Portfolio manager John Hussman warns in a detailed economic lament how the U.S. has buckled at its productive core even while maintaining a deceptive appearance of prosperity.
Describing what he calls a “Ponzi economy,” the Hussman Funds manager’s latest shareholder letter tracks a 15-year-long shift away from productive capital accumulation toward continuous debt expansion that will have to end badly unless the U.S. starts making some good decisions.
At stake in this crisis is the U.S. standard or living, which is necessarily “chained” to growth in productivity.
But real gross domestic investment has been crawling at a measly 1.4% rate since 1999, versus a real annual growth rate of 4.9% in the preceding half century, says Hussman. While our capital base has been thinning, the other key to productivity — the active labor force — has been cratering.
“During the same 15-year period, the U.S. labor force participation rate has collapsed from a record high to the lowest level since the 1970s,” he writes, adding that “wages and salaries have plunged to a record low share of GDP, and real median household income has contracted by a cumulative 9%.”
Hussman suggests that “conditions feel better” than these alarming statistics imply because of an accumulation of debt and money printing that have coincided with and masked this fundamental erosion in the economy.
“The U.S. has gone from the largest creditor nation in the world to its largest debtor by shifting from accumulation to dissaving,” he writes.
This debt accumulation, including “deficit-financed government assistance and unemployment compensation,” have made up the shortfall in productivity and allowed continued high rates of consumption “and by extension, corporate revenues and profits, to be sustained.”
But Hussman warns the problem goes deeper than merely flipping between assets and liabilities on the national balance sheet. That is because assets are flowing “up the food chain toward a few dominant players” in what he dubs “winner-take-all” markets.
He cites Friday’s Alibaba IPO — the largest in history — as just the most recent example of these dynamics, with too-big-to-fail banks, an “all eyes on the Fed” financial system, a growing gap between the haves and the have-nots and hollowing out of the middle class as other notable features of today’s economy.
These divergences fuel systemic risk and instability, Hussman writes, because “remote and overspecialized relationships invite greater disruption as a result of crises or single points of failure,” citing the recent financial crisis during which “the notion that ‘all real estate is local’ was turned on its head.”
Writes Hussman: “Fed-induced yield seeking, pooling of mortgages in complex securities, and excessive reliance on too-big-to-fail banks all collaborated to create a single point of failure that propagated through the global economy as the deepest collapse since the Great Depression.”
That was a few years ago, but the stakes appear higher in today’s Ponzi economy, whose characteristics Hussman describes thusly:
“…Domestic workers are underemployed and consume beyond their means; household and government debt make up the shortfall; corporate profits expand to a record share of GDP as revenues are sustained by household and government deficits; local employment is replaced by outsourced goods and labor; companies refrain from productive investment, accumulate the debt of other companies and issue new debt of their own, primarily to repurchase their own shares at escalating valuations; our trading partners (particularly China and Japan) become our largest creditors and accumulate trillions of dollars of claims that can effectively be traded for U.S. property and future output; Fed policy encourages the yield-seeking diversion of scarce savings toward speculation in risky securities; and as with every Ponzi scheme, everyone is happy as long as nobody seeks to be repaid.”
Despite decrying debt accumulation, Hussman candidly admits that U.S Treasury debt will likely be seen as a haven in the next crisis and that an inflationary cycle (“probably late in this decade”) will only come to the fore after the next downturn.
In contrast, Hussman is alarmed at corporate debt issuance, which companies are using to finance buybacks of their own stock or to acquire shares of other companies at overvalued prices, for which reason he is steering clear of corporate and high-yield bonds.
While value destruction and disruption are currently “baked-in-the-cake,” the often gloomy money manager offers an unusual “ray of hope,” arguing that there is always room to improve if policymakers will but make “each next decision well.”
The path of virtue Hussman lays out includes an increase in bank capital requirements, a deepening of the base of productive capital and labor through measures such as investment tax credits, a gradual normalization of interest rates that would allow markets to resume their role in signaling supply and scarcity of capital, and the encouragement of local lending institutions that provide capital to the small businesses that create two-thirds of all jobs rather than too-big-to-fail institutions, among other steps.
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