If Growth Is So Great Why Do We Have To Borrow So Much? Trump keeps pointing to stock market growth as indicator of economy. What do they know? Why does the FED have to cut rates again? When do we go with “Deep Negative Rates”?
New Economy: If Growth Is So Great Why Do We Have To Borrow So Much?
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
Welcome to the Michaels any weekly commentary now I'm Kevin Orrick, along with David McAlvany. Last week, Jim Grant talked about how risk is no longer something that people actually worry about. Yeah, I was thinking about it. Do we really live Dave, in a world where risk and responsibility have been managed and overpowered with the magic of the central banking system?
It certainly gives us a sense of carefree Enos. Right, you get to engage the markets without an idea of there being consequences to bad choices. In fact, the more risk averse you are, it's almost like there's a, you're out of touch. Exactly. You're out of touch. If you're risk averse, you know, we have a bull market in everything. And I know we've asked the question, okay, what does a bull market in everything look like when, if it ever turns into a bear market, in everything, when everything is falling at the same time, that'd be something worth looking at, just because we are in this magical time where everything's going up, even Trump the criticize the Federal Reserve, when it was under a democratic administration for being too loose. And now he's criticizing it for being too tight.
I sat at dinner this last week with a gentleman who ran the venture capital side of the Harvard Foundation, and venture capitalists his deal as a trained engineer. And in this fascinating conversation, a part of that did relate to things that are changing. And of course, he's interested in new technologies and innovative shifts within the economy, old economy versus new economy, and where there's opportunity, obviously, as a personal investor today, and in his prior posts there at Harvard, part of their foundation group. And part of our conversation revolved around the influence of central banking and how that's distorted asset prices. He was very intrigued by this article from the IMF, the white paper, and I sent that to him the next morning, he was like, get that to me immediately. There's some guys that I'd really like to discuss it with. You look at today, global manufacturing this week. And the trend of shrinkage in the manufacturing sector here in the US is and it has been down for many years. And yes, that's a function of transitioning more and more towards a service economy. And yes, there are improvements in technology. And there's a shift in consumer patterns which accelerate those trends.
Yeah, but we've got growth. I mean, that's what we're told.
Yeah. On the other hand, if you'll go to the other end of the spectrum, there's significant growth. And I honestly tend to be a little bit cynical here, comparing the requirements of a manufacturing economy, which you've got design elements and production elements and marketing and distribution elements. What goes into fabricating a product, it feels more real, doesn't it than the technological or service industry?
Well, I can see the jobs, I can see the money created, I can see the money dispersed and then recycled through the economy. Contrast that to 21st century growth, where like with Google, really, we're just talking about a new version of advertising. I mean, I know they're more complex than that, but it how they started, its kind of an advertising engine, or, you know, a digital poster board for personal moments. It's like online scrapbooking.
Facebook, it feels like it adds productivity, dramatic productivity to the world economy. So online scrapbooking gets a you know, quarterly revenue of almost $17 billion. And I think to myself, yeah, old economy versus new economy. I kind of like the idea of making stuff, right. But, again, I tend to be cynical, let me set that aside. These companies, Google, Facebook, Amazon, they reported very impressive increases in revenues, this past quarter. Second quarter revenue, if you take those three tech giants came in at a hair below $90 billion combined. And it gives me pause is wondering how many jobs in the old economy would it have required to generate that kind of a quarterly number? So my mind goes all over the place. You have to forgive my rabbit trails this morning. But I ponder velocity. Why is velocity of money down? Well, part of it is we're moving towards an economy where you don't have an income distribution, which gets the middle class, the money that they would have had and spending the money they would have had. There's a really interesting shift. And I think the participation there in terms of wealth creation, research, elation, that too, is a different dynamic that we may just have to get used to. Well, wealth is concentrating at the top, I mean, the middle class, they're running out of money much quicker, but the concentration of wealth is up at the high side.
And I guess my point is this as the economy changes, that the drivers of growth shift, there is a group that benefits there is a group that does not there is a concentration of wealth, part of that if you thinking Silicon Valley, this is a geographically minded and it's not the Heartland. And here's where I'm fascinated thinking in a sort of multidisciplinary way. There's political implications to that. That's really my point is that progress is not bad. Technology is not bad.