5 THINGS THAT COULD DERAIL THE RECOVERY
Gary Shilling of A. Gary Shilling & Company, spoke at John Mauldin’s Strategic Investment Conference in San Diego last weekend and Robert Huebscher, CEO of Advisor Perspectives, was kind enough to take some notes. He provided the 5 things that Gary Shilling sees as threats large enough to derail the recovery:
“First was housing. Shilling was among those who correctly identified the housing bubble and predicted its collapse in 2006. Today, excess inventories – between 2.0 and 2.5 million houses – may lead to a further price decline of 20%, Shilling said, which is the decline necessary to bring housing back to its long-term trend. He cautioned that markets usually overshoot on the downside.
The oil market and the turmoil in the Middle East were Shilling’s next concern. He said he wasn’t sure how severe the problem might become, but he was adamant that high oil prices would not trigger inflation. “As long as you have high unemployment, there is virtually no risk that high oil prices would seep over into the wage structure,” he said. “It isn’t inflation; it’s a tax – and it is a big tax on the consumer.”
Japan was Shilling’s third concern, and he called that country’s economy a “slow motion train wreck.” Japan faces a serious problem down the road financing its huge government debt, he said, which it has done so far largely by selling bonds to its citizens. That worked while Japan ran a trade surplus, but unfavorable demographics and a weak US consumer will eventually create a current account deficit, at which point the Japanese will have to borrow from foreign markets – at much higher interest rates than the 1.25% it pays now. That could lead to a “death spiral,” he said, wherein additional debt would be necessary to fund interest payments.
Fourth on Shilling’s list was the Eurozone debt crisis. Shilling said that he expects a restructuring to take place to resolve the problems facing Greece, Portugal, Ireland and perhaps Spain. A recession in Europe would follow, which would impair US exports. It will also create problems for the US banks, which collectively own 28% of the debt in the Eurozone.
A likely “hard landing” in China completed Shilling’s list of concerns. China now faces 12% inflation, he said, which is very significant for the bulk of its population that earns modest incomes. Slowing down China’s economy will be very difficult. Its central bank has already raised reserve requirements eight times since January of last year and raised interest rates four times over that period.”
Read the full piece here.
So I guess this means that if China is experiencing higher prices it’s inflation but if the US is experiencing higher prices it’s a tax.
OK I get it.
12% is quite different from 2.5% , don’t you think ?
Agreed, 12% is quite a bit different then 2.5%. Now if I could only find someone who actually believes that current inflation is running at 2.5% I’d be all set. The problem is, like it or not, the vast majority of people aren’t buying into that 2.5% line. it. Certainly no one I know. I suppose we could all be wrong or perhaps we’re just spending money on the wrong things. Then again so could the 2.5% believers be wrong.
time will tell
I think Shilling’s point is that wage inflation will not erupt in the America, fueling a wage/price spiral as last seen in the ’70′s. Meanwhile, in China, wages have been spiking higher over the last two years, their monetary base has exploded from state enforced bank lending and a cheap Yuan policy.
Inflation is a much bigger problem for the Chinese Central Gov than their average person. It could mean wage growth or lead to civil unrest that they must battle both eating into their growth rate. If China’s growth slows too much they will have a lot of problems to clean up from financial, to real estate to potentially civil unrest. I am inferring from what I think Shilling meant. High Inflation (caused partly by food/energy) in America which has a huge consumer driven economy is a tax because you must start allocating more and more to your basic needs taking away from spending on other things. In a country like China that isn’t consumer driven it is a different problem than it is in America. I believe that is why Shilling worded it that way, but I may just be making an a$$ out of myself for assuming.
That’s an interesting take on Japan, Cullen. I’m guessing you disagree?
Yeah, I certainly do. The old “Japan will have to buy from foreigners at higher rates” is the same argument that people have been making in the USA for years on end now. It shows a fundamental lack of understanding with regards to the operations of a fiat monetary system in which the sovereign nation is a currency issuer.
Exactly. In the future, if Japan sells bonds to int’l investors, it will look like the US now. And if the US has to sell domestically instead of to int’l investors, it will look like Japan now. US and Japan are at opposite ends of the spectrum for about 2 decades now, and in both cases it’s been monetary policy that’s set the interest rate on govt bonds, not “mkts.” The adjustment is in the exchange rate and trade balance, not interest rates.
http://www.voxeu.org/sites/default/files/file/DP8310.pdf
Debt slows growth. No need for a (poorly written) paper to prove that.
The only meaningful thing in the whole paper is graph b, page 18.
If debt slows growth, how do you explain the growth under the Reagan years? He consistently ran government deficits of 5% of GDP and the economy began to move. If your assertion were correct, would you not have seen the opposite result?
I do not agree with the conclusions, or pretty much anything in the paper. They state that above 90% the growth slows with 1% … Even so, the proper way to get out of debt is not austerity.
Of course if you have student loans your savings will grow slower than if you do not ceteris paribus.Common sense dictates that, but the goal of the paper is to provide justification for the austerian path.It actually proves the opposite with Figure 5b, p. 18.
Here is some info on Reagan. Keep in BR is a republican so this not not a left wing conspiracy:
http://www.ritholtz.com/blog/2011/02/presidential-chart-porn/
http://www.ritholtz.com/blog/2010/09/reagan-tax-increases/
Cheers
One more about Reagan compared to others:
http://www.presimetrics.com/blog/?p=325
Dimm, I love your partisanship….I always cringe when someone links, Herr Ritholtz…
The facts are, that only Con gress can issue and vote upon a budget, which in most cases results in debt growth…
Upon examining who has control Con gress since H. Hoover, the Repubcos have only had a majority control for eight years in both the house and senate…
As for Mr Shiling, I believe the first two points, will in fact, bring about an Obamacession…
Falling home prices, will continue to unnerve homeowners and rising petrol prices will reduce consumer spending…
But there is no need to worry, as government spending and debt will save the day…..
Wow, Hans you are out of your mind man
Dimm, a mind is a terrible thing to waste…
The left always tries, to indite Republican president as big spenders and responsible for the growth of debt and the deficit…
As always, it is the perversion of the truth…
http://www.house.gov/jec/news/DebtChartbyCongressionalControl.pdf
Are those numbers intended to be a factual statement?
You can’t be serious quoting a congressman.
Made me laugh though. Thanks for that.
Dimm, thank you for supporting your POV with any credible evidence…
The last time federal debt was reduce was 1957! In the last 54 years, if my memory service me correctly, con gress has been control many times more by the left than the right…
This is why the left has used the phony argument of who sits in the White House, because it has not been monopolized by the socialists….
Let’s just examine the past decade, which I am afraid is quite representable of the past, to see who has cause the most debt damage…
BTW, according to the CATO Institute, as Repubcos spend more and more time in con gress, they are less likely to vote for spending reductions…
I clearly understand the difficulty in defending the progressive ideology, I could not either…
http://newsflavor.com/opinions/democrats-more-than-doubling-deficit-vs-republicans/
CATO Institute
LOL
Thanks for the linky, Nemesis….
More reading for the doomed…
Reinhart/Rogoff are ignorant of the monetary system we actually operate within. Wray/Nersisyan destroyed their argument here: http://www.levyinstitute.org/publications/?docid=1273
In other words, Nemesis’ link is garbage.
If would suggest that all five events are somewhat interelated, in that if just one of these events becomes severe enough it will trigger the other four events in a domino style fashion. If that happens, then I could forsee the global economy heading into a double dip recession.
“It [high oil prices]isn’t inflation; it’s a tax – and it is a big tax on the consumer.”
MMT says this is simple foolishness, doesn’t it? Taxes reduce aggregate demand and they don’t “fund” government spending. Taxes destroy money and create legal pressure behind demand for currency from the sovereign. In contrast, high oil prices result in higher prices paid up the chain of production and usually higher corporate profits that result in more investment by the integrated majors, higher dividends paid to shareholders, more GDP etc.
High oil prices don’t destroy money; instead they increase velocity and investment and transfer income from consumers to producers. When prices rise high enough to materially reduce demand, prices then fall over time and the mechanism self corrects–it’s known as “the free market”. You know, that thing that Americans have forgotten once underpinned our economy.
If a canard such as “higher oil prices are a tax” is repeated often enough, everybody starts believing it–including people like Shilling who should know better.
You need to take your thought process one step further.
Rising oil and gas prices means falling consumption on other items and rising profits for oil producers. If those profits are not spent and are saved (by the businesses, or shareholders) then it is a leakage to aggregate demand and the effect is the same as a tax.
Would that statement also apply to welfare transfers?
Shilling is a meat head. He has been calling for deflation since 2000 and his followers now live in tents.
To Adam:
Integrated oil companies can reinvest profits in facility expansion, acquisition of reserves, exploration etc. Shareholders can spend dividends. I realize that savings as capital formation is a gold standard concept that is misplaced in a fractional reserve banking system operating in a pure fiat monetary system, but oil companies aren’t banks. Even if the profits go into corporate retained earnings and savings accounts, that money is low velocity but not destroyed as it is in taxation; we instead have future investment and deferred consumption resulting from these savings. I am not sure that MMTers would say that deferred consumption and savings for capital investment are necessarily a drag on the economy. They are a drag on consumption, which is 70% of the economy but not nearly all of it.
“High oil prices are a tax” is a meme like “greedy oil companies” is a meme that pops up when oil prices are high. When oil prices drop, no one at the Fed wants to raise interest rates because “cheap oil prices are a tax cut” and everyone forgets that oil prices are set in a world market. Instead, the Fed says that declining prices are a sign of deflation and that we must cut interest rates.