16 June 2016

Money For Nothing, part the second

One of the adopted themes of these endeavors is that predicting tomorrow based on the last X years/months/weeks/days requires that the context of today and tomorrow is quite the same as the previous Xs. Gordon's book is a very (overly?) long account of how tech as been fleshed out during the last century or so. Key to understanding the history is that innovations such as the steamboat had much bigger impact on progress than has/will Twitter.

Moreover, one need keep in mind that both the DotBomb of 2000 and the Great Recession of 2008 were powered by the same context: a global over-supply of savings. Some (much?) of tha glut of moolah is unused corporate profit, which is in the trillions of dollars. That segment of the glut exists just because the CEO class no longer knows how to deploy fiduciary capital into innovative physical capital. Both the DotBomb and the Great Recession were bubbles generated by all that idle moolah demanding high returns and little risk. In the former case, the likes of pets.com were viewed as can't miss sure things. In the latter case, holders of idle moolah decided they'd learned the hard lesson of chasing high return at low risk in the dot.com world, so it all flooded into moderate return at low risk: the American house.

So, we got "Viagra at The Home". The common knowledge was that house mortgages were a safe instrument; historically, default rates were teeny. The mortgage industry obliged the demand for securities by creating ever more mortgages, which required making said mortgages to folks who'd not previously qualified. Rising house prices, per fixed definition of "house", can only happen if mortgagees (Joe Sixpacks) have rising incomes, or drastically reduced other spending. Neither accounted for the experienced house price inflation. Once that inflation just slowed (it didn't have to stop, much less reverse), escaping mortgages became impossible. Crash.

Coupled with this demand for high return at low risk is the scenario that the .1% will engineer a crash just so they can "earn" their 10% return in the form of deflation. Brexit may well do that. Turns out that not only the .1% but also the millennials think that 10% is their God given right. Gad.
Research from U.K.-based asset management firm Schroders shows that millennials (those ages 18 to 35) expect annual investment returns of 10.2 percent. That's higher than the historical averages of 9 percent to 10 percent. More important, it represents a much bigger bang for their investment buck than they're likely to get given today's historically low interest rates around the world amid slow global growth.

This week, Treasuries have traded at 1.56%. Given the Giant Pool of Money (some may be from the ECB and BoJ) chasing high returns at low risk, that ain't gonna happen. Ironically (or perversely, depending), insurance companies and brokerages have been pumping "you should save more, with us of course") adverts on the TeeVee. Yet mo money chasing little demand for it. Perversely (that again), economic growth is driven by growing aggregate demand. Depending on how that demand is distributed, an economy gets more or less growth. But if most folks stop consuming and start "saving", they get recession (or, heavens, depression) and yet less return on their "saving". Welcome to the world of zero sum.

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