For the past six months it has become very clear that the answer to my original 2008 question is a resounding yes. Of course, there still exists a loud chorus of denial from the "Goldilocks recovery ..." pundits - whose increasingly feeble rationale remains only that "...it's never different this time". Some of these pundits are now telling us that the crisis has been averted, the US economy has recovered and growth has resumed, but, it seems that for the most part any growth the US economy has seen in the past two and a half years is in the bottom-line; productivity growth which in turn has only added to the overall contraction in the economy -- especially in terms of employment. Top-line growth still remains illusive in the US, Canada and most of the OECD. Meanwhile, without a lot of top-line growth the real problem, debt
, gets "kicked down the road".
What has also become clear is that supply-side pundits are finding it increasingly difficult to substantiate their failed philosophy in the face of what is obviously now a demand-side problem. The "New Normal" includes austerity (increasingly imposed on millions), increased savings and an increasing retirement age. It seemingly excludes rampant consumption and debt. Fortunately, at least one of the supply-siders seems willing to acknowledge this reset
. So much wisdom but is it enough in this increasingly polarized society?
Look, what is obviously different this time is firstly the true magnitude of the problems the 2008 Credit Crisis has wrought on the balance sheets and economies of the OECD. Secondly, it seems to be becoming increasingly clear that what is really different this time is how long it is going to take to recover from these problems. In 2008 I figured about a decade and determined that it would be at least 2 or 3 years (2010/11) before I ventured into equity markets again. More recently I'm not so sure.
The real challenge I have found during the past year has been trying to assign reasons for what is really going on in North American financial markets. It is obvious to me that these markets, especially US equity markets are more accurately correlated to hope than to any discernable future economic or corporate performance. The magnitude of this deviation is IMO largely unknown to anyone. Likewise, it is obvious to me that the yield curve no longer accurately indicates the direction of future economic growth -- ISTM with all the uncertainty the yield curve should, at best, be flat, or even slightly inverted, which it cannot be with a ZIRP. The magnitude of this deviation is probably about +1% at the long end.
I have long accepted that since 2009 the stock and bond markets are being manipulated to a far greater degree than in normal times. I have also accepted that this is not necessarily a bad thing. What I don't know (for certain) is: what goal is driving this manipulation? when is likely to end? and what the likely result will be when it does end?
Recently, I have begun to see what (in large part) I believe may be really driving this manipulation of US financial markets. IMO it's mostly about a massive shortfall in US Corporate
, State and Municipal
and probably other (Federal) pension funds. ISTM they have already begun to leverage the future by selling pension bonds, and are perhaps paying today's obligations with this money borrowed at low interest rates, meanwhile they are likely investing whatever else they can in higher yielding stock and corporate bond markets. ISTM they can only do this if they are fairly certain of a (POMO induced) return and, disconcertingly, ISTM many may be poised to crystallize those returns at or about the same future moment.
If I'm even half right about the goal, then the when and the result become much clearer.