The Economy

We're finishing a long economic expansion -- that was artificially stretched out. If the recession we are heading into, gives us something like 1981, 1982. ... right now cycle-wise we're in 1977 or 1978 (when the CPI was somehwere around where it is today, and would just go bonkers in the next few years). The difference is that in 1977, 1978, there was still economic growth; the economy was stronger heading into the recession than it looks right now. It's a pretty stupid exercise to compare the beginnings of a downtrend to the peak of another downtrend, as if what is happening right now is the end, not the beginning.

 

One other thing about that 1981 1982 thing. ... In the late 70s, early 80s, debt to GDP was below 35 percent. Today, it's around 130 percent.

There is absolutely no room to spend our way out of it fiscally this time around, the way they did then.

Plus, to deal with the flation part of the stagflation, Paul Volcker jacked the Fed Funds rate to 21 percent. That wouldn't be even close to a possibility today. The debt levels are so much higher, and there is so much malinvestment on the back of zero percent interest rates for more than a decade that I don't think our economy can afford even 6 percent on the 10-year note (which is below the starting point Volcker was working with) without credit defaults that make what happened in 2008 look quaint.

 

It's not likely. That economic growth in the 1980s was purely a function of borrowing and running escalating government budget deficits. They were starting at such a relatively small base of debt that it had a really dramatic effect. They took us from something like $998 billion in debt in 1981 to $2.9 trillion in debt by the end of the decade.

Today, the debt levels are not only way higher -- why propping it up has required the central bank to come up with more and more extreme ways to keep monetizing debt -- as a percentage of our economy, it is way higher. As I said, that bit of candy-today, worry-about-tomorrow-later "policy" in the 1980s was being done when government debt to GDP was below 35 percent. After the spending binge of the last 2 decades? Debt to GDP is now around 130 percent. How far do you think we can take that without creating a lost decade or two beyond what we're already facing here?

The only reason debt levels have been able to get that high without a cleansing -- credit defaults, credit drying up to fix all of the malinvestment they've created in the process -- is that the Fed took over the debt markets, and created trillions of dollars out of thin air to buy most of the debt being issued by our governmnet. They blew up their balance sheet to $9 trillion. Our government has literally been borrowing trillions of dollars, spending it badly. ... and printing money to buy that debt itself (i.e. trying to inflate away the debt). We are just beginning to pay for it.

If we are going to have a repeat of the 1980s, it will require our government to borrow an insane amount of money and increase the national debt by 3X of where it is today. But without the Fed destroying the dollar to buy all of that debt (at all of our expense, the way they have been doing it). Who do you think is going to fund the party for a repeat of the 1980s? The U.S. hasn't been the only big economy monetizing debt that way for the last several decades. Everyone is facing the same payback time. There is no Japan or China or Europe to buy U.S. treasuries so we can live a fantasy.

 

The core PCE deflator (the feds "favorite" inflation indicator) released earlier slowed to 4.7 percent (4.9 percent was expected). The headline number stayed steady at 6.3 percent.

It's a bit tricky to interpret, because they are May numbers and the price of gasoline took off in June, so we may see a rebound when the next number comes out. But steady for a month is better than relentlessly rising (the way it had been), so there is that.

 

I think we are just beginning to see demand starting to recede, we're not at the peak of it. You see it in some of the preannouncements and earnings that are coming out now. ... earnings are still nominally growing, but they are guiding people lower and pointing to the signs (which are hard to miss) they are starting to see consumers tapping the brakes.

With regard to 4th of July travel, it's subtle, but you have to look at the details: The surveys are reporting that people are traveling shorter distances this year. Younger people, and those earning less than $50K, are doubling and tripling up with passengers to share costs. It's things like that right now.

But you're right, we are obviously not at the point that people absolutely can't afford to hop in the car and go or else they wouldn't. They pumped so much liquidity into the economy that we are still seeing the residual effects of people feeling flush. Savings are still being drained, they are not completely drained. Revolving credit levels have jumped, defaults are up, but they are not yet in danger territory yet where people are being cut off in numbers.

We're not in full-fledged recession yet. If it's happening, we're at the very, very beginning, not the peak, of a downtrend.