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Why It’s Impossible To Replay The 90’s

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    March 27, 2014

    There was a very interesting article out this morning on Bloomberg discussing “Is The Stock Market About To Go Totally 90’s?”  The opening paragraph is as follows:

    “Early in 1992, Time magazine projected that the nascent economic recovery would be ‘one of the slowest in history and the next decade one of lowered expectations.’ That was the conventional wisdom and, at the time, seemed eminently reasonable. It also turned out to be completely wrong. The Internet and huge productivity gains propelled above-average economic growth and a rip-roaring, “Cult of Equity” bull market that surged into the year 2000. We spent and borrowed like mad and eased into fluffy college majors.”

    There are a couple of issues with this statement worth discussing.

    To start with, Time Magazine was not entirely wrong.  The chart below shows the annual percentage change in real economic growth from 1854-present.  I have marked both the zero percent growth rate line and the average rate of real economic growth which is 3.56% historically.

    GDP-Real-AnnualChg-032414

    While Time Magazine was early in the sub-par growth rate call for a couple of years, it eventually did come to pass through the entirety of the 21st century, so far.  While the internet boom did cause an increase in productivity, it also had a very deleterious effect on the economy.  As I discussed recently in “50% Profit Growth:”

    “Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression.  The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth.  This has been achieved by increases in productivity, technology and offshoring of labor.  However, it is important to note that benefits from such actions are finite.”

    Wages-to-Profits-030414-2

    This drive to increase profitability did not lead to increased economic growth due to increased productive investment and higher savings rates as personal wealth increased. The reality was, in fact, quite the opposite as it resembled more of a “reverse robin-hood effect” as corporate greed and monetary policy led to a massive wealth transfer from the poor to the rich.

    It is easy to understand the confusion the writer has from just looking at the stock market as a determinant of economic prosperity.  Unfortunately, what was masked was the deterioration of prosperity as debt supplanted the lack of personal wage growth and a rising cost of living.

    The chart below shows the rise in personal debt, which was fostered by 30 years declining borrowing costs, to offset the declines in personal income and savings rates.

    Household-Debt-Deleveraging-021914

    As the author correctly states above, it was the “borrowing and spending like mad” that provided a false sense of economic prosperity.  The problem with this assumption is clearly shown in the chart below.

    PCE-GDP-032414

    In the 1980’s and 90’s consumption, as a percentage of the economy, grew from roughly 61% to 68% currently.  The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards.

    In 1980, household credit market debt stood at $1.3 Trillion.  To move consumption, as a percent of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt.  Since 2000, consumption as a percent of the economy has risen by 1% over the last 13 years. In order to support that increase in consumption it required an increase in personal debt of $6.1 Trillion.  

    The importance of that statement should not be dismissed.  It has required more debt to increase consumption by 1% of the economy since 2000 than it did to increase it by 6% from 1980-2000. 

    The problem is quite clear.  With interest rates already at historic lows, consumers already heavily leveraged and economic growth running at sub-par rates – there is not likely a capability to increase consumption as a percent of the economy to levels that would replicate the economic growth rates of the past.

    It is quite apparent that the ongoing interventions by the Federal Reserve has certainly boosted asset prices higher.  This has further widened the wealth gap between the top 10% of individuals that have dollars invested in the financial markets, and everyone else.  However, while increased productivity, stock buybacks, and accounting gimmicks can certainly maintain an illusion of corporate profitability in the near term, the real economy remains very subject to actual economic activity.  It is here that the inability to releverage balance sheets, to any great degree, to support consumption provides an inherent long term headwind to economic prosperity.

    In my opinion it is likely quite impossible, from an economic perspective, to replay the secular bull market of the 80-90’s.  While I would certainly welcome such an environment, the more likely scenario is a repeat of the 1970’s.  The trick will be remaining solvent for when the next secular bull market does indeed eventually arrive.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.

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