What they said, Bang!

I continue my Tuesday reading day, with Endgame.  There follows a brief summary of Chapter 5 of the Endgame book.  "What they said;  Bang!"  That's about the height of Mauldin and Tepper's value added in this chapter.  They merely parrot Reinhart and Rogoff.  In slightly more detail. We're part way through an 8 year de-leveraging process.  If this started in 2008, then perhaps we're already at the stage where the real GDP begins to quicken even as the de-leveraging continues for a further five years.  A key retrospectively clear signal was a housing boom accompanied by a sharp rise in debt.  The distal cause is human psychology - greed and fear, as per Keynes's animal spirits.  In short, irrationality, together with institutional failings (the Fed's excessive efficient markets perspective which denies the spotting and pricking of bubbles; housing sector policy changes; foreign inflows form China as the workforce came on-line post communism).

The R&R ceiling kicks in somewhere between 90-100% debt/GDP ratio, at which point the bond markets bolt in an instant, at some indeterminate, un-knowable triggering event.  These debt/GDP ratios move like economic super-tankers, very slowly.

Each developing nation faces a game-theoretic timing issue on when is best to deal with their de-leveraging burden.  I'd say this chapter was slight.

All quiet on the western front

Tuesday evenings these days for me is economics night.  At the moment, I'm reading a macroeconomics populist book, "Endgame".   I'm on chapter four, which I'll summarise as succinctly as possible here.  First, I notice that when I search for an Amazon book called Endgame, that this one comes up first, well ahead of Samuel Beckett's great play.  Beckett's should come first.

Also, as I write the current posting, I'm listening to the following artists from my colelction: Banshori Baaje, by Aajo Madhuro.  La Femme D'Argent by Air.  The moon is full by Albert Collins.  International by Laidback.  Long Haired Doney by R.L. Burnside.  Riddle I This by Scotty.  Cowboys by Portishead.  Mis Pensamientos by Las Hermanas Mendoza.

Finally, I'm reading this 2011 published book in February 2013 so I get to see how the immediate future panned out for the authors' predictions.  On p42 the authors state that they wrote that section in November 2010.

The authors in chapter four propose a macroeconomic thesis.  Many countries, primarily America, are so indebted that it will be practicably impossible to innovate and grow out of their current economic endgame.  Phenomena of the endgame include generally slower real GDP growth, more frequent recessions, higher real GDP growth volatility, higher equity and bond market volatility, higher structural unemployment, particularly at the low skilled, who have been undercut by a cheaper globalised workforce and who are receiving compensatory governmental transfer payments which merely extends the pain.  Looking back from proximal to distal causes he draws on elements of Minsky the so-called post-Keynesian.  This is a story of complacency and low volatility leading to credit booms.  This is itself an elaboration of the 'animal spirits' of Keynes.  In a way Minsky seems to have taken the idea out of the realm of personal psychology and embedded it in financial institutions.  He also identifies the effects of lengthening global supply chains as a significant cause of global volatilities of the kinds mentioned above.  Central bank responses will lead to continued quantitative easings, which in turn makes the debt burden worse.

Next they spell out advice to readers as investors.  Reduce the average holding period of your investments.  Invest tactically.  This isn't too surprising, coming from money managers.  Readers as ageing citizens should count on receiving a much reduced safety net in their retirement. 

How's he done in February 2013?  Well, we have just had surprising negative Q4 GDP read for the US, and for the UK and Europe too.  But Equity market volatility is at 5 and 6 year lows as measured by the daily S&P500 realised volatility and the VIX.

Two intriguing charts plot a relationship between the credit cycle and equity volatility.  First, he gets a chart of annual change in commercial and industrial loans over time.  He plots a point against a time two years into the future.  That is, the C&I growth obervation point for October 2010 gets plotted on the October 2013 x-axis. On this same diagram he plots the VIX, which exhibits a very strong correlation.  He does likewise with the MOVE Index 3 years forward, against the Fed funds rate.  

Both of these curves exhibit impressive correlation, especially given the seeming predictive power of the two proxies for the credit cycle - commercial and industrial loan growth and fed funds rate. However, the leading indicators are actually predicting incredibly low volatility for 2013, which is exactly what we've been seeing.  This appears to be, short term, exactly the opposite of his stated macroeconomic thesis of increased volatility.  Certainly the Fed funds rate now is still flat on the floor, leading me to wonder if volatility is in for several more years of flatness (VIX below 18)?  In any case, it doesn't support, in the short term, Maudlin and Tepper's claim.

This is my whole experience with the book so far.  They look like they're reading a lot of other peoples' research but not quite connecting some dots which are there right in front of their eyes.