But what of the Commodity producers? Ill be a Jim Grant and own some physical but I still have to do something with all this 410k capital LOL, I have been surprised to see commodity producers have very low debt and often multiple commodities they are producing from each mine, not just gold or silver. As a O&G guy I am fascinated at the balance sheets and various ways they make money off mines and control costs. They are not my grandfathers mining companies it seems.
The chart that is speaking to me is the US Govt Spending Growth over 5 years.
With the pandemic, governments all around the world has unleased fiscal stimulus and I feel there is no turning back from here on in. Take for example, Liz Truss vs Rishi Sunak. LIzzie is promising more spending and the populous knows that isn't the best outcome but more willing to embrace that. If politicians don't provide some form of fiscal stimulus, they will simply be voted out. With each financial crisis, we go on to more easy money measures. 2000s interest rates go almost zero, 2008 QE and 2020 fiscal + QE. Next crisis, probably fiscal stimulus +QE + universal income (if you earn below a certain threshold)? I fail to understand, how will Government finance this, if that is the case.
The really interesting thing is that the US ran a balance budget through all of the inflationary 1970s. You have to remember larger and larger flows of capital though firms like Apple, Amazon and Berkshire generate little cash. Larger share of GDP to labour is much easier to tax. You also get tax bracket creep as more and more people pay higher tax thresholds. Also the politics of squeezing tax from the rich get easier and easier. Biden has just hired a huge number of new IRS agents. So strangely, I think the money will be there, which is why governments can live with higher interest rates too...
Even with the benefit of hindsight it can be difficult to precisely date structural turning points.
For example, do we date the death knell of the progressive/new-deal philosophy to the Volcker shock of 1979-80, Yom Kippur oil shock of 1973-4 or as early as when Nixon abandoned the gold standard in 1971? Or was the whole period 1971-80 really just a transition period, an intermezzo if you will (with a tremendous commodity rally and bond massacre to boot!) This isn't just an academic exercise - I wouldn't want to be short gold in 1971, or long gold in 1979-80.
With the benefit of hindsight (if only!) I can now more confidently say that the post-2008 "Great Stagnation" was really the intermezzo of my generation (I'm a Gen Y- millennial). In 2009 I struggled to understand what was happening and kept pondering, what next? If only I knew then!
Now I view the 2008-22 period (between Lehman Brothers collapse and the Russo-Ukrainian War) as the precursor to the statist (or pro-labour, as you put it) era.
Just as I wouldn't want to be short bonds in 2009 (only to see interest rates collapse to zero!) I wouldn't want to have been long bonds at the beginning of 2022!
But if forced to choose, I would actually date the turning point to the 2015-6 period - right after the late 2014 oil crash and 2015 Chinese devaluation and market rout.
Now that I think about it - many of the salient issues today date from that period:
Chinese GDP in PPP terms overtook the USA in 2016
China ended its one-child policy in 2015
OPEC plus (Russia joined the extended grouping) in 2016
The Covid pandemic of 2020 and War of 2022 only just confirmed the change in trend later on.
So I think simplicity - as I was one told simplicity breeds elegance.
So what if we use China as centre of the political world - and not the west. China moved left after World War II. China began to break with Russia in the early 1970s, and completed moved to the right with the elevation of Deng Xiao Ping in 1978 - and then needing another 4 years or so to push through his reforms.
Xi Jinping was elevated in 2011, and 2015/6 was for me when Chinese assets began to trade very differently.
When you say Chinese assets began to trade very differently, you really mean underperform.
I think this is a good point to mull over; the insularity of the Xi regime seems like it will start to be a drag on global growth (not to mention demographics as Zeihan likes to espouse).
Either way you crack it, the Chinese growth miracle appears to be over and we're left wondering what will emerge as an encore?
Yes Chinese assets have underperformed - but Chinese growth has been fine. The government has emphasised wage growth over capital growth, which is bad for profit growth.
One recurring feature of the neo-classical feature is that policy has seen currency devaluation as a "good thing" - as it allows domestic companies to become more competitive. China has not followed that policy - which actually pressures corporates to improve productivity.
My other theory is that as more money is diverted to labour globally, "growth" will constantly surprise to the upside, as will inflation.
I agree the 2015/6 devaluation and equity spike-crash in China was a key turning point
Didn't you also say that around 2016 was when you started to get bearish on US equities (incorrectly, with the benefit of hindsight) based on a relationship with long-term bonds? I have a vague recollection of some chart you posted but my memory is hazy.
In 2016, the US had a very big negative NIIP - and long term bond yields were beginning to rally - which is when I get worried about capital flows out - and bear markets. Did not happen in the US, and the NIIP has continued to widen
Market cycle = Government cycle
I've always felt that govt activity aligning with market cycles couldn't be a coincidence.
But what of the Commodity producers? Ill be a Jim Grant and own some physical but I still have to do something with all this 410k capital LOL, I have been surprised to see commodity producers have very low debt and often multiple commodities they are producing from each mine, not just gold or silver. As a O&G guy I am fascinated at the balance sheets and various ways they make money off mines and control costs. They are not my grandfathers mining companies it seems.
The heroes of the pro labor era were Alfred Sloan and McNamara. Company men. What’s good for GM is good for America
Yes - good point. And GM was basically thrown to the wolves after 1980 as Japanese competitors were invited in
The chart that is speaking to me is the US Govt Spending Growth over 5 years.
With the pandemic, governments all around the world has unleased fiscal stimulus and I feel there is no turning back from here on in. Take for example, Liz Truss vs Rishi Sunak. LIzzie is promising more spending and the populous knows that isn't the best outcome but more willing to embrace that. If politicians don't provide some form of fiscal stimulus, they will simply be voted out. With each financial crisis, we go on to more easy money measures. 2000s interest rates go almost zero, 2008 QE and 2020 fiscal + QE. Next crisis, probably fiscal stimulus +QE + universal income (if you earn below a certain threshold)? I fail to understand, how will Government finance this, if that is the case.
The really interesting thing is that the US ran a balance budget through all of the inflationary 1970s. You have to remember larger and larger flows of capital though firms like Apple, Amazon and Berkshire generate little cash. Larger share of GDP to labour is much easier to tax. You also get tax bracket creep as more and more people pay higher tax thresholds. Also the politics of squeezing tax from the rich get easier and easier. Biden has just hired a huge number of new IRS agents. So strangely, I think the money will be there, which is why governments can live with higher interest rates too...
Thanks Russell. That does make a lot of sense.
Nice post.
Great piece, it's certainly food for thought!
Even with the benefit of hindsight it can be difficult to precisely date structural turning points.
For example, do we date the death knell of the progressive/new-deal philosophy to the Volcker shock of 1979-80, Yom Kippur oil shock of 1973-4 or as early as when Nixon abandoned the gold standard in 1971? Or was the whole period 1971-80 really just a transition period, an intermezzo if you will (with a tremendous commodity rally and bond massacre to boot!) This isn't just an academic exercise - I wouldn't want to be short gold in 1971, or long gold in 1979-80.
With the benefit of hindsight (if only!) I can now more confidently say that the post-2008 "Great Stagnation" was really the intermezzo of my generation (I'm a Gen Y- millennial). In 2009 I struggled to understand what was happening and kept pondering, what next? If only I knew then!
Now I view the 2008-22 period (between Lehman Brothers collapse and the Russo-Ukrainian War) as the precursor to the statist (or pro-labour, as you put it) era.
Just as I wouldn't want to be short bonds in 2009 (only to see interest rates collapse to zero!) I wouldn't want to have been long bonds at the beginning of 2022!
But if forced to choose, I would actually date the turning point to the 2015-6 period - right after the late 2014 oil crash and 2015 Chinese devaluation and market rout.
Now that I think about it - many of the salient issues today date from that period:
Chinese GDP in PPP terms overtook the USA in 2016
China ended its one-child policy in 2015
OPEC plus (Russia joined the extended grouping) in 2016
The Covid pandemic of 2020 and War of 2022 only just confirmed the change in trend later on.
So I think simplicity - as I was one told simplicity breeds elegance.
So what if we use China as centre of the political world - and not the west. China moved left after World War II. China began to break with Russia in the early 1970s, and completed moved to the right with the elevation of Deng Xiao Ping in 1978 - and then needing another 4 years or so to push through his reforms.
Xi Jinping was elevated in 2011, and 2015/6 was for me when Chinese assets began to trade very differently.
Its an idea I am still mulling over...
When you say Chinese assets began to trade very differently, you really mean underperform.
I think this is a good point to mull over; the insularity of the Xi regime seems like it will start to be a drag on global growth (not to mention demographics as Zeihan likes to espouse).
Either way you crack it, the Chinese growth miracle appears to be over and we're left wondering what will emerge as an encore?
Yes Chinese assets have underperformed - but Chinese growth has been fine. The government has emphasised wage growth over capital growth, which is bad for profit growth.
One recurring feature of the neo-classical feature is that policy has seen currency devaluation as a "good thing" - as it allows domestic companies to become more competitive. China has not followed that policy - which actually pressures corporates to improve productivity.
My other theory is that as more money is diverted to labour globally, "growth" will constantly surprise to the upside, as will inflation.
I agree the 2015/6 devaluation and equity spike-crash in China was a key turning point
Didn't you also say that around 2016 was when you started to get bearish on US equities (incorrectly, with the benefit of hindsight) based on a relationship with long-term bonds? I have a vague recollection of some chart you posted but my memory is hazy.
In 2016, the US had a very big negative NIIP - and long term bond yields were beginning to rally - which is when I get worried about capital flows out - and bear markets. Did not happen in the US, and the NIIP has continued to widen