Good Monday morning.
Good to be back at my desk, where I will try to ease back into my usual routine after way too much travel the past few months.
Camp Kotok, as it is known, brings together about 40 economists, strategists, fund managers and Fed researchers for a weekend in the woods. Unlike the typical 1,000 person conferences I attend, you really get to spend some quality time with people you mostly know from Soundbite TVTM. There are not many events where my instinct is to shut up and listen, but this is one of them (my lost my voice was due to the scotch and cigars, not my usual incessant yammering).
The entire event is subject to Chatham House rules — we can use the comments made no background, but we are not permitted to identify the speaker (nor their affiliation) regarding specific quotes. I cannot tell you who got too drunk and danced, who said what about dinner with Alan Greenspan, or which well regarded analyst type, long thought of as a far right conservative, came out of the closet as a liberal. Such are the rules of the weekend.
I fly from La Guardia to Bangor, hook up with Scott Frew (he drives up from the hedge fund region of Connecticut), and we drive the 2 hours to Leens Lodge. Joining us on the drive this year was Stu Hoffman, Chief Economist of PNC Bank.
Of the many interesting discussions we had on the drive up, the one that is safe for publication (with Stu’s permission) was our GDP conversation. Stu, who I would describe as grudgingly bullish on the economy, takes the other side of John Mauldin’s position regarding the Muddle Through economy.
Stu’s thesis: 2% GDP is unsustainable, and the economy must either break out higher or fade lower. It cannot muddle along at 2% indefinitely.
Why? Stu sums it up thusly: Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP. At 200, the jumbo liner will stall. At 2% GDP, the economy stalls, and will fall into a recession. So the captain of the plane must increase thrust and fly faster, or lose altitude and land.
The economy, according to Stu, behaves the same way. There are virtuous and vicious cycles, and 2% is a form of economic purgatory. It is not encouraging enough to get corporations to ramp up CapEx spending in anticipation of more growth and opportunity. It will not create enough jobs to stimulate domestic retail sales and other beneficial actions.
Hence, the only options are that 2% GDP either stalls, or achieve escape velocity. Stu believes the latter, and is mildly bullish — for both growth, and the markets.
I suspect the economy can also avoid stalling — for now — but that following the 78% SPX pop, market prices mostly reflect the improved economic backdrop. The headwinds of Housing and employment will cap forward economic momentum at 2.5-3% or so. Hence, I expect no double dip, but also a range bound, mediocre stock market.
More on the trip later this week . . .
This hit hard at the core of my thinking. I’ve been getting comfortable with the muddle through camp for the last few months.
Someone once told me that you need to be growing or shrinking your business. When you think you’re in a Goldilocks position and want to hold it there it’s won’t work.
Peole rarely understand why I don’t just “sit and enjoy a good thing” but I know it will break one way or the other if you just do the same thing. Luckily I’ve had it break upward a couple times before being pro- active.
It can be just as fun shrinking a business as growing one. You get to work with the customers that are just plain fun to hang with.
“Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP. ”
Does Mr. Hoffman have any proof at all to make this assertion? Or is this just another MBA survey course analogy that has no basis in fact?
[...] Barry spent the weekend with 40 top economists, here's an interesting take on GDP. (TBP) [...]
Is that 2% growth wrt the increase in population/workforce, or 2% wrt a stable population/workforce? I’ve often wondered, assuming the numbers are corrected for population growth, whether growth is actually desired for the sake of growth (and/or greed) or for stability/economic heath.
Given that most actors act in their own self-interest, did Mr. Hoffman suggest an associated top end for growth; a top end that would prevent things running away with themselves in the other direction? It’s one thing to have a Goldilocks bottom end, but perhaps one should be looking for a Goldilocks "?safe range,' instead.
If Russia burns to the ground and China washes away, all our problems are over!
Barry"”
Glastonbury is the hedge fund area of Connecticut? Who knew? Now I'm going to be deluged by curiosity seekers dying to get a look over the top of my massive, immaculately trimmed hedges, to see the grass tennis courts, marble statuary, and indoor hockey rink. My neighbors will be furious.
Scott
That was my tongue-in-cheek sense of humor.
stimulus out; state & local govt. spending decreasing rapidly to turn net total govt stimulus negative; low to no capex (since no pickup in economy & still ample unused capacity), historically the driver of non-housing, non-inventory investment; inventory up cycle has run its course; housing starts dead for another 2 yrears no matter how low Bernanke may want to drive LT interest rates &/or MBS coupons (refis starts) due to glut magnified by foreclosures shadow inventory; consumption down due to balance sheet recession (historically in international comparisons these last 4 years, but, of course, we all remember Japan’s lost 2 decades) ; dollar is/will weakening/weaken to help exports a bit (but what exports, what do we produce anymore) after a huge run-up, hence becoming net net neutral wrt beginning of recession in Dec07? So where is this magical 2% GDP growth going to come from?
The airplane analogue assumes that the economy, without artificial thrust, is essentially unstable.
Perhaps the economy is more like an oceanliner, with plenty of natural momentum to keep it moving along steadily, essentially stable system, still floating without a crash.
Hence, the only options are that 2% GDP either stalls, or achieve escape velocity.
Stu’s a genius apparently-
and what’s the time frame on that BR-
I guess we’ll find out soon enough if Japan reaches escape velocity- I mean its only been 20 years- massive debt and RE implosion seems to have kept the thrust for escape velocity beyond reach-
and when you say your man Stu is bullish- it appears you mean the economy- did he bother to give you a tidbit or two on why the economy is going to hit “escape velocity”- outside of- well it just has to do something since muddle through is not an option
possibly he just has blind faith in “American Exceptionalism”- and “by golly” you just can’t keep a good god fearing country down- what a joke
~~~
BR: Japan has a giant surplus when it comes to balance of trade. They are a net exporter . . .
Always good to consider a perspective that isn’t commonly out there.
This analogue could be extended to: what condition is the plane in (real economy), what state are it’s control surfaces in (government), what is fuelling the engines (demand), and indeed are they all running (supply). One feels that some of these areas are easier to fix than others, but the mechanics didn’t seem to pay much attention to some of these areas when it was on the ground.
That 2% theory assumes a pretty monolithic economy. What if it is more like a squadron in formation – where housing can crash while corporate profits can gain altitude?
BR: I had a similar conversation, recently. In my case, I was throwing some trash away in the dumpster behind 7-11, and two dudes who were dumpster-diving "” they went by the names Nuck and Willie (I'm sure these weren't their given names, and even if I knew their true identities, honor and The Hobo Code would prohibit me from revealing them. I am also prohibited from telling you whether or not Nuck took a piss behind the dumpster). While waiting for the manager of the 7-11 to finish emptying his rat traps, Nuck, Willie, and I became engaged in a conversation regarding GDP.
To make a long story short (too late), both Nuck's and Willie's assessment of the appropriate level of GDP were identical to that voiced by Stu "” Chief Economist of PNC Bank.
A good time was had by all.
@Petey Wheatstraw – LOL hard!
@Petey Wheatstraw – LOL!
br,
any mention of fdr tactics of currency devaluation of 75%, debt jubilee to underwater farm mortgages and bank closures and CCC and wpa work programs…….nothing much is new under the sun, since last depression to hit.
the currency devaluation is a tried and true method with much successs, from the rulers standpoint, of course.
I apologize for dropping this in here but i was rereading an earlier post and this came to mind: I realize this is late but does anyone maintain a new home prices vs median income smoothed for interest rates. Having been a homeowner during the phases of sky high interest rates I find it fascinating that home prices were low to income in the 80’s w/ interest rates so high yet flat as they came down. Having bought in 1991 @9 7/8th%, watched as homes didn’t appreciated till 1998 at all, actually saw a home bought in 87 sell for less than paid for in 1998 and then a doubling in prices in 2002 yet the chart says no impact by interest rates. original post by ritholtz june 24 10
Comparing the economy to an airplane, and the growth rate of GDP to the velocity of an airplane is something that sounds great, but has no practical value other than as a cheap metaphor by someone who is used to sales pitching and shaking hands with suits on financial deals.
A lot of person’s have spent a lot of time criticizing GDP, because Gross Domestic Product growth does not automatically imply prosperity for all. Medical expenses, College Expenses, Fuel expenses, and the various costs of Increased criminal activity from fraud and burglaries can all cause the GDP to go up. In order to keep up with population growth the GDP has to go up, because with each new baby comes a new consumer of products that shows up as a series of price tags and expenses. When older people need more medical services, this too increases the GDP. When financiers make deals and companies cut their costs by out-sourcing, the difference in profits also shows up as an increased GDP.
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