“In the time it takes to raise a child and pack her off to college, the world order that existed in the early 1990s has disappeared. Some three billion people who once lived in sleepy or sclerotic statist economies are now part of the global economy. Many compete directly with workers in the United States, Europe, and Japan in a world bound together by lightning-fast communications. Countries that were once poor now find themselves with huge surpluses of wealth. And the rich countries of the world, while still rich, struggle with monumental levels of debt—both private and public—and unsettling questions about whether they can compete globally.”
– Daniel Alpert, The Age of Oversupply
The U.S. economy will probably continue to grow at about a 2% annual rate, better than most developed countries but constrained by ongoing financial deleveraging, deceleration in China and worldwide excess capacity, especially in commodities with the resulting price weakness.”
– Dr. Gary Shilling
Today, my plan was to highlight two of my favorite analysts, Dr. Lacy Hunt and Dr. Gary Shilling. But that plan has changed and importantly, I believe, what I share this week can give us a better understanding of the structural issues we face. And how they might be fixed. Listening to Bloomberg’s Tom Keene early this week, I stood quiet as he interviewed Daniel Alpert.
Alpert wrote The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy (Portfolio/Penguin Group, 2013). Alpert believes, and I concur, that:
“the invisible hand of capitalism is broken. Economic and political forces are preventing markets from correcting themselves, and we’re now living in an unprecedented age of oversupply.
Governments and central banks across the developed world have tried every policy tool imaginable, yet our economies remain sluggish or worse. How did we get here, and how can advanced nations compete and prosper once more?”
I know this sounds like nothing new to you but hang in there with me and hear what Alpert has to say. I believe a deeper understanding of the structural issues may help us better zero in on potential future outcome(s) and position our portfolios accordingly. I did some searching and came to the article, written by Alpert, that I share with you today. It is entitled “GLUT – The U.S. Economy and the American Worker in the Age of Oversupply.”
You’ll also find a link to the Bloomberg podcast here. Download it, put on those running shoes and plug in.
As I listened to Mario Draghi’s ECB press conference yesterday morning, I couldn’t help but to think about one of Alpert’s prime arguments:
[T]he reason conventional economics offers such poor alternatives to policy makers is that insufficient attention has been paid to what he refers to as “oversupply” in the labor market. “The suddenness and extent of the integration of over 3 billion people into a global capitalist market, that really only hitherto consisted of about 800 million in the advanced economies, produced not only the imbalances and glut conditions that have been written about extensively since the Great Recession, but have echoed in the many crises since then.” (Emphasis mine.)
“Oversupply, he argues, is a global phenomenon that triggers a host of other economic ills, from “… declining productivity and falling labor force participation, inflation in real estate and stock markets, the value of the U.S. dollar, and even stock buybacks, swollen executive compensation, and increasing income and wealth polarization since the recession, to say nothing of the global financial crisis itself.
This time, Alpert argues, is really different. The phenomenon of the global oversupply of labor is not easily remedied by the private sector alone. Instead of creating the kinds of jobs that used to fuel the middle class, the private sector today is making short-term commitments and hiring more people as needed. Government, argues Alpert, needs to “step into the breach now unfilled by the private sector.”
The last several On My Radar posts have been about the Fed and the need for monetary policy to marry with fiscal policy. The government can step in with tax reform and needed infrastructure spend that can provide meaningful lift.
To that end, I had several wow moments as I read Alpert’s piece. You may as well. Fiscal policy comes from our elected officials and, well, no signs of movement on that front.
But before you dive in, I wanted to let you know that my latest research paper, “The Total Portfolio Solution,” is now available. I discuss a systematic approach to portfolio construction that includes equities, fixed income and liquid alternatives that considers median P/E as a determinant as to when to overweight equities or underweight equities and how to design investment portfolios designed to achieve a certain return and risk objective along the efficient frontier. In a world of high valuations (low single-digit probable 10-year annualized forward returns) and ultra-low bond yields, I believe there is much we can do to help our clients succeed and importantly at times play defense so that wealth can be both preserved and positioned to take advantage of the opportunities that material equity market corrections present.
If you are interested in receiving a copy, simply reply “TPS” to this email and we’ll send it to you early next week. It is free. My hope is that you find it helpful in your work with your clients, especially in explaining the difference between a diversified investment plan that targets goals, needs and suitable risks versus comparing that equity, fixed income and liquid alternatives portfolio to the S&P 500 (“the market”), a singular large-cap-focused concentrated equity risk.
Next week, I’ll share my Shilling and Hunt notes with you. Alpert’s article is long but not heavy. Read it in parts, step away, and come back to where you left off. It really got me thinking. I hope you find it insightful as well.
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Included in this week’s On My Radar:
- GLUT – The U.S. Economy and the American Worker in the Age of Oversupply
- Trade Signals – ST Trend Bullish, LT Not Confirmed, Sentiment Is Bearish
GLUT – The U.S. Economy and the American Worker in the Age of Oversupply (by Daniel Alpert)
“It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach. We need enthusiasm, imagination and the ability to face facts, even unpleasant ones, bravely. We need to correct, by drastic means if necessary, the faults in our economic system from which we now suffer.”? – Franklin Delano Roosevelt, May 22, 1932
Since the Great Recession there has been a tendency in economic policy circles to evaluate post-recession data and trends in light of prior understandings. Both economists and policy makers have been desperately attempting to “put the genie back in the bottle” and proceed with business as usual notwithstanding how inapplicable some of the received economic policy wisdom is