Wells provide us the first 2013 fundamental projection report. Many more will follow of course and I’ll try and post up as many of these as I can to see what themes emerge. The Wells report is a US centric report, to my mind.
I pick this single chart out from the report. This is a thought provoking chart worthy of highlighting and comment:
Its clear that in 75% consumption economies, as many developed economies now are, the engine of growth, over the last 40 years or so, has been the accumulation of debt by consumer and governments alike as well as a collapse in savings rates. With consumer debt burdens at high ratio levels to income overall debt accumulation has stalled (in spite of government efforts) and therefore growth has been constrained. The solution to this growth problem is to monetize debt and lower interest rates so that the interest costs of this debt fall to such a level as can stimulate more debt accumulation and consumption. The Fed fund rate is currently 0.17% p.a. 15yr fixed rate mortgages in the US can be found at 2.5% p.a. interest rates. 30yr treasury bonds yield a little over 2.5% p.a. As the chart above illustrates debt servicing costs are now back to 1981 and 1993 levels. Such low costs of debt servicing for consumers might well encourage another wave of debt accumulation, consumption and another cyclical fall in consumer savings rates. Structurally, over the medium and longer term, this is likely to be disastrous for western economies but for world growth and asset prices this suggests a wave of asset price inflation may be around the corner.
Yesterday the Fed increased its attempts to lower interest rates still further by monetizing yet more debt declaring it will do so on an unlimited basis until unemployment falls to 6.5%. Bill Gross manager of the world’s largest bond fund at Pimco today declared “The Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury. It means the Treasury is issuing debt for free”.
The problem here is that you can only take interest rates down to zero. And then what?
Of course rates can go negative and indeed they are negative right now if you can get inflation in the system. And the way to get inflation in the system to create negative rates is via debt monetization or the debasement of your currency. WF sort of hint at these measures rather than spelling them out. In my opinion it is worth spelling them out as it will effect many investment decisions by capital holders in the coming years. Be aware that nominal GDP growth is quite strong in many economies at present. Nominal growth can remain very strong even if inflation adjusted growth stagnates or goes negative. This is the phenomena of inflation which distorts the pricing of assets and debt considerably.
Well here the report.
Its the first of many 2013 projection views and i would read it on this basis. As one single perspective on the story ahead for 2013. I personally look forward to some emerging market commentary and projections as these economies now make up over 50% of the world’s GDP. And I’m particularly interested in commentary on the unfolding Japanese monetary story.
All the best
Rich
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