I am writing this before the jobs report this morning. I do not predict individual economic reports and even if this report fails to live up to current expectations the trends I see in place forecast a healthy economic expansion for at least several years. I continue to be stuck by the extent of the pessimism prevalent in the media. I see it as a type of Financial Vertigo.
Even after 5yrs of economic recovery, which at the moment is actually accelerating, the media remains nearly wall-to-wall with individuals whose names we have never previously heard claiming that ‘The end of the world as we know it is at hand!!’ This is not a real quote but it sums the dire warnings I am seeing in every direction by so called experts who have never been thought of as experts in the past.
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The editorial here from the WSJ is only one such example I saw this morning.
The one constant we have across economic/investment cycles as far back as one can see is, that regardless of the excesses which may be in the economy at the moment, corrections of consequence do not occur till we stop credit issuance. When I mean ‘We’, I mean the US which is the largest and most open, ‘Free Market, in the world with the best protections to property bar none. Our economy has never in recorded history entered a correction without first seeing credit spreads between the T-Bill(short rates) and the 10yr Treasury(mortgage rates) move to zero, i.e. a Flat Yield Curve. Once credit cash flows come to a halt, so does the economy. Every time!!
At the moment even with the excess debt in China’s Shadow Banking and the taper by the Fed, it remains US bank lending which is the elephant in the room. As long as US bank lending is healthy or headed that way, our economy has seen expansion. We appear to be in the early stages of a lending expansion as the 10yr Treas rates move higher while the T-Bill remains mired below 0.1%.
Our economy has always powered through perceived worries as long as credit flows were positive even with imbalances in the system. But, once credit flows stop, every excess in every part of the market rears its head and a full blown correction ensues. Once this begins, it cannot be stopped. Too many people panic at the same time and the market has always been much bigger than whatever government thinks it can do.
At the moment and for the next 5yrs-7yrs using a historical estimate, every ominous sign is very likely to be papered over as has occurred in the past till credit flows stop. As the global consumption engine, what occurs in the US, occurs globally. Nothing has changed with the emergence of younger nations. Most mistake them as growth areas, but in reality they have only been lower cost manufacturing sites for goods developed, paid for and consumed by the Western type countries. They have not yet developed a significant Middle Class with its higher standards of living and consumption patterns. They are not self-supporting economies and highly dependent on the financial health of Western nations where standards of living are much, much higher as is our creativity and skill sets and most importantly so is the global value creation. The iPhone and the Internet were not inventions of EmgMkts!
What is most likely occurring with stories like that below is that it is the simple process of fear of the unknown being exaggerated by global recovery. It seems that human beings fear having something taken away. We would rather not have it than lose it unexpectedly. Now that some are seeing global growth, they have become overly fearful of losing it!
Now that enough of us can see how far we have lifted off the ‘bottom’, i.e. March 2009, we suddenly become excessively fearful of falling down again because it appears we have risen so far that we are paralyzed looking back by a sort of vertigo.
Me? Not so much!