantage of that era’s soaring home prices to borrow increasing amounts of money for home improvements, vacations, even buying more homes:
Sources: Freddie Mac, Federal Reserve, Bureau of Economic Analysis (BEA)
Does that surge from 1% to 4% of GDP look normal? Looking at total debt growth (consumer + business + corporate debt) reinforces the point:
Sources: Federal Reserve, Bureau of Economic Analysis (BEA)
Home mortgages weren’t the only type of debt that was booming back in those bad old days; so was corporate LBO debt and commercial real estate mortgages. Throw in a growing government deficit due to tax cuts and a war, and the US brewed up a very presentable bubble. Far, far from normal.
I get why the NY Times ignored me. They, and the great bulk of Americans want to believe that ’98-’06 growth was normal. So many were prospering, without even having to work harder or smarter. You could wake up in the morning knowing that your house appreciated by a couple of hundred bucks overnight, without you doing a thing. We want our debt bubble back. And it looks like we are getting a government debt bubble, no matter whether the Republicans or Democrats have the upper hand.
The Republicans have already delivered a debt bubble. The Congressional Budget Office expects the Trump Administration’s tax and spending plans to generate federal budget deficits of $1 trillion a year for the following decade. These will be by far the biggest deficits ever during as non-recessionary period, as this chart shows:
Source: Congressional Budget Office
On the Democratic side, note that “ showed that a majority of Democrats want candidates in 2018 to be…‘more like Bernie Sanders’…” (Newsweek, July 11, 2018). The left-leaning Brookings Institute said “The Sanders plan would increase federal deficits by more than $18 trillion over the next decade.” So one way or another, the US is getting a government debt bubble.
What this means for investors.
I don’t have space here to review my outlook for private sector debt growth, but a quick summary is that it is about average today, and it is likely to accelerate over the next year or two, particularly consumer debt. Added to the government debt story above, it seems inevitable that US citizens will get their wish for another debt boom, if not full-scale bubble.
What’s an investor to do with this outlook? I argue in my book Debt Cycle Investing that debt growth → GDP growth → business earnings growth → stocks outperform bonds. For example, the debt bubbles of the ‘80s and the ‘00s were awesome times for the stock market. Skip the other noise and focus on the main event, which is above-average debt growth. Overweight stocks and underweight bonds until our fervently desired debt bubble stalls out.