Inquiring minds are reviewing a chart of Total Loans and Leases and also a chart of Quarterly Real Final Sales of Domestic Product for clues about the strength of the alleged recovery.
After a review of the charts, my friend “BC” shares some of his thoughts regarding the converging Long-Wave, Fixed Investment, Inventory, and Demographic Cycles. The possibilities are not pretty.
Real Final Sales of Domestic Product
ear Annualized QoQ Annualized YoY Q2 ’08 +1.10% +1.80% Q3 ’08 -3.90% +0.15% Q4 ’08 -4.60% -1.93% Q1 ’09 -3.90% -2.86% Q2 ’09 +0.22% -3.07% Q3 ’09 +0.41% -2.00% Q4 ’09 +2.07% -0.33% Q1 ’10 +1.06%+0.94%
Q1 ’10 +0.90% +1.11% Avg. -0.74% -0.69% Avg Since Q1 ’09 +0.13% -1.04%
Total Loans and Leases at Commercial Banks
My friend “BC” writes ….
US GDP Poised to Contract
The trend rate of bank lending and money supply ex incremental annualized government spending implies that the private sector probably decelerated to around 0% or slightly negative early in Q3 and is poised to contract again hereafter.
Consider what real final sales/demand would have been had the government not borrowed and spent 30% of private GDP over two years.
The average trend rate of real final sales since the secular ’00 peak is 1.6% vs. the average long-term trend rate of 3.4%.
This means that the US economy has experienced a 14-15% decline (24-25% per capita) in real final sales/demand below what would have otherwise occurred had the long-term trend rate continued from the secular peak. Were the trend to persist through the rest of the decade, as the secular LW (Long-Wave) debt-deflationary precedent implies, the loss of US real final sales/demand from the long-term trend rate will be 30% (~40% per capita), which is likely to be the level at which the US labour market underutilization rate eventually reaches.
Downwardly Converging Cycles
Moreover, we are likely completing a weak Kitchin Cycle (inventory rebuilding) as a part of the simultaneously downwardly converging Kondratiev Cycle (Long-Wave), the Juglar Cycle (fixed investment), and the Kuznets Cycle (demographic swings).
If so, the post-’00 trend rate will likely decelerate well below the 1.6% rate to around the 1% rate or lower, implying the risk that real final sales/demand will be 35-40% (as much as 45-50% per capita) below the long-term pre-’00 trend rate by the late ’10s or early ’20s.
Note that bank loans grew 9%/yr. (5-6% in GDP deflator terms) from after WW II to the absolute peak in ’08 and 7% from ’74 and ’82 (4-5% deflated), whereas real final sales grew 3.2% from after WW II to the peak in ’08 and 2.9% from ’74 and ’82.
A deceleration of real final sales/demand of 35-40% or so below the long-term trend implies a similar scale of decline in bank loans of 35-40% (-4%/yr.) from the secular ’08 peak to converge by ’20 with the longer-term trend growth of final sales from the onset of the secular reflationary phase in the early ’80s.
As mentioned earlier, the loss of growth of final sales/demand per capita from the secular peak will be closer to 50%, which is approximately the scale of decline per capita likely to have occurred from the ’85 secondary peak for US oil production by ’20.
The loss of bank loans and final sales/demand, with total government /GDP of 36-37% (and 56-57% of private GDP), implies a combined loss of GDP and resulting government receipts totaling no less than 8% of GDP or $1.1T/yr. avg. in federal deficits for the decade just to keep nominal GDP from contracting.
Loan Growth and PE Contraction
Growth of bank loans, final sales, and thus GDP and corporate earnings will have decelerated from the 6-7% secular bull and long-term trend to 4% by 2020. The implication for stock prices given the tendency for the P/E to contract and earnings to track GDP is for the SPX to fall to the 300s-400s at some point.
Unfortunately, by the late ’10s to early ’20s, the doubling or more of the US debt held by the public will have a net interest burden reaching and then surpassing 25% of government receipts (absent large tax increases and/or cuts in spending).
The larger the deficits in the meantime, the sooner the US government will reach the fiscal day of reckoning.
Please note that the above analysis is not a prediction that the S&P 500 will fall to 300. Many things can happen along the way.
However, it is important to keep an open mind on these things.
The S&P 500 certainly could fall that low. Moreover, were it to do so, it would be consistent with the convergence of the various cycles as described above, and it would also be consistent with Japan’s Two Lost Decades.