petec

Me too, if it is described as an 80-year cycle and that is used for timing purposes. But the idea that debt drags forward demand, and the idea that when you have a huge acceleration in debt big chunks of that money will be wasted, and all the consequences of those two things including that GDP will be overstated during such a period, seem absolutely crucial to me.

I would argue that falling profits (and therefore falling margins) had a LOT to do with the sell-off in stocks in 2008/9. That was, in fact, mean reversion. The fact that it didn't *last* was down to huge stimulus. And if people had correctly diagnosed the original high margins (as being caused by too-low interest rates) then they would also have predicted that, with huge stimulus, margins would bounce back to new highs after the crisis. Point being, there's macro and there's the policy response to macro and you have to look at both together. But I believe you were right to worry about aggregate margins and that they will eventually mean revert. I try to stick with market sectors where margins are not above long run norms.

Sure - but house transfer can't eliminate debt, can it? Parent owns house. Child has debt. House transfers across: child's balance sheet looks better, parent's looks worse. You can only pay down debt by paying down debt or defaulting on it. And if you pay it down, in aggregate, house prices will fall. EDIT: more generally I look at this the opposite way. Yes, people will have to work longer than they planned and this will create GDP. But it will also suppress confidence, as all negative surprises do, and also spending, as people might save more in order to have *some* sort of retirement. E.g. when your real pension gets smaller (either through renegotiation or simply the suppression of CPI statistics to control federal outlays, which is what is happening) do you spend more or less?

I'm deeply conscious of this and it's part of what I was trying to get at when I said it has become a LOT harder to save for your future. But I don't see why it makes debt go away? Or rather, I don't see why the impact on debt is any different to inheriting your parents' property after they died, which is what always used to happen. I also can't quite tell whether you think it's a good thing or a bad thing!

I agree. I have started to think of inflation/deflation as being much broader than CPI - more to do with the size of CBank/Ibank/bank balance sheets etc., and asset prices. And these things do feed into peoples' lives - e.g. it is FAR more expensive for the average person to save for retirement than it has ever been in huge parts of the world today. That depresses spending and confidence. Separately, I would strongly recommend that people read the shadowstats work. I have no idea what the right way to calculate inflation is, but I do think it is important to understand that the CPI stats we see today can't be compared to the ones that were produced in the last inflationary period. I view the last 10-15 years as highly inflationary.

Quite! My answer is: in the future ;) Although, combining www.shadowstats.com with the asset inflation that we have all seen (which is very important even if it is not captured in CPI) I would argue that we have had a LOT more inflation in the last few years than we think we have. And I'm not saying that's a triumph of macroanalysis since I have been a deflationist all that time ;)

Yes, sorry, I'm saying the economy is a bubble, not the market. I'm actually starting to sniff around for some stocks and would love to hear any recommendations. Actually a LOT of people are saying exactly that. In the EMs where I work it is only in the last year that people have even started to entertain the idea that China might have issues. Pity ;)

@ Vinod: All previous decades have indeed had something worrisome. And some of them were terrible for investors. If you'd gone into the 1970s ignoring macro you'd have got wiped out. But if you'd gone in thinking, "Nixon's just abandoned the gold standard so there's a decent chance of inflation and I'll use that as an *overlay* on my value-oriented stockpicking" you'd have done great. The same could be said about most decades - with the great benefit of hindsight. The question is: is macro predictable in advance? My view is that it makes sense to look at a world that has record debt, record interest rates, record margins, and record valuations and say: I think I'm going to be especially careful today. If that's macro then I believe in macro. There is a great difference between taking a macro view and knowing what's going to happen. I don't *know* what's going to happen with any of my stocks, but I do my work and take a view and invest accordingly. Similarly I don't *know* what's going to happen with macro but I do a lot of reading and thinking and I have come up with some generalised predictions which I have as much confidence in as I do any of my stock picks. That helps me steer clear of specific risks and has served me very well. What I do not do is make specific predictions or timing predictions. Even if your macro view is "the world will muddle through the next 100 years much as it has the last 100 years, with ups and downs but generally progressing", that *is* a macro view. All I am doing is making a much finer study of the same history and seeing if more specific lessons can be taken from it. Macro may be an art, but so is stockpicking. And what you refer to as changing theory is, in my opinion, changing academic fashion. The real theories that explain how things work were laid down a long time ago and haven't changed. On profit margins: I still believe that we will eventually find that central bank policy has a lot to do with the current level of margins. And from what you say, you actually did exactly what I am advocating: you had an overarching concern, that kept you careful when the market was overvalued; but you piled in like a good value investor when things were cheap. Sounds good to me ;)

(Emphasis added). This is what I find confusing. These threads talk about macro and how bad long term investment prospects might be. I tend to agree. But I don't think it is data that is reliable enough to provide conclusions that will make you more money. And since you are 90% invested and like investments available today, does talking about this give you/us much insight? Honest question. I follow macro stuff a little bit just because it is fascinating, but if you can't act on it, it does seem like a waste of mental power, no? Very fair question. I find it fascinating too, but it also guides my investing. My investments fall into a few categories: 1. Companies I am fairly sure will maintain their real value (even if prices fluctuate) even if we get a truly terrible experience (which isn't what I expect) 2. Companies that will do OK in a muddle through scenario, and will excel in a bad one. 3. Companies that are so cheap I don't really care about the macro. Equally I actively avoid things that might have some cyclical fluff in their results or valuation (of which there are a lot). I can honestly say that I'd happily own my portfolio through a 1930s or a 1970s scenario, so long as I didn't have to sell in the middle of it - and I have done everything I can to ensure that, too. In other words, I believe it is 100% possible to be long and still substantially protected from a potentially serious market event. So far in this minor selloff I've made money (in sterling) and found some good ideas. If we get a truly serious event then I am sure I will lose money - everyone long will - but I'll preserve a decent amount of wealth and have great opportunities. I'd expect to come out the other side better off than I am now in real terms. So yes, I think having a macro backdrop view can add huge value (but not a timing one). (And on that note, 99% of the people who say macro is useless, when you dig into their views, assume that the macro will look largely like it has done for the last 35 years for the next 35, which in itself is a macro view - just not a well-thought-out one!) P

Jurgis, Thanks for your well-thought-out response. We agree more than you might think. Everything I have read in history and economic theory tells me that after 35 years of falling rates and rising leverage the global economy is highly likely to be slow, fragile, and prone to either inflation or deflation depending on policy. Everything. I'd also argue that markets starting at the valuation levels of 2015 with the margins of 2015 don't offer a lot of return on a 10 year view. I fully expect, therefore, a better buying opportunity in the (say) 5 year future. You make it sound like those just come along. I don't agree. They happen because of the starting economics/valuations and I don't see the current starting point as very auspicious. That's got nothing to do with the collapse of civilisation or the long term future of humanity (which I am exceptionally bullish about) or the availability of good investments today (which I must be pretty bullish about since I'm >90% invested, long. P

Now this we *can* disagree on. Demographics is key but the big, big thing for me is high debt levels and the natural volatility they bring - that is related to demographics, but it is *far* more directly related to central banks having the wrong targets and politicians never wanting a recession.

Me too.

Totally agree re: the history of the world. I disagree on China: I think history suggests that economic collapses are worst when the state is powerful, and less bad when markets are allowed to clear. I'd extend that to say that inflation isn't the only or the best way out. Evidence: the 1921 depression. However, because governments are so much more embedded in economies than the US government was in 1921, we can't take that way out, so inflation it will have to be.

Jurgis, I'd very much rather not be part of that crowd. However so far no-one has satisfactorily explained to me why record levels of debt and experimental policy *won't* end with some fairly serious instability, whereas several sources have explained quite coherently why they will. I won't ask you to explain but if you have read some really coherent positive arguments (books, articles etc.) then please let me know. I'm not looking for stuff that argues why there won't be a recession tomorrow, but stuff that argues why the current global economic setup (debt levels, inequality, slow growth, etc.) is long-term sustainable. To be clear, this is not a sarcastic post - it's genuine! Cheers Pete

JBTC, I totally agree it's what central banks want. What I am arguing is that it might feel like a crisis when we get it - although I accept your point that the central banks could stop a *banking* crisis that way, I'm saying I don't think they can stop an *economic* crisis that way. I very much doubt the markets have really decided we will get deflation. The bond markets might have done but are hugely distorted by central bank policy; but I do not believe equities are pricing in *either* deflation or inflation over say 4%. As you suggest, the future looks interesting!

Will it, though? You have just created untold moral hazard and dramatically raised the probability of harmful inflation.

I never got past about page 10. But he is a great thinker.

Community Health: ouch.

Cheniere is not a play on commodity prices, that might sound ridiculous considering it sells liquid natural gas, but the core theme behind the investment is not a rebound in commodities prices. Actually you could make a very good argument that low natural gas prices, and even low oil, will help Cheniere bc it is a low cost provider. The company gets paid a fixed fee from customers. Any rebound in international LNG prices is just additional upside. what is the core idea behind the investment? contractually locked in cash flows trading cheap - *but* its marketing business definitely benefits from the spread between US gas prices and international LNG prices. Since (for now - this won't last) international LNG prices are set off oil, it has sold off hard with the oil price.

Picasso, I agree with most of what you've written. But you ask why this structurally flawed banking system should be more prone to a crisis now than at any other time* and my answer is: 1. NIRP might cause a run on the banks. 2. Global lending has run amok in the last 5 years so the probability of high loan losses is higher than normal. These two could operate in a feedback loop - if NIRP causes loans to get called then banks can't extend-and-pretend. More generally I would also point out that while overlevered and badly run banks usually avoid crises, banking crises do happen so it's not so odd to expect one where you can see all the warning signs! *NB by now, I mean within the next 3-5 years. That's about as good as I think you can get with macro timing.

I agree. So China's manufacturing competitiveness has eroded somewhat compared to its past. But it remains mostly competitive to both the DM countries (lower cost) and EM countries (unparalleled scale, supply chain, infrastructure, worker quality). I suspect even taking out the benefit of lower commodities/oil, China will continue to run surplus. Agreed. The dollar-pegged yuan has been very strong against the major trading competition but it takes ages to re-orient a supply chain. The bigger impact can be seen in the Chinese PPI figures - deflation there is keeping them in the game. But that has to hit employment and creditworthiness internally.

Well that's sort of my point: when no-one wants to hold cash, and passes it on to the next person as fast as possible, you get a rise in the money velocity and, all else equal, inflation. Which is what the central banks think they want. You're assuming the cash has to be parked somewhere. That's exactly what the central banks are trying to stop. They want it to go round and round. First of all, is it happening? As rates have come down, has money velocity gone up? I want to know. Second, if it is and somehow causing inflation, that's great news isn't it? Because we can finally get rid of negative rates. Back to normal - whew! I actually don't completely discount the possibility of seeing inflation. Maybe that's the ultimate contrarian trade. Call me biased but I don't quite like the negative rates death spiral seemingly unfolding before us... No it is not happening - the question is, is that because it won't happen, or because -ve rates have not been passed on to depositors yet? BTW see my edited post above for idea about specialist firms setting up vaults - might answer your question! Re inflation and therefore positive rates, I'm not so sure. You'd get (even more) inflation in the prices of real assets; but would that get into CPI, which is what CBanks look at? In other words, if it works NIRP just inflates the bubble further (remember that von Mises quote about needing to throw ever more fiduciary media on the fire to keep a bubble going) and if it doesn't it's actively contractionary and starts the bust. That's my view so I don't like it either!

JBTC I think we have been arguing at cross-purposes. I agree with your post and wasn't trying to argue that foreign debt is the key problem (although it is a problem). What I would question within your post is the continued competitiveness of Chinese manufacturing. We know their currency has appreciated vs competitors, that salaries have risen fast, that urbanisation has reversed (indicating fewer manufacturing and other jobs in cities). My understanding is that the only reason the trade balance is OK is because imports are falling even faster than exports! Jan -18% and -11% for example. Neither looks good.

http://www.bloomberg.com/news/articles/2016-02-14/here-s-why-ecb-and-boj-can-t-copy-danish-negative-rate-success EDIT: also http://www.economist.com/news/leaders/21690031-negative-rates-club-growing-there-limit-how-low-rates-can-go-negative-creep "For commercial banks [in Europe], a small interest charge on electronic deposits has proved to be bearable compared with the costs of safely storing stacks of cash—and not yet onerous enough to try to pass on to individual depositors." "Banks in Europe have started to pass on some of the cost of negative rates to big corporate depositors. Their only ready alternative to stashing large pots of cash is safe and liquid government bonds, whose yields have also turned negative, for terms of up to ten years in Switzerland. Rich personal-account holders are next. The boss of Julius Baer, a Swiss private bank, said this week that if interest rates in Europe go further into the red, it might have to charge depositors." "That would be only the start of the topsy-turviness. Were interest rates negative enough for long enough, specialist security firms would emerge that would build vaults to store cash on behalf of big depositors and clear transfers between their customers’ accounts. Firms would seek to make payments quickly and receive them slowly. Tax offices would discourage prompt settlement or overpayment of accounts: one Swiss canton has already stopped discounts for early tax payment and said it wants to receive money as late as possible. Far from being incentivised to lend more, banks worried about shrinking deposits would be warier of extending credit."

Yes you are right, negative rates are not the solution, but maybe giving money directly to people will solve it. The swiss are voting on this in the summer (http://www.thelocal.ch/20160127/swiss-to-vote-on-guaranteed-income-for-all), when this gets approved than thats probably the channel to throw money of the helicopter. If enough countries do it, you can be sure that inflation picks up sometime down the road. I was always under the impression that current government policy (austerity) is the real problem, because they don`t see the problem in the first place. Maybe it comes too late to save the banks, who knows. My feeling is that the real problem is the unwillingness to allow recessions and deflation to clear markets. But that aside, I agree that a guaranteed income for all is a great channel for helicopter money and may well be the future. Free markets my a*se.