2018_09_26 — “The Power of Ten”

The Power of Ten

  • Deleveraging: Household debt to disposable income has fallen appreciably in the U.S. and Europe.
  • Banking: Banking and brokerage leverage has also fallen precipitously as regulation reined in financial industry risk.
  • Growth: As good as economic growth seems in 2018, average U.S. GDP growth has declined from around 3.5% prior to the GFC to near 2% for the past decade (this was dubbed by some to be the new normal). Europe’s growth is averaging 1.6%. China’s growth has slid from approximately 9.5% to 6.5% and emerging market (EM) growth overall has halved.
  • Trade: U.S. administrative rhetoric aside, global trade imbalances are narrower now than in 2006. The U.S. current account deficit has fallen in half over the last ten years, and China’s current account surplus has declined from a heady 10% of GDP to almost nothing. The big picture is that borrowing countries are borrowing less from foreign entities, and creditor nations (like China) are spending more domestically.
  • Supply & Demand: Since the crisis, the supply of goods and services seems to have outpaced demand as savings continue to stockpile, capital expenditure (capex) has decelerated, and technology has made digital replicability seamless. Low commodity prices, low inflation, and China’s governmental push to increase its own domestic consumer demand are just a couple symptoms of this excess supply problem.
  • Asset prices: With decreased leverage and excess capacity, an economic text book might tell you that asset prices should be lower; but ten years on, most assets — stocks, bonds, real estate — are valued higher because interest rates are low and huge mountains of money, savings, and profits (looking for a home) have been plowed into investable assets.
  • Fed rates: The Fed can keep pushing up rates without worrying about investors fleeing bonds because demand for safe assets (or any asset for that matter) remains high
  • Long vs late: Although we have been a long expansion phase and bull market, that does not necessarily mean we are late cycle. No capex boom and ho-hum leverage reduces the chance of a cyclical economic bust.
  • Caution: Stocks could still see a 10% to 20% price correction — especially when analyst earnings projections for 2019 and 2020 start scaling back, as they should — but that probably won’t derail economic trajectories. Enough investors seem to be cautious regarding extended valuations and fearful of a recession by 2020 that contrarian signs of excessive risk taking and investor euphoria are lacking.

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Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm

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Michael Ashley Schulman

Michael Ashley Schulman

Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm

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