The Lemon Fool

Morning All.

Please see below an interesting (IMO) article

https://nourielroubini.com/a-stagflationary-debt-crisis-looms/

The obvious questions arise

(1) How likely is he to be right?
(2) If he is, what, if anything, should one do about it, from a Portfolio Management perspective?

I think the answer to (1) is more likely than not (though I'm not sure the many/most of the major Central Banks will "blink" at, say, 5 & 5*, with the ECB perhaps being an outlier) and to (2), at some level, "who knows".

Regards, Newroad

* e.g. 5% interest rates and 5% inflation

Newroad wrote:The obvious questions arise

(1) How likely is he to be right?
(2) If he is, what, if anything, should one do about it, from a Portfolio Management perspective?

1. I think he will be right although he presents several possible scenarios, all bad, any of which could be the ultimate outcome and not necessarily inflationary if we see another 2008-like financial implosion.

2. A variation of Harry Browne's permanent portfolio could be a good place to start but perhaps a little less cash, a little less bonds and a little more gold.

I don't think it was that widely reported at the time. But I recall in The Times it was said that in May this year the government borrowing was higher than expected due to treasury borrowing to pay interest on the national debt. That's economics of the mad house. Yes, I can see that sooner or later the UK in particular, is going to have a very serious day of reckoning over debt and economic underperformance.

BullDog wrote:I don't think it was that widely reported at the time. But I recall in The Times it was said that in May this year the government borrowing was higher than expected due to treasury borrowing to pay interest on the national debt. That's economics of the mad house. Yes, I can see that sooner or later the UK in particular, is going to have a very serious day of reckoning over debt and economic underperformance.

Normally I would agree with you but most other western countries are in the same position having spent money like mad during Covid. Everything is relative! Much of the extra borrowing was just printed and so the interest is not paid to a third party but to the BOE who return it as I recall.

Even if there’s a 90% chance he’s right, it could turn out very differently. He gets paid to make predictions, and the more worrying the more attention turns to what his investment management company Atlas Capital might offer as a solution.
Since we don’t know what the future holds we stick with our well thought out portfolio whose design for the long term took account of predictions like his. What happens in the short term doesn’t matter. Investing’s a long term game, with few making a greater success with predictions, than the market gives.

If we look at a variety of data and figures coming out of the US, interest rates and their effect on debt affordability have reached levels comparable or even slightly higher than what caused the banking collapse in 2007-8.
Business and consumer credit markets are beginning to freeze. Consumers are finding mortgage payments and the cost of living are crippling. Discretionary purchases are being reduced as money is required to pay for food, bills and housing. Companies are beginning to miss profit expectations.

Within several weeks, or at most a few months, the Fed will find the US economy in a depressionary tailspin. Yes, depressionary because the US national and consumer debt is so high that even 3% interest rates push interest payments higher than ever before; higher than levels which 'broke' the system numerous times in past decades.

The Fed will be faced with two bad choices:
1. Stop raising interest rates (maybe even start lowering them next year as the recession bites) and tolerate elevated inflation, assuming inflation doesn't come down anyway due to severe recession.
2. Keep raising rates and watch a full-blown 2008-like financial crisis unfold (if we haven't already gone past the point of no return) which will require even more QE to save the financial system.

Snorvey wrote:Roubini seems to be in a permanent state of depression about the world.

Yes, but a stopped clock is correct twice per day.

Jesting aside, the debt/inflation/asset bubble situation is serious and the warning indicators are flashing red.

Central banks - especially the Fed - haven been far too easy with monetary policy since the 2008 crisis, maintaining 'emergency' measures such as QE and artificially low interest rates for a decade too long.

QE should have been gently brought to a stop ten years ago. Interest rates should have been gently raised starting ten years ago.

If sensible monetary policy had been followed, we wouldn't be in the fragile situation we are now. Admittedly 'growth' would have been a few tenths of a percent lower per year in all of the past decade but the underlying economy would still be sound and central banks would have room for emergency measures such as QE or lowering interest rates. In fact we wouldn't even be in the current predicament.

BT63 wrote:
QE should have been gently brought to a stop ten years ago. Interest rates should have been gently raised starting ten years ago.

Where has all the money gone? Trillions!

scotview wrote:

BT63 wrote:
QE should have been gently brought to a stop ten years ago. Interest rates should have been gently raised starting ten years ago.

Where has all the money gone? Trillions!

Isn't this fairly obvious? It's been partly paying down personal debt following the GFC, largely of homeowners...



and partly transferred to wealthy individuals in the form of tax cuts (able to retain more of their huge incomes from businesses which benefited from cheap funding) while the public debt rose over the same period:





GS

Snorvey wrote:Roubini seems to be in a permanent state of depression about the world.

That's probably because he is only rolled out by the media whenever the market is feeling particularly gloomy, with any gloomy comments he makes being used to support that view.

GS

BT63 wrote:QE should have been gently brought to a stop ten years ago. Interest rates should have been gently raised starting ten years ago.

If sensible monetary policy had been followed, we wouldn't be in the fragile situation we are now.

You seem to have forgotten. The government acted for an "austerity" fiscal policy. This put tight constraints on the BoE. See also the chart I posted about about personal debt repayment. How do you raise rates when people don't want to borrow even at 0%?

Fact is rates were too high over most of that decade (hence debt repayment/no inflation). The government should have had an expansive fiscal policy, not austerity. Their fault, not the BoE's. Obviously massively reversed in 2020->.

GS

GoSeigen wrote:See also the chart I posted about about personal debt repayment. How do you raise rates when people don't want to borrow even at 0%?......

But what if people didn't want to borrow because their finances are already over stretched and assets are sky high as their valuation is based on 0% rates? Maybe some debt needed repaying to put us back into a position where we could grow sustainably again? Can you not argue that the 'emergency measures' worked well in 2008/2009, a good thing, but maybe they worked a bit too well and certainly should have not been repeated at every little bump in the road since?

Anyway, we'll all find out soon enough. Assets very high as risk-free rate so low, but inflation very high and starting to look a little bit broad and embedded (US inflation has much less to do with Ukraine than European). UK looking particularly shaky as tax cuts and spending (i.e. yet more borrowing and stimulus) is definitely feeding through to gilt yields and £. (I know £/euro looks much better than cable, but is that really anything to get excited about, just now?)

NotSure wrote:

GoSeigen wrote:See also the chart I posted about about personal debt repayment. How do you raise rates when people don't want to borrow even at 0%?......

But what if people didn't want to borrow because their finances are already over stretched and assets are sky high as their valuation is based on 0% rates?

Ah, that's a misunderstanding. Asset valuations are not based on 0% (money) rates but on yields which are a completely different animal. So, yes asset prices might be high but it is because yields (not rates) have fallen (and not to zero in most cases), and they could easily stay there or thereabouts.

Maybe some debt needed repaying to put us back into a position where we could grow sustainably again? Can you not argue that the 'emergency measures' worked well in 2008/2009, a good thing, but maybe they worked a bit too well and certainly should have not been repeated at every little bump in the road since?

Anyway, we'll all find out soon enough. Assets very high as risk-free rate so low, but inflation very high and starting to look a little bit broad and embedded (US inflation has much less to do with Ukraine than European). UK looking particularly shaky as tax cuts and spending (i.e. yet more borrowing and stimulus) is definitely feeding through to gilt yields and £. (I know £/euro looks much better than cable, but is that really anything to get excited about, just now?)

I'm still holding to my conviction that the monetary climate is closer to 1920s/30s than 1970s so I can't see gilt yields staying at higher levels for long. But like you say, it should become clear in next few months.

GS

GoSeigen wrote:

NotSure wrote:

GoSeigen wrote:See also the chart I posted about about personal debt repayment. How do you raise rates when people don't want to borrow even at 0%?......

But what if people didn't want to borrow because their finances are already over stretched and assets are sky high as their valuation is based on 0% rates?

Ah, that's a misunderstanding. Asset valuations are not based on 0% (money) rates but on yields which are a completely different animal. So, yes asset prices might be high but it is because yields (not rates) have fallen (and not to zero in most cases), and they could easily stay there or thereabouts.

Thanks, and sorry - I meant yields, as in risk-free rates. They certainly fell below zero in Germany, and got very, very low in most the developed world. They are now, in general, above 'policy rates' and other than further QE it's hard to see what central banks can do about it.

If you are correct regarding future yields, should we be piling into bonds? I actually had a look at some bond funds last night, due to a lack of attractive (to me) equity fund options. But they still looked 'pricy'.