Registered Investment Adviser Caleb Lawrence
After opening higher on little news, the major averages struggled late entering the final hour mixed.
With the world’s central banks, led by our very own Federal Reserve, attempting to normalize monetary policy in the post bust Quantitative Easing or QE period by ending asset purchases and raising interest rates. A few items standout, while successful in arresting a global economic collapse after the 2007-2009 Great Financial Crisis and reinflating asset bubbles. The Fed failed miserably when it came to real reform allowing the Too Big To Fail or Jail Crowd to become much larger along with the derivatives menace. New and better rules designed to prevent the next crisis in the form of Dodd-Frank etc. were followed by even less enforcement something that was fingered as a primary cause of the last crisis. Lastly debt was not only encouraged through the Zero Interest Rate Policies enacted at the time it has now hit, or nearly so, new record highs across the board. Missing from all this is of course a real and meaningful recovery for Main Street America who has seen its wages decline, 95 odd million people no longer employed, or counted as unemployed as per the Labor Force Participation Rate, a group that has once again turned to debt in an attempt to make ends meet. With the world’s central banks now realizing that they have painted themselves into a corner that features more debt, less income and higher asset prices today than it did in 2007 while wage and earned income growth remains absent are now attempting to normalize policy. The following best illustrates the failure of QE or Quantitative Easing. The G7 economies, United States, Japan, Canada, Germany, the United Kingdom, France, and Italy collectively grew at a 1.8% average annual rate over the 2010-2017 post-crisis period. A little more than half the 3.2% average rate of the two recoveries of the 1980s and the 1990s. In dollar terms the G-7 economies grew by 2.1 trillion. Debt on the other hand ballooned 8.3 Trillion from 2008 to 2016 in the post crisis period, and this is just central bank balance sheet expansion. Add record or near record corporate, state and local government, margin, consumer, auto, student and other types of debt and the official 4-1 ratio of debt to growth becomes about $8 in new debt to create $1 Dollar in new economic growth since 2007. Relatively minor reductions in aggregate debt during the 2008-2010 period sent the economy and asset prices into a tail spin. I’ll note that the previous crisis was in fact a solvency crisis, not enough income to service too much debt, put another way afford the house and car payments, hence the defaults etc. I very much doubt that it will be different this time.