There seems to be a very large consensus the markets have entered into a “permanently high plateau,” or an era in which price corrections in asset prices have been effectively eliminated through fiscal and monetary policy.
Partnering with this fairytale-like mindset is an overwhelming sense of complacency. Throughout the entire monetary ecosystem, there is a rising consensus that “debt doesn’t matter” as long as interest rates remain low. Of course, the ultra-low interest rate policy administered by the Federal Reserve is responsible for the “yield chase” which has fostered a massive surge in debt in the U.S. since the “financial crisis.”
As Ray Dalio, CEO of Bridgewater, recently noted:
“We’re in a perfect situation, inflation is not a problem, growth is good, but we have to keep in mind the part of the cycle we’re in.”
Yes, current economic growth is good, but not great. Inflation and interest rates currently remain low which creates an environment in which using debt remains opportunistic. But rising debt levels has a negative economic consequence. As shown, prior to the deregulation of the financial industry under Ronald Reagan, which led to an explosion in consumer credit issuance, it required just $1.25 of total system-wide debt to create $1.00 of economic growth. Today, it requires $3.83 to create the same $1 of economic growth. This shouldn’t be surprising, given that “debt” detracts from economic growth as the required “debt service” diverts income from savings and productive investment leading to a “diminishing rate of return” for each new dollar of debt.
However, debt levered economic cycles are a function of the ability to draw forward future consumption. But there is a finite limit to the “positive” effect of a debt-driven economic cycle.
Eventually, the “bill” must be paid.
This particular debt-levered economy has been supported by the ongoing, and seemingly never-ending, monetary stimulus being injected by Central Banks.
Therein lies the conundrum.
Since “quantitative easing” programs are the Central Bank’s “emergency measures” for supporting the financial system during crisis events, then why are Central Banks still engaged in these programs nearly a decade later?
This is particularly worth asking given the widespread belief we are in a powerful “synchronized global recovery.”
Dalio is right.
“We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws.”
Yes, indeed. Everything does seem to be firing on all cylinders.
Official unemployment rates, jobless claims, and layoffs are all running near historic lows while a variety of production measures are running near record highs. As I stated last week:
“Economically speaking, things have rarely been better. The monthly Citigroup Economic Surprise index is hitting levels not seen 2004 and 2012. We can also confirm Citigroup’s index by comparing it to the Economic Output Composite Index which is also registering its highest levels since 2004 as well.
(The EOCI is comprised of the CFNAI, Chicago PMI, LEI, NFIB, ISM, and Fed regional surveys.)”
What could go wrong?
Broke, More Broke & Levered Up
Retirees Are Already Broke
According to the June 2017 snapshot from the Social Security Administration, nearly 61.5 million people were receiving a monthly benefit check, of which 68.2% were retired workers. Of these 41.9 million retirees, more than 60% count on their Social Security to be a primary source of income.
