Wikinvest Wire

Jim Grant, Raging Bull

Sunday, September 20, 2009

Jim Grant of "Grant's Interest Rate Observer" is apparently not buying any of that "new era for consumers following traumatic financial blows" thinking espoused by San Francisco Fed President Janet Yellen last week.

In fact, bearish Jim Grant is now a raging bull, happily looking past any differences between the current recovery and every other post-World War II recovery in this WSJ op-ed.

As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don't know, and can't. The future is unfathomable.
IMAGE Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can't predict, I can guess. No, not "guess." Let us say infer.
What Mr. Grant then goes on to infer is that, the period that we've just experienced was a very severe but, otherwise, quite run-of-the-mill economic downturn, from which the nation will just pick itself up, dust itself off, and go on.

No scary debt levels seem to exist in this view of the U.S. economy and, apparently, there is no end in sight to the spendthrift ways that consumers have adopted over the last few decades - it's just a matter of us Americans being a bit wimpy and out-of-shape when it comes to battling economic downturns (due largely to being out of practice) and the good news is that, the steeper the decline the steeper the rebound.
Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."
Now, I, for one, would like to see the data from the 1929 to 1939 period that backs up that claim. If it's GDP that is the metric, I don't know that too many Americans will feel too good about their prospects based on the shape of the curve in the chart below.
IMAGE Yes, the decline and the advance seem to match up, but it's the overall duration here that most people would probably find troubling - some seven years to recoup that lost GDP. That gives a whole new meaning to the comfort of a symmetrical upside and downside.

And this was when the U.S. government left markets largely to their own devices. The ascent in the 1933 to 1936 period did not have the government baggage that our economy has today, what with the folks in Washington owning or insuring virtually the entire mortgage market along with major banks and other assorted industries.

In that respect, we are clearly going where no U.S. economy has gone before, a fact that is duly noted by Mr. Grant but doesn't seem to weigh on his overall conclusion.
In the post World War II era, the government has attacked recessions with an average fiscal stimulus of 2.6% of GDP and an average monetary stimulus of 0.3% of GDP, for a combined countercyclical lift of 2.9%. (Fiscal stimulus I define as the cumulative change in the federal budget, monetary stimulus as the cumulative change in the Fed's balance sheet, both measured from the peak of the boom to the trough of the bust.) This time out, the fiscal stimulus is likely to measure 10% of GDP, monetary stimulus 9.5% of GDP, for a combined pick-me-up equivalent to 19.5% of GDP. Our Great Recession would be marked for greatness if for no other reason than by the outpouring of federal dollars to repress it.
Here, he begins to make good sense again...
The Fed's voice is among the saddest in the lugubrious choir of bearish forecasters, and for good reason. By instigating a debt boom, the Bank of Bernanke (and of his predecessor, Alan Greenspan) was instrumental in causing our troubles. You might have thought that it would therefore see them coming. Not at all. Belatedly grasping how bad was bad, it has thrown the kitchen sink at them. And it maintains this stance of radical ease lest it get the blame for a relapse. However, by driving money market interest rates to zero and by setting all-time American records in money-printing ($1.2 trillion conjured in the past 12 months), the Fed is putting the value of the dollar at risk. Its wide-open policy all but begs our foreign creditors to ask the fatal question, What is the dollar, anyway? Why, the dollar is a scrap of paper, or an electronic impulse, the value of which is anchored by the analytical acuity of the monetary bureaucracy that failed to predict the greatest financial crackup since the 1930s.

The Fed may be worried about something else. By sitting on interest rates, it is distorting every business and investment decision. If mispriced debt was the root cause of the narrowly-averted destruction of global finance, the Fed is well on its way to setting the stage for some distant (let us hope) Act II. In the meantime, ultra-low interest rates have lit a fire under the stock and debt markets.
The one thing that, apparently, will not be distorted, however, is the shape of the recovery...


This week's cartoon from The Economist:
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Anonymous said...

Actually, the scary debt levels may be the very reason that asset classes in bubbles a few years ago will rise strongly. The banks are terrified that their loans won't be repaid if they don't use the printing press to at least partially re-inflate the asset bubbles.

This will lead to a greater disaster in a few years, but a short term asset bubble bounce is quite possible.

Lisa said...

This Grant guy is using the same kind of thinking that produces such idiot assumptions as "war is good for the economy." It's interesting that, now that the wheels have come off the Fed-led economy, otherwise fairly rational people are jumping off the cliffs, one after another, into the black pit of insanity.

Joe Calhoun said...

Lisa: "This Grant guy" as you put it, is one of the most thoughtful analysts anywhere. I've been reading his stuff for twenty years now and he is not to be dismissed lightly. In short, he is scary smart.

Tim: Grant doesn't directly address debt levels in this piece but he has addressed it ad nauseum in his newsletter over the last decade. He isn't a pollyanna. In the article he also mentions that at the low of the cycle in 1933, consumption was 80% of GDP and the savings rate was negative. And yet we still got a large recovery from 33-37.

Another point; while government spending was not as high as a percent of GDP back then, I would argue that the intervention in the economy by the FDR administration was in many ways much worse. It was accomplished through command and control rather than direct spending, but the level to which they micromanaged was simply astonishing. Remember the brain trusters were true believers in the planned economy. The big problem with the interventions was that business never knew what FDR would do next and were therefore reluctant to invest. Higgs calls that regime uncertainty and it was rampant in the 30s.

As for Grant's thesis, I happen to lean in his direction for the relatively short term. Over the next year or maybe even a little longer, I expect GDP growth to be better than the consensus. That is based on the idea that the Fed will be slow to reverse their money creation and that the "stimulus" bill was written so most of the spending happens in 2010, an election year. And remember that government spending is part of the GDP calculation.

That doesn't mean that this will be good growth and it doesn't mean it will be sustainable, but could it be better than expected? Absolutely.

Lisa said...

Joe, you are a case in point. People like you and Grant talk about GDP calculations, stimulus spending, etc,etc., as if those numbers are the end all, be all. The biggest point "analysts" are missing is that there is NO more road on which to kick the can. Yes, government manipulation was "successful" in keeping those numbers up and the country running. But, by doing so, it slowly eroded the last vestiges of the production that makes this country/economy great. The definition of insanity is doing the same thing over and over, yet expecting a different result. "Black pit of insanity" I believe is apt.

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