The Late Cycle Lament: The Dual Economy, Minsky Moments, and Other Concerns
By
👤GMO
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Overoptimism and overconfidence are two well-known psychological traits of our species. They are particularly dangerous in the late stages of an economic cycle where these terrible twins result in investors overestimating return and underestimating risk – a potentially lethal combination of errors. Far from the sanguine consensus of the current state of health of the U.S. economy, in this paper I demonstrate that this is the slowest and weakest recovery in post war history. Whilst GDP growth has been poor, labour productivity growth has been worse, and real wage growth worst of all. The headline data obscure even more worrying trends. Effectively, the U.S. is witnessing the rise of the “dual economy” – where productivity growth is reasonable in some sectors, and totally absent in others. Even in the sectors with good productivity growth, real wages are lagging (wage suppression is occurring). All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like. Real earnings growth in the corporate sector has been below the rate of GDP growth even after the significant boost from the financial engineering known as buybacks. So investors have little to celebrate. Indeed, a breathtaking 25% to 30% of firms in the Russell 3000 are actually loss-making! Yet the stock market remains well bid. In large part, this bid is sourced from the buybacks (and mergers) from USA Inc. itself. However, individual investors have returned to the “party” – never a good sign. Other portents of late-cycle capitulation include global fund managers throwing in the towel and buying into U.S. equities.
By
👤GMO
