A Secular Reduction in Credit Creation and Financial Inventiveness Lies Ahead
Coming out of the last several recessions, aggregate economic activity moved quickly back to peak levels -- but, consistent with the accepted shallow-recovery thesis, it won't be as quick to recover this time. David Rosenberg expresses in Barron's that the secular rise in credit expansion of the past several decades could be a thing of the past in the years ahead, producing a truly different experience this time. While we have to try, it's hard for me to be confident in the certainty and precision of a baseline view, especially within the context of the long and uncertain tail of all the nontraditional headwinds. With financial inventiveness being put on the back burner, unbridled, unregulated and (sometimes) unsavory debt creation will no longer catalyze growth in a world where banks are reluctant to lend, the securitization markets are broken and the shadow banking system is nearly extinct. While it's fortunate that our financial institutions have reduced the chance of systemic risk by decreasing their balance sheet debt, the U.S. government has taken the banking industry's place. And with that come challenges anew over the next decade. Like Berkshire Hathaway's Munger argued, those challenges and the bills associated with policy are being ignored -- or investors believe they can get out before they come due. The credit and stock markets have been buoyed and dominated by the better-than-expected earnings cycle. The replenishment of historically low inventories, the effects of recent and extraordinary fiscal/monetary stimulation, a recovery in residential housing activity and the productivity gains from draconian corporate cost-cutting are favored in influence by Jim Cramer (and others) and have clearly trumped the potentially negative consequences and those due bills of policy.