Are we in a period of secular stagnation? No, this is wrong for a number of reasons:
1. The reason there was no inflation problem in 2004-2006 was because the Fed was hiking rates during that period.
2. Wealth in the economy continues to increase, that will at some point spur an acceleration in growth.
3. One important reason growth has been weak following the crisis has been the fiscal drag and that drag is big in 2013 and is much smaller in 2014 and 2015.
4. If there is so much slack in the labor market why are wages then rising across all industries (except construction) and why are unit labor costs then trending up?
5. Yes, demographics will weigh on growth for a while but there are other production factors/growth sources (namely capital and productivity). Do we really believe the US has lost its ability to invent IPads and IPhones in the future?
Secular stagnation is a nice academic concept but unfortunately it doesn't fit with the data. The conclusion in Reinhart and Rogoff was that it takes time (7 years) to get over a banking and a housing crisis but after that period the economy starts to grow again Add 7 years to growth think again. 2007 and we may be closer to than many people think.
Here is a link to the report quoted above.
As someone with a short position in a major equity index I have a vested interest in the near-term bearish perspective. This is a calculated bet that the overextensions relative to the 200-day MA moving average, which have developed over the last few months, are more likely than not to be unwound. However, despite the 12-month challenge represented by normalising monetary policy I am as bullish as ever on the stock market over the long term.
Lengthy periods of underperformance in the stock market have a conditioning effect on expectations. The liquidity fuelled rally experienced by Wall Street since 2009 has introduced a casino type aspect to the market and will in all likelihood be challenged when monetary policy normalises. However, the real fundamental value creation characteristics of the technology, healthcare, materials and energy sectors coupled with improving governance in the world’s major population centres represents productivity growth potential that should translate into significant additional upside for stock markets on a secular basis.Back to top