I have been slugging it out with Bear C, who taught me all I knew for years, and now have come to a slight disagreement on how to view things.
Maybe y'all can read it and point out all the flaws in both arguments. Keep in mind the these differences are not "light". They either take you to the left or the right. Your choice.
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From: Bear C
Sent: Wed 10/22/2008 3:12 PM
To: MTGSPY
Subject: triumph of reason over chaos?
Going back to 1978, I obtain the total market capitalization of the russel 3000, which represents around 98% of public companies today (back in 1978, fewer percent of total GDP came from public companies, but that doesn't really change the moral of the story). Then I obtain the nominal GDP in dollars.
Finally, I take the ratio of market cap to GDP. This is a proxy of the ultimate Price/Sales ratio, of the economy as a whole. That is on the x-axis. On the y-axis is the subsequent 3-yr return of the Russel 3k. Note that once the ratio has fallen below 1, not even once has the 3-yr return been negative (it improves a lot if you look at the 5-yr ratio, but you get a little less data). Today the ratio is about 0.77 (assuming the Q4 GDP nominal is the same as Q2 which probably implies a real contraction of 2% for the remainder of the year).
From: MTGSPY
Sent: Wed 10/22/2008 4:35 PM
To: Bear C
Subject: triumph of reason over chaos?
You cannot take this ratio when the next $ of borrowing (I assume govt = corporate for now so don't distinguish public vs. private - actually that's the reality huh?) create negative GDP - of course all of this is forward looking. At that point the ratio analysis cannot be used, kinda the same way when P/E dips to negative.
From: Bear C
Sent: Wed 10/22/2008 5:17 PM
To: MTGSPY
Subject: triumph of reason over chaos?
How does the next $ of borrowing create negative GDP growth? Even if you took it and just spent it on coffees for the whole country, it wouldn't be negative.
Look at the governments funding rate...the whole world is willing to send their money this way at a nominal 3.60% for 10 years. All you need to do is generate 2% inflation and 1.6% growth and have a GDP multiplier from fiscal stimulus of 1 (which is absurdly low) or more. Multipliers from fiscal stimulus spent on employment benefits, for example, would be on the order of 2 or more; from infrastructure that the country already needs anyway, it might be significantly higher (and longer lived). The US government is like a company that can borrow at 3.6% and whose intake is a larger and larger share of GDP the faster it grows (because of the way the tax code/brackets work). You would need a 10-year treasury rate above 6% before I'd be at all concerned about the argument breaking down.
From: MTGSPY
Sent: Wed 10/23/2008 8:35 AM
To: Bear C
Subject: triumph of reason over chaos?
Ok, so the afternoon cocktail started early yesterday and I didn't really address the question. But after reading the question about the -ve marginal GDP response to new $ in debt and the response were quoting RATES, I was thinking again, wow, is this not an attempt to flame me rather dan debate honestly?
Let's say I give you $10M, no, make it smaller, like $1M, can I task you given an interest rate out there (which are all higher than what you said) make more money than what I have to pay out, given the forward looking? Believe me, you won't and this is coming from a guy who ran a small business with 100% equity. The debt market is oversized relative to the natural capital formation ability (read: supply of worth asset to buy/invest in) and the probability of on average making a positive return from borrowing is zero.
You will need a washout, not just in stock price, but in a complete meltdown of employment and uncompetitive factory shutdowns before you have a basis to borrow profitably. I know what you say next is aha that's the average, I am talking about the government who borrowed X% lower than the private sector and therefore they will channel that to utilities and make a ton of money. The key is not in the rates and amounts this time, it's in the people. Read: FRE and FNM. How did that go? Government is not the best allocator of resources, because it is either run by Peter or Paul. Dig?
The right enemy
11 years ago
2 comments:
The ending is inevitable, the only question is how we get there and how long it takes to get there. The essence of free-markets, as Adam Smith described, is incentives and individuals following their incentives to their personal benefit. The regulators, politicians, and bankers have incentivized everyone to take on significant debt. The problem with debt is that unless it is funding a more productive activity than the productive cost of the debt (interest rate, money is a standardized unit of productivity for exchange) than default is inevitable without further borrowing to service the debt. A pretty basic concept is that you cannot survive borrowing from your credit card to pay your mortgage or auto loan, you need to be more productive (earn more money) or you will have to file bankruptcy. I am definitely conflicted about how far the government should go in its activities that delay the full liquidation of debt because of the social and geopolitical consequences. On one hand we can delay by taxing the assets of high-wage earners and asset owners and redistribute that money through "economic stimulus packages" to the less well-healed. On the other hand, that equates to excessive taxation and it still doesn't solve the problem of commercial bank money (non-physical) that has been created and backed by unproductive assets (homes and credit card receivables).
When you break the argument down into money being a standardized unit of productivity to lubricate exchange, it puts the problem in an understandable context. Money is very abstract, even to people who are in money businesses. Most are educated with what to do with money, but no one ever really gives much thought to what money is. This is one of those situations when we (nation, rest of world) will pay for our collective ignorance in spades.
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