Blain’s Morning Porridge – 27th October, 2023: The US Economy – Strong and Resiliant, but… but..
“Never mistake a woman’s meekness for weakness.”
The US economy posted strong growth in the face of monetary headwinds and financial adversity, demonstrating its unique strengths. But how sustainable is it in the face of debt, higher rates and political crisis?
This morning… brace yourselves. I am feeling quite positive, even philosophical about the future. I’ve being doing a lot of thinking recently… perhaps a dangerous and foolish thing… So let me pile straight in:
Yesterday’s strong US GDP Number – 4.9% growth fuelled by a 4% rise in consumer spending – represents a far more “resilient” US economy than anyone could have expected according to the optimists. Pessimists say it simply highlights an economy spending its way towards a government and household debt apocalypse! Markets are worried it means higher rates for longer. Sure does.
Give the USA some credit! Consumers and corporates; the twin pillars of consumption and production respectively, are overcoming serious monetary headwinds and financial adversity while demonstrating the fundamental balance, poise and strength of the World’s powerhouse economy. Or more prosaically – the US works because it works, and sells stuff people want to buy.
In contrast, the ECB’s hesitation to continue “normalisation” by unwinding QE highlights the political compromises at the core of the Euro – the fight against inflation is being balanced by the threat of a renewed debt crisis (which will likely be triggered in Italy.)
(And yes, I do feel sympathy with my Italian chums who asked me to lay off lambasting Italy. They point out it’s undeniably a fantastic place to live, a marvellous quality of life, while the success of high quality design and tech led businesses illustrates that there are other approaches to economic success that the London rat-race. Yes, perhaps….. but the economy and demographics are in crisis and the debt load way is beyond a problem Italy can solve alone. It will require the kindness of strangers from rich Europe – where economic strife means the attitude of Northern Workers to paying for the profligacy of Southern Europe is hardening.)
Back the US – some things don’t quite gel. Since 1990:
- US GDP has grown from $5.93 trillion to $25.47 trillion, an increase of 426%. Impressive.
- The stock market (the S&P 500) has increased by 1220% from 339 to 4137 – about 3 times as fast as the underlying economy. Interesting….
- The outstanding sovereign debt of the USA has increased by 826% from $4 trillion to $33 trillion (outstanding Treasuries are lower). Worrying.
- US household debt increased from $3 trillion to $17 trillion today, a 566% rise. Scary.
- US Household incomes have risen 250% from $30k to $76k (2021 US$). Debt has doubled as a portion of income.
These apparently contradictory numbers beg more questions than answers. What might they tell us?:
- That the US economy and stock market has been juiced with debt?
- That the stock markets overvalue the worth an over-indebted economy?
- That despite rising debt, confidence in the stock market has grown?
- That rising debt is a clearly good thing – because it’s enabled growth?
As I keep saying… In bond markets there is truth. Great truth. Take a look at 10-year US bond yields. The 10-yr bond yield fell from 8.62% in Jan, 1990 to less than 3% for most of the 20-teens, and hasn’t been above 5% since 2007 until a couple of moments on Monday! (In reality – bond yields have been below 5% since 2002!)
Maybe:
- Low debt is a good thing as it clearly enables production and consumption to rise.
- Low interest rates – the great bond market rally of 1990-2022 – artificially raised the relative values of financial assets by pricing debt artificially cheap? (That is certainly true during the QE era 2009-2022).
- The rise in the value of financial assets exceeds the value of the real economy – and is unsustainable?
- Or that the imbalance between rising GDP and soar-away stock markets highlights dangerous financialisation
Gosh… Who knew debt is good and debt is bad? (US Readers: moment of smug self-satisfied Told-Ya-So Sarcasm…) I would argue the greatest damage of artificially low rates has been making people comfortable with it. Debt is as useful and as dangerous as electricity: use it wisely to live well, or abuse it and it will abuse you back. Cheap debt makes us careless of the consequences. We became addicted. It drove overleveraged bad corporate actions, the rise of the fakery and the fraud of bitcoin and NFT, increased inequality and fuelled populism.
But the really critical thing is… I don’t really think it actually matters in the long-run., in fact, even over the medium term. Economies are self-correcting.
Snapshotting economies in terms of growth, rates and debt is useful to look at the economic picture. But the reality is economies are dynamic (which is what makes them so darn difficult to understand) and constantly adapting.
Machines are not dynamic – when a moving part snaps, they stop. But economies are not machines – they comprise the inter-actions of millions of economic participants and components. When something breaks, these participants swarm around to fix, replace, or work around any obstacle. (I’m thinking an army of ants…) History tells us economies weather hyper-inflation, deep recessions or stagflation, wars, famine, plague and pestilence, and come back changed, and often grow stronger.
I’m pretty sure there will be a debt reckoning across economies. It will not be nearly as bad as the doomsters expect. There will be pain and we will move on. We can see it happening in rising credit card, autos, and mortgage defaults. The fact Chinese property developers have now triggered CDS payments highlights it’s not just a Western problem. We will see more corporate defaults. We will see banks wobble on the back of their commercial and office property losses. We will cope….
In the short-to-medium run, markets and governments are putting tremendous faith in the likelihood AI tech will trigger a new wave of technological boom, increasing productivity. (It will take longer and be of a lower magnitude than they expect.) Quantum computing and Fusion Power are tomorrow tech – but one day (maybe sooner than we think) the sun will come up on them! Climate change is climate challenge – and, gosh, we are good at solving puzzles – if given the chance.
I suppose the real question to ask is not about the inevitability of ongoing market bubbles, crashes, rallies and dives, but how much stronger the economy will come back in the future? Lots of folk, since Thomas Malthus in the 18th Century, have predicted we will hit limits in terms of space, food, population, and now climate and environment. There are no end of threats – from the lack of effective anti-biotics, to broken oceans, to scarcity of this and that.. But, broadly, as an optimistic pessimist I can’t help but think we continue to muddle through.
Fossils are fascinating. They tell us about species, evolution, mobility and spread. The reason we have so many species is because they adapted to evolutionary niches as they found them. Man is completely different. Homo Saps were a biological A-Bomb explosion taking less than 100,000 to establish ourselves everywhere, adapting niches to our requirements. However, the fossil record also shows many evolutionary dead ends… I do hope the US economy does not become one of them?
Looking at the challenges the new Speaker of The House, Mike Johnson, faces – everything is about timing and the procedure of bills, with little about the content of what they may achieve. Biden’s climate change bill will be set against aid to Ukraine in the fights to come. While Congress, the Senate bicker, Biden is unlikely to sign anything. Can a shutdown be avoided? Who will blink first.
The US has a genuinely effective economy. It works. It may even be big enough to shrug off global recession. It meets 2 critical components necessary for success: a stable (and dominant) currency, and a sustainable bond market. However, I am increasingly nervous on the third leg of that Virtuous Sovereign Trinity: political competency. There must now be enough Republicans in Congress upon whom Trump has unleashed his Cruciatus RINO curse upon to vote down the Trump-worshiping right? I think they need a name? How about ARADs – Actual Republicans Against Donald? It would only take 4 good men and true Republicans to vote down this latest speaker and his dubious mix of misogynistic views on arbortion, womens rights, marriage, divorce and overturning the 2019 election.
What is Johnston’s real aim? To establish Gilead?
No Time for Five Things today…
Have a great weekend. World Cup Rugby Final. I will go Kiwi (Scots v2.2.)
Bill Blain
Market Strategist, Author of the Morning Porridge
