We will all discover that the economy is much more fragile than advertised by the Central Planners and their media toadies.
This week I have made the case that the past 13.5 years have been the most destructive to the core values of the nation in U.S. history. The same holds true for the economy, which has been critically weakened by 6 years of unprecedented Central Planning.
What do I mean by Central Planning? Here are the key characteristics of Central Planning:
+ The central bank/state intervene in the economy in a dominant fashion, controlling functions such as interest rates by order of central authorities that were once set by decentralized, self-organizing markets.
+ The central bank/state pick winners and losers: for example, the Too Big To Fail Banks (TBTF) were selected to win, as the central bank/state bailed out their private losseswith public-taxpayer money. In effect, the central state/bank enrich cronies at the expense of everyone else.
+ The central bank/state manipulate the nominally "free" market to boost asset valuations as a way of enriching cronies who own most of the financial assets and as a public-relations charade to mask the failure of their picking winners and losers.
In other words, in centrally planned economies, markets are not allowed to discover price--they exist only to reflect positively on Central Planners.
+ The central bank/state use the power of the printing press to create as much money as they need to reward cronies and cram their decisions down the throat of the economy.
+ The central bank/state use the power of their public policy announcements to manipulate behavior and the financial markets while keeping programs that might attract scrutiny secret.
Central planning fails for intrinsic reasons unrelated to the specific policies. The decentralized, self-organizing market is like the immune system for the economy; it keeps the system healthy by burning off the deadwood of failed bets and failed investments and distributing credit and risk on performance rather than cronyism.
By eliminating the economy's immune system, Central Planning dramatically increases vulnerability and guarantees systemic crises down the road. Another way of understanding the destruction wrought by Central Planning is to see the Central Planners as heroin pushers who addict the economy to zero-interest credit and a constant flow of "free money" to the winners selected by the central bank/state.
The economy becomes dependent on the The central bank/state intervention and loses the ability to function in the real world. When the real world finally intrudes, the weakened, strung-out addict, no longer capable of responding to reality in a positive fashion, expires.
A handful of charts illustrates the scope of the Central Planning and the fragility this Central Planning has generated. (Charts are courtesy of Market Daily Briefing. All comments on the charts are mine.)
The Federal Reserve balance sheet: hey, what's $4.3 trillion between pals? Where did all this newly created money go? To inflate asset bubbles that enrich the few at the expense of the many.
That little spot of bother in 2008 that caused credit to contract a bit nearly collapsed the entire U.S. economy. Has expanding credit to subprime banks and borrowers fixed anything, or simply extended the system's already-sky-high fragility?
And what has all this unprecedented Central Planning done for the GDP? Growth as measured by GDP (a largely bogus metric, as many have pointed out) has been declining since the Central Planners picked their cronies as winners.
How about real median income? Central Planning has greatly boosted the wealth and income of the financier winners picked by the Planners, but sadly this does not include wage earners, who have seen their inflation-adjusted earnings plummet.
Aren't you delighted that Central Planning works so great?
One predictable result of Central Planning is more asset bubbles--or in the case of housing, an echo bubble of the housing bubble created by Central Planners in the early 2000s. Alas, an echo bubble is still a bubble, and so it will pop just like every other financial bubble throughout history.
Just as a refresher on the staggering enormity of Federal Reserve intervention / manipulation in the housing / mortgage market: if the Fed buying $2 trillion of home mortgages (more than 20% of the entire market) isn't Central Planning, then what is it?
The damage done by Central Planning has yet to come home to roost. Six years into the Grand Experiment--that Central Planners can pick winners who just happen to be their cronies--the chickens of consequence are still making their way home.
And when they finally come home to roost, we will all discover that the economy is much more fragile than advertised by the Central Planners and their media toadies.
Abrazos,
PD1: Prediciones de la bolsa a 10 años:
No matter what, SocGen sees US equity performance over the next 10 years as modest at best. They note that US equities face three headwinds: cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory, corporate margins stand at historically high levels, and after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years). While their central case is 'moderate growth and inflation', they project a possible high growth surge to 4000 for the S&P 500 and a deflation scenario which would put the S&P 500 at 500 (-12% per annum).
Via SocGen,
This is the second edition of our 10-year equity outlook. The first was published in July 2009, when the economic consensus was still weighing up deflation fears and valuations were depressed (read: an excellent entry point.). At the time we set an S&P500 target of 1300 under our central scenario (in mid-June 2009 it was 923).
[ZH: So in 2009 they forecast the S&P to be at 1300 in 2019... and we are now 50% higher than that already!!]
US equities
US equities face three headwinds:
cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory,
corporate margins stand at historically high levels, and
after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years).
A recession costs on average a 22% drop in US earnings
The most recent economic recession triggered by the collapse of Lehman Brothers caused an unprecedented wave of US earnings downgrades and was comparable in effect to the two previous oil shocks, the Gulf war and the Dot-Com bubble burst.
But US equities have supports as well, such as impressively strong balance sheets and the beginning of a new M&A cycle, backed by a highly reactive central bank.
Central scenario: moderate economic growth and inflation
Our central scenario projects moderate underlying economic growth of 5% per year over the next few years, i.e. below the long-term growth trend (8.6%). We have also adopted a scenario whereby inflation will gradually increase at a modest rate, until it pushes down the normalised 10-year moving P/E rate slightly, to below its long-term average of 20x. Based on these assumptions, we expect the S&P 500 to rise by +3% p.a. and reach 2500 points in 10 years.
But there are 3 Alternative Scenarios...
Alternative scenario 1: sharp growth & high inflation +2%/yr
In a high inflation scenario, two opposing forces go head to head: on the one hand, inflation prompts an acceleration in (nominal) reported corporate profits and, on the other, it reduces equity valuations. The combined forces would be likely to have a positive impact on equity markets (+2%). In this scenario, while nominal returns are positive, real returns would be eaten up by inflation.
Alternative scenario 2: sharp growth & moderate inflation +8%/yr
In this scenario, the equilibrium between growth and inflation would be well managed by the central banks and /or the US gas shale revolution would help maintain inflation within a low range. This is a kind of continuation of the trend we have observed over the last couple of years in the US. On this assumption, equity market P/Es would remain high and corporate profits would accelerate rapidly. Our scenario would yield an annualised equity index slope of about 8%, pushing the S&P 500 to 4000 points at the end of the period.
Alternative scenario 3: depression -12%/yr
We have no doubt that a deflation scenario, like that of the 1930s in the US, would considerably damage corporate profits and the equity market valuation, eventually impacting the equity markets themselves. We saw this in Japan between 1995 and 2005, when the collapse in listed Japanese company ROEs severely cut into their equity valuations and thus the Nikkei index. We believe such a scenario would put the S&P 500 at 500 points in 10 years (-12% p.a.).
PD2: La reciente subida de Wall Street, ¿no está algo pasada?
Hay quien dice que después de 5 años de subidas, vienen dos años de bajadas… Eso es lo que ha pasado hasta la fecha. ¿Se repetirá? Uff, espero que no acierten estos agoreros…
Algo caras están ya…
Aunque en el mundo emergentes, los precios están mucho mejor…
Los resultados acumulados de muy largo plazo son muy distintos si se invierte en un sitio y en otro…, de ahí la importancia de diversificar y de no tener todo el dinero invertido en España:
Sólo invertir en acciones genera valor a largo plazo… Los depósitos y activos monetarios generan casi lo mismo que la inflación…
PD3: Tenemos demasiado ruido en nuestro entorno, demasiada información… y nunca tenemos tiempo de pensar. ¿Te has parado aunque solo sea un rato al día para pensar en silencio de algo que te importe? No te puedes imaginar las soluciones a los problemas que se te ocurrirán. Esto es hacer oración, pararte cada día un rato, pensar en tus preocupaciones, en los que más quieres, en tus problemas…, y Dios te recomendará lo que tienes que ir haciendo. Con el paso del tiempo, te habituarás a hacer cada día un rato de oración, de estar un rato largo en silencio, contándoles tus problemas y buscándole sus soluciones… Después, dejarás de ser egocéntrico y empezarás a hacer oración por otras cosas que no están tan cerca de ti, por otras personas, por su bienestar material y por su bien espiritual, por su conversión…
