Getting Growth Back on Track Could Be Very Rewarding

As the first chart shows, GDP growth has snapped back to "normal" following a record 4 quarters of negative growth. But as the blue and green lines in the second chart suggest, the economy today is about 10% below its "trend" or potential level (extrapolating from the past). Stated another way, our national income is about $1.4 trillion less than it otherwise might have been if we hadn't suffered from the real estate/financial system collapse of the past few years.

Before proceeding further, I'm going to step back and engage in some "inside" thinking (see my previous post on this subject). We all know that the economy is facing enormous headwinds: 10% unemployment that is going down very slowly; an administration determined to ramp up government spending and tax burdens to new post-war levels; trillion-dollar federal deficits for as far as the eye can see; states and municipalities that are bitterly strapped for cash; broken credit markets; a commercial real estate disaster waiting to happen; a second wave of residential foreclosure sales; consumers retrenching and deleveraging; and a Fed that will soon have to withdraw over $1 trillion in liquidity or face an explosion in inflation.

Add all these concerns up and you have the "new normal" environment where the economy struggles to grow by 2% or so per year in perpetuity. Since the market is fully aware of these abundant "inside" facts, it is no wonder that 10-yr Treasury yields are only 3.5% despite the prospects of a multi-year, trillion-plus annual deluge of Treasury supply. It is no wonder that the S&P 500 today trades at the same level as it did over 10 years ago, even though corporate profits (per NIPA) have risen some 70% over that same period and are currently beating expectations almost every day. It's no wonder that corporate credit spreads are trading at levels that in the past have signaled the onset of recession. In short, the outlook is miserable and the market is priced to miserable expectations.

Now let's engage in some "outside" thinking. That's summed up in the purple, dashed line in the second chart. (New readers might want to refer back to this post on Milton Friedman's "plucking" theory of growth, and to this post from the Atlanta Fed that demonstrates how the strength of a recovery is largely a function of the depth of the preceding recession.) For the past 40 years, the economy has managed to grow on average about 3.1% per year: this would be the economy's "potential" growth rate. Currently the economy is about 10% below this potential, making this recession the most painful, in some respects, of any since the Depression. Let's say that because of all the headwinds out there that it takes the economy eight full years to recover to its potential; this would mark by far the slowest recovery to trend ever observed since the Depression. Yet despite being a miserable recovery, we would still see growth of 4.4% per year, and that is about double the rate of growth that many optimists are calling for.

The inside view says the outlook for growth is miserable, while the outside view says that there is a decent chance (not a certainty of course) that growth could be much stronger than the market expects, and for many years, even though the economy faces significant obstacles (headwinds) to growth. Since the market is not even remotely prepared for such an outcome, risky financial assets such as equities and high-yield debt could enjoy excellent returns even as the economy struggles to get back to its trend growth path. Imagine what could happen if some of the assumptions held by the inside view were to be challenged: what if electoral upsets next week and next year result in fiscal policies which rely more on supply-side incentives and less on Keynesian fiscal stimulus? What if faster-than-expected growth reduces the deficit and makes tax cuts possible, instead of tax hikes? The possibilities are endless, and you don't have to be a congenital optimist to see them. Just use a little "outside" thinking.

Comments

[Archman Inv...:]

Heres some "inside thinking" for you Mr. "Every day is a sunny day even as average Americans are living on the street":

The GDP report was nothing more than a massive report on government spending. They are completely mortgaging away the future of this country instead of allowing the economy to reset on it's own. This will, without question prolong this recession and prolong any real recovery.

Of course you have not a care in the world as your bank accounts are chock full of cash from your previous gigs at various high paying places of employment, but for average Americans, these are the worst of times.

Don't believe me? Go for a long walk in an average middle class neighborhood and spew your lies about how everything is rosy and great (per your rationalizations in your previous articles).
Somehow I do not see you surviving your walk down the block.

Oct 29 04:49 PM

[MarvinMBA:]

I've made a reversal in my thinking and now have liquidated gold and silver and are into large cap equities like GE, INTC and the largest chain drug store in China. In the short and long run equities will continue to perform IMHO. A energy play will be my next investment.
What this country needs is a free college education for everyone so that the future can be assured in high tech and medical technology.


Marvin MBA

Oct 29 05:26 PM

[concrete guy:]

Archman: I just don't get all the personal invective directed at this author and others on this site. Your post above is more whining than thinking. Why hurl insults at anyone who voluntarily publishes open and honest opinions? Why be uncivil when you express your disagreement?

Oct 29 06:08 PM

[igggy:]

The second graph is very informative but I don't believe the trend will continue. For the last 30 years GDP growth has been boosted thru borrowing. Not only will it be harder to borrow in the future but the US will also have to pay more in interest every year.
How about adding Japan to the graph? As I understand their real growth has been around 0% for the last 20 years. That seems like a more likely scenario for the US as well. Slightly better perhaps (1%?) since the US demographics is not as bad.

Oct 29 07:07 PM

[Archman Inv...:]

Concrete guy:
This particular author as well as others that he follows and knows personally, are part of an elitist group that has the agenda of telling people what they want to hear, rather than what they need to hear. They are bold faced liars who spin every single piece of news as good news, to deceive those who are less informed into believing everything is fine. Review his articles and you will easily see this. This particular author was a former economist at a large asset gathering firm, who's only job is to grow the asset base and collect fees regardless if they lose everyone money. That is the nature of Wall Street and this author was and still is loyal to that world.
As far as being critical of others personally i am not sure of who you mean.
I re-read my post and I am sorry if you thought i was whining. My post was based on fact and unlike the author, I do not attempt to massage the truth in order to hide just how horrible the facts really are.
Let me be clear about something to you or anyone on here.
I may be in the top 10 as far as commentators on SA who have positive comment reviews, however I do not ask anyone for their "thumbs up" comment reviews, nor do i lay awake at night praising myself for all the positive comments I receive. Obviously people know that 90% of the time I speak the truth and do everything I can to expose those who's job it is to fool average Americans, that is why they give me a thumbs up.
Secondly I may have 147 followers on SA, yet I ask for no one to follow me. Again I do not lay awake at night thinking about how great I am that 147 people care about what I have to say. I have better things to do than that. Unlike the Facebook, worker drones that believe people want to hear about every useless thing in their lives, I don't waste my time with that crap.
That is probably why my portfolio is at 2009 levels (where it should be) unlike average Americans who cannot understand why their net worth is at either 1999 levels or has vanished completely.

Once again, I believe in telling people what they need to hear, not what they want to hear.
Today's GDP report was based completely on government intervention and spending. Unemployment (the real number) is over 20% now. There are more people on food stamps and living out of cars than ever before in our nations history. Our gov't is again extending unemployment benefits because things are "so good" now and the recession "is over".
The deceptions never end, but when one takes the red pill and sees the truth, Wall Street, and the media for what it is, then you will always make money and stay one step ahead of them.


On Oct 29 06:08 PM concrete guy wrote:

> Archman: I just don't get all the personal invective directed at
> this author and others on this site. Your post above is more whining
> than thinking. Why hurl insults at anyone who voluntarily publishes
> open and honest opinions? Why be uncivil when you express your disagreement?

Oct 29 07:49 PM

[concrete guy:]

Archman; the majority of CPB's career was spent working for "a Pasadena-based manager of fixed-income funds for institutional investors around the globe". Note the words "fixed income funds". Your characterization of him as a man "who's only job is to grow the asset base and collect fees regardless if they lose everyone money" is a slanderous distortion based on what????

Well, good luck with your role as SA policeman. Keep working hard to squash any hint of optimism that might creep onto this site.

Oct 29 09:07 PM

[bigbear4511:]

You said it man this guy only promotes "It is always sunny in Philadelphia " type of information. He dogmatic analysis of every little upswing in an otherwise horrible recession (that still continues) despite manufactured GDP numbers is nauseating. Wonder what he will say if there is another crash. Things like "Corrections are a good thing" or The job market will only take 15 YEARS to recover! How about "Don't worry about the governments fiscal spending, debt grows on trees!"



On Oct 29 04:49 PM Archman Investor wrote:

> Heres some "inside thinking" for you Mr. "Every day is a sunny day
> even as average Americans are living on the street":
>
> The GDP report was nothing more than a massive report on government
> spending. They are completely mortgaging away the future of this
> country instead of allowing the economy to reset on it's own. This
> will, without question prolong this recession and prolong any real
> recovery.
>
> Of course you have not a care in the world as your bank accounts
> are chock full of cash from your previous gigs at various high paying
> places of employment, but for average Americans, these are the worst
> of times.
>
> Don't believe me? Go for a long walk in an average middle class neighborhood
> and spew your lies about how everything is rosy and great (per your
> rationalizations in your previous articles).
> Somehow I do not see you surviving your walk down the block.

Oct 29 11:05 PM

[Archman Inv...:]

Concrete:
I said and meant "the firm" he was employed at is an asset gathering firm. Not him personally. Trust me, I am not worried about being slanderous.
The author was an economist for that firm. His job was not to grow assets, yet I am sure he like everyone else at that firm was paid from monies collected from individuals.
thanks


On Oct 29 09:07 PM concrete guy wrote:

> Archman; the majority of CPB's career was spent working for "a Pasadena-based
> manager of fixed-income funds for institutional investors around
> the globe". Note the words "fixed income funds". Your characterization
> of him as a man "who's only job is to grow the asset base and collect
> fees regardless if they lose everyone money" is a slanderous distortion
> based on what????
>
> Well, good luck with your role as SA policeman. Keep working hard
> to squash any hint of optimism that might creep onto this site.

Oct 30 06:33 AM

[chap08:]

In among the arguments above, iggy made the most relevant point.

The point is that there is no "on track". "On track" would require that debt/GDP went back to growing on track. This link makes the point quite simply and starkly.

www.chrismartenson.com...

If you expect another huge run up in debt, expect GDP growth of 4.4%. If you don't, then expect ... something else.


On Oct 29 07:07 PM igggy wrote:

> The second graph is very informative but I don't believe the trend
> will continue. For the last 30 years GDP growth has been boosted
> thru borrowing. Not only will it be harder to borrow in the future
> but the US will also have to pay more in interest every year.
> How about adding Japan to the graph? As I understand their real growth
> has been around 0% for the last 20 years. That seems like a more
> likely scenario for the US as well. Slightly better perhaps (1%?)
> since the US demographics is not as bad.

Oct 30 07:59 AM

[GreatWhite:]

I live in a middle class neighborhood and go for long walks with my wife and children and everything is very rosy! I don't get mugged, people wave and say high. You are either basing "Your" walks in the ghetto or your trailer park.

The average neighborhood is managing just fine and your are D&G blow hard and it shoes on your photo (or your just constipated)

GreatWhite


On Oct 29 04:49 PM Archman Investor wrote:

> Heres some "inside thinking" for you Mr. "Every day is a sunny day
> even as average Americans are living on the street":
>
> The GDP report was nothing more than a massive report on government
> spending. They are completely mortgaging away the future of this
> country instead of allowing the economy to reset on it's own. This
> will, without question prolong this recession and prolong any real
> recovery.
>
> Of course you have not a care in the world as your bank accounts
> are chock full of cash from your previous gigs at various high paying
> places of employment, but for average Americans, these are the worst
> of times.
>
> Don't believe me? Go for a long walk in an average middle class neighborhood
> and spew your lies about how everything is rosy and great (per your
> rationalizations in your previous articles).
> Somehow I do not see you surviving your walk down the block.

Oct 31 01:48 PM

[GreatWhite:]

On Oct 29 07:49 PM Archman Investor wrote:

"Secondly I may have 147 followers on SA, yet I ask for no one to
follow me."
"Let me be clear about something to you or anyone on here.
> I may be in the top 10 as far as commentators on SA who have positive"

I am sure without a doubt I or anyone else who chose too, could start posting D&G garbage like you and the others like you and get plenty of followers and thumbs UP (e.g. Jeff Nielsen) . The majority of SA readers are her looking for fuel for their whine machines and your are amongst the biggest whiners and propagators.

So don't round-about pat yourself on the back, you have achieved nothing.

GreatWhite

Oct 31 02:02 PM