Steen Jakobsen, Saxo Bank chief economist and CIO just pinged me with a PowerPoint presentation on the preceding and next 30 years.
He commented “I somehow to my own surprise came to one single trend I believe in: everything is deflationary. Enjoy the “funny pictures” and the outlook.”
30 Years Ago
Current and Foreward Trends
Mish Comments
I agree with Steen that the trends are deflationary from a CPI perspective.
Compare the GMO 7-Year returns estimate to the John Bogle view. I believe GMO has this correct.
Public pensions are in serious trouble even on the more optimistic view.
Credit Impulse
Pay close attention to the global credit impulse chart. Credit impulse is the “Rate of Change of Change” of global credit creation/QE.
The Stevens Report discusses the topic in Why “Credit Impulse” Matters to You.
There are many analysts and investors who believe that the entire ’09-’17 stock rally is nothing more than the result of a historic, globally coordinated credit creation event from the world’s major central banks. Put in layman’s terms, every major central bank in the world has done QE at some stage over the past eight years, and pumped the world full on cash. So, all they’ve done is create massive asset inflation in bonds, stocks and real estate.
While there is no hard proof that this global expansion of credit has powered US (and now global) stocks higher, there certainly is at least a casual relationship if we look at history.
The reason I am pointing this out is simple: There are growing signs that the near-decade-long global credit creation/QE cycle appears to be nearing the end. First, there are the central bank actions. The Fed is hiking rates, and likely taking steps to reduce its balance sheet, draining liquidity from the system.
Second, the ECB appears to be on the verge of tapering its QE program, and while that will still result in a net credit increase for the next year, the pace of credit creation will slow. Finally, and perhaps most importantly, China continues to aggressively reduce credit in its economy, and I’ll again remind everyone the last time they did that, we got the volatility in 2H ’15.
This is where the “Credit Impulse” comes in.
Credit Impulse is a term used by various research firms that measures the “Rate of Change of Change” of global credit creation/QE. Put simply, while the global amount of credit may still be rising, the pace of the increase has not only slowed… it’s turned negative. Similar to taking your foot off the gas while you’re still going forward. It’s just a matter of time until you stop.
Getting more granular, UBS has been out front on this issue, and back in February noted that Credit Impulse turned negative. In a much-anticipated report out last week, the firm said that the decline over the past three-to-four months has accelerated, with Credit Impulse dropping to -0.6% annualized over the past three months.
Now, Credit Impulse is a composite of various measures of credit, including loans, loan demand, and other metrics, so this is not a hard-and-fast number. And the fact that it has turned negative doesn’t mean we’re looking at an impending collapse in stocks.
But if we look at the entire picture, negative Credit Impulse; a more-hawkish-than-expected Fed that’s apparently committed to reducing its balance sheet, a Chinese central bank that is apparently committed to reducing credit in that economy, and an ECB that will begin tapering QE in 2018… the fact is we appear to be nearing the end of the post-financial-crisis credit expansion, and with economic growth where it is, I cannot see how that will be positive for stocks longer term.
Bottom line, I’m not turning into ZeroHedge (although they are all over this), but the fact is that I sense a lot of complacency regarding the end of this global credit creation cycle.
Credit Impulse Update
Also consider comments on the Global Credit Impulse by Adam Tooze.
In late Feb 2017, UBS’ analyst Arend Kapteyn reported that a measure of global credit impulse covering 77% of the world economy was behaving rather alarmingly. After growing vigorously in 2015 and 2016 thanks to another round of Chinese stimulus the credit impulse had collapsed to zero.
Since then the news is worse with the global credit impulse indicator falling earlier this month to negative numbers not seen since the dot.com bubble burst. This should be a strong leading indicator of a fall in investment and contractionary pressures in the world economy.
Wrapping up the global credit impulse, ZeroHedge discussed it in Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains.
Complete Powerpoint
Once again Steen made an excellent presentation. It consists of 28 slides. I used 14 of them.
Click on Investment Returns Plus/Minus 30 Years for Steen’s full presentation at the 30th Anniversary CFA Annual Forecast Event, Singapore July, 2017.
Thanks, Steen!
Mike “Mish” Shedlock
Yes, I believe Steen is correct on this one.
FYI, Rick Ackerman (who IMHO is a very, very good technical and fundamental analyst) has a 0.624% yield target on the 30-year T-bond, 2-3 years out.
And no, that is not a typo.
LikeLike
Presentations like this have to entertain.
It’s not entertaining to say 30 yrs from now you will pay more taxes, more for the stuff you really need (not the bullshit you can live without) & then die – Plan accordingly to reduce essential expenses, reduce tax burden and save for old age and the unexpected.
One slide could have said that.
A single pandemic (more than possible given virus manipulation capabilities) makes all projections mute. Same for one big volcanic eruption or nuclear exchange.
LikeLiked by 1 person
Think on this Steen, from Tim Price:
“While quantitative easing (QE) was inflationary in theory, but deflationary in practice, shall the withdrawal of QE be deflationary in theory but inflationary in practice?”
Thoughts?
LikeLike
Interesting … about where I am at … sooner or later 10 yr yield near 0% … and 30 yr not far behind with yield curve compression.
LikeLike
human nature is price deflationary….most of us try to be more efficient and technology is an example of that……but if the monetary/credit base increases at a greater rate than the rise in population/gdp then the system has price inflation. the latter barely existed between 1717 and 1914 for which there is empirical evidence. when the monetary/credit base expanded at a rate far greater than the increase in human efficiency we have significant price inflation
LikeLike
the last slide says: “more transistors than human have neutrons“? That’s really funny 🙂
LikeLike
I’ll buy that he meant neurons rather than neutrons.
LikeLike
Something’s odd here. I’m of the deflationary view myself but why are commods breaking out along with industrial metals. Copper looks ready to fly. Look at the charts of emerging markets. They are saying expansion if not also inflation.
LikeLiked by 1 person
Gold makes sense if you believe the Fed will not hike as expected.
Copper makes sense in light of the falling dollar.
LikeLike
Silver or gold make more sense if there are going to be even more semiconductors.
LikeLike
The “credit impulse” is not a good money metric. RoC’s in money flows rise up until Sept/Oct. Then we will get a recession, barring gov’t countervailing intervention, beginning in the 2nd qtr. of 2018.
-Michel de Nostredame
LikeLike
The capitalist corporations are spending a greater share of their surpluses that is why. The world of finance is the shadow that follows production, you cant shake it off and because it is in darkness it is difficult to make out its details. However as far as I know, no shadow has ever set off in the opposite direction to the body that generates it.
LikeLike
” Education (no schools)”
That might turn out to be inflationary. People may actually learn things and demand to be compensated for their knowledge/skills.
LikeLike
Yes, but what is an education? Teaching someone how to use a search engine effectively? Or is that just a skill? Will the search engines get better at anticipating what we want and make that skill moot?
LikeLike
Grantham made his call for flattened 7-year returns a long time ago, but Steen is putting a March 31, 2017 on his graphic? The S&P 500 has made better than 14% for five years running.
Bogle’s call will be more accurate. He is discounting the “speculative return” portion down to -2%. He realizes passive investing is ramping up from here rather aggressively.
LikeLike
GMO puts these graphs out quarterly. Q2 looks a bit uglier for US equities than Q1, but they’ve increased their outlook for EM. Everyone in the managed space is growing enthusiastic about EM lately, which is why I have been paring back on it lately. Call me a stodgy old Westerner, but where is the EM without us buying all their stuff? Call me after the next global depression which is due sometime next year.
The most interesting thing to note after seeing years of these is that GMO has taken Managed Timber, which used to be one of Jeremy’s perennial favourites, off the charts. Last time I saw it, on the Q4-2016 chart, the 7-year expected returns on managed timber were somewhere around 4.3%.
LikeLike
I think 2019.
LikeLike
Sounds reasonable to me. Slow growth, low inflation, low interest rates. Pretty much lines up with my expectations. Japan, 1/2% growth, US growth 1%/yr for the foreseeable future. Most other developed nations 2-3%. Emerging markets 3-4%. Don’t see any big catastrophe coming soon, though as usual, my crystal ball is fuzzy.
LikeLike
Was off to the beach today, but then this…
LikeLike
I’m certain that in the Conclusion Slide the statement:
‘More transistors than humans have neutrons’ is a typo and should be ‘More transistors than humans have neurons’.
LikeLike
Yes I believe so
LikeLike
“There is no Alternative” and “Fear of Missing Out” are still in play.
LikeLike
If every stays on the same flight path deflation is correct. However war, famine, financial collapse to name a a few could change everything.
LikeLike
Agreed: a 30 year prediction omitting any reference, or impact of war, is delusional.
“…with Trump, the mask has come off. The ‘humanitarian’ and ‘democratic’ pretenses used to disguise US imperialism’s predatory interests are being dispensed with, and the ruthless, parasitic and criminal character of the American ruling elite, personified by Trump, openly drives US foreign policy.”
Selected quote from “Dropping the mask: A war of plunder in Afghanistan”
http://www.wsws.org/en/articles/2017/07/27/pers-j27.html
Nearly 16 years in Afghanistan…
Does anyone even know the true costs that will be passed onto US tax payers?
The only concern appears to be private investment opportunities.
LikeLike
Doesn’t China do the same but without the conflict?
Look at Africa.
It has ever and always been thus.
LikeLike
Who is the contrian here and what are their arguments for inflation?
Consensus appears ok sometimes, other times it’s dangerous.
Why is it OK here?
Too many people on one side of the boat?
LikeLike
Anyone that wants to bet CPI is lower 10 years from today, I’ll gladly take the other side.
LikeLiked by 1 person
Me too. Probably the same for taxes unless theirs a big change in big government.
LikeLike
Sure, CPI is easy to game. How about making a wager on consumer purchasing power?
LikeLike
1- Wasn’t my suggestion of deflation. I was only addressing what was specifically proposed. Forward market pricing disagrees with him, and therefore so do I.
2- I can’t game it and neither can you, and if you know it could/will be gamed by others, and don’t include that into your analysis, well then you can finish the rest of the thought about my opinion of that person….
2a- Unless of course you want to define deflation as the Austrian money supply thingy, but to me, even if they are technically correct, no one else refers to that. It’s like me running around Italy, Spain, Argentina, Brazil and rabidly insisting that what they call football is not football but soccer. (Technically, by my metric, I would be correct, but sound like an absolute fool at the same time)
3- As an ex-addicted gambler, for fun I’ll say FLAT to your purchasing power question, with very little standard deviation around that outcome. Actually too boring to bet, and once again it was not what was suggested. You might as well have just asked me, “How about betting on tonight’s Cubs-White Sox game.”
LikeLike
My niece’s fiancee just quit his 6 figure engineering job at Lockheed to become a professional gambler. Daddy’s not happy. I guess he figures he’s smarter than everyone else.
LikeLike
“I guess he figures he’s smarter than everyone else.”
Maybe he knows something about Lockheed that nobody else has figured out yet.
My niece’s husband quit his job to join a smaller firm that increases his daily commute by some 30 miles. Five months in and he is still much happier although I do not know my niece’s side of it.
I say take chances when you’re young. With UE low, employers should expect workers to move around.
LikeLike
A lot of projections of the past onto the future.
Not that this is always wrong, but …
in 1997 it looked like Microsoft had the operating system of the planet tied up with Windows … and then Google.
The problem with predictions of the future is that they can’t predict what might happen.
😉
LikeLike
Right now, I can’t even predict what I’ll have for lunch tomorrow.
LikeLike
Was it John Lennon who said “life is what happens when you are busy making plans ” or something like that.
LikeLike
Nope. Allen Saunders. And in any case, this popular quote was already in common use in the 1950s.
LikeLike
I can say that nobody absolutely nobody can predict 30 years ahead,,pure nonsense..
LikeLike
You will pay more taxes, more for the stuff you really need (not the bullshit you can live without) & then die. One slide could have said that.
Would tend to agree with 30 yr projections and more so given;
A) rate of change of tech – faster and faster
B) geopolitical background and balances that can shift rapidly through a single mistake. Don’t take hegemony for granted nor dollar status
C) major shift underway given demographics in the EM vs EU
LikeLike
“It’s tough to make predictions, especially about the future.”
― Berra
LikeLike
Yogi was a genius!
It is indeed difficult to make predictions, but necessary. It’s not easy to plan for the future without some sort of prediction. If your prediction is way off, then you probably made the wrong plan.
“If you don’t know where you’re going, any road will take you there.” (George Harrison)
LikeLike
…Or you planned incorrectly, if you are dependent upon your prediction…
LikeLike
Always a possibility. No one is infallible. I’ve had by share of failures!
LikeLike
When you accept anything is a possibility, you simply prepare for anything… That way you can never be right, and never be wrong, and never get caught by surprise.
– A rule I lived by.
LikeLike
or maybe it’s more.. you’re always right and always wrong… hmm… I’m not one for philosophical bullshit.. you choose 🙂
LikeLike
I’m of the deflationary view myself but why are commods breaking out along with industrial metals. Copper looks ready to fly. Look at the charts of emerging markets. They are saying expansion if not also inflation…
LikeLike
Steen obviously has not bought a house, healthcare, or gotten a student loan. Deflation abounds, just not in the things one needs.
LikeLike
I don’t believe Steen is American.
LikeLike
Let’s say the economy rolls over in a year and we have a recession…the Fed would just start printing money again…which should boost stocks all over again. We should be in a deflationary world, but remember to never fight the Fed.
LikeLike
So somehow by deflating the dollar they are going to know where to introduce that new money to make it all work? With an ability like that people will come to depend on them… so it is a good thing they are selfless and know what they are doing, or people would be in alota trouble… which they would owe to the strategists in terms of hard cash, if it came to the detail. People don’t want to fight the Fed. … why should they waste their time that way…. instead they simply drain all that is available and/or work out ways around its existence.
LikeLike
The real money, BIG MONEY is made from cycles, buBBles, speculation on a future that is predicated by speculation itself. Most working people would be satisfied with a slow, steady sustainable growth, but that would NEVER do for the speculators, and the normal working people end up driven to the speculator’s table in hopes of making up for past losses derived from the collateral damage brought by previous “corrections”.
We have all of these convulsions and malinvestments because the speculators need them.
LikeLike
People are free to speculate, but it should only be with what they own and stand to lose themselves , not by spreading the losses onto others or earning failsafe commissions for sending others to whatever fate. For that to be there has to be a system of sound money, where existing worth cannot be unfairly drawn off for use to other ends. The financiers work with very small margins but on vast sums, there are natural mechanisms to leverage which only need a small impulse to set into motion. There is no wonder that rates are on a continuous decline, they are the margin available, and the monetary system must always find expansion by lower rates or policy that has a similar effect – look at the real value of all fiat on a long timeline and they all go the same direction, with their smaller ups and downs according to other real world feedback and events. Simple theft would be more noble.
LikeLike
Even the common thief acknowledges that what he has taken belonged to another. Monetary manipulation on the other hand would have others believe that they owe for their losses.
LikeLike
Wild card in all of this is, how long can “Perpetual Self Driving-Autopilot ETF fueled Passive Investing continue? Talk about the Fed Put!
LikeLike
Even the dollar might deflate , but if everyone is using crypto , what is the use of CPI in dollars if it is no longer a market reference ? Most people know the difference between official prices and street prices in a state controlled market, or where black market rates differ widely from official exchange rate… but to calculate a ‘meaning’ from it is not easy, as it is mostly informal transaction. In fact western media usually describes disparity of that nature as political failure… gov. losing the plot… would look mighty useless to end up in the same circumstance… use of force and all… unless it were an inflationary necessity to restore ‘the order’ ?
LikeLike
By 2050, if the current demographic trends persist, G7 economies like Germany and France will be “emerging markets”.
LikeLike
I’m not convinced that electrified cars are “key”. We’re awash in cheap oil for the foreseeable future.
LikeLike
I guess we’re at deflationary environment,
But 30 years?
From my experience, when adjusting to the current environment
Of very low inflation, and when financial experts
Believe it’ll be that way for 30 years
That’s the time I’m starting to think inflation
May rise back in the next few years.
Technology and development were always making
progress not just in the 21st century
LikeLike
Thinking about it. Hasn’t he made the mistake of projection of the past to the future?
.
The past 30 yrs may be zero like the next 30.
Trend is your friend until it isn’t.
Trends do change.
LikeLike
Mr Steen, economics is not a science and never will be. Two, economic metrics are fairly accurate for micro economic applications but are poor for macro economic applications. Three,all economic measurements are about past economic activity by human beings and can only measure the past accurately but never the same about the future. Four, all future predictions of any kind are speculations. Electric cars the wave of the future? Where, Europe and North America, maybe China? Look at geography and tell me that the one size fits all approach works world wide. Go to You tube and start watching some of the videos about the videos. We were suppose to have natural gas turbine driven vehicles and super highways with the appropriate sensors embedded so that we could travel under the supervision of controllers across the nation. These men and women would take control of our vehicle and insure safe travel, ask question about where we wished to stay for the night and direct our travel effortlessly. What the hell happened? Remember the “plastic” house Monsanto was pushing at the World’s Fair and at Disneyland? What happened to that? The real question is why pay attention to these futurist predictions since the chance of them coming true is very low?
LikeLike
I get the arguments for electric transportation, but what magic development is going to deliver the energy without a comparable level of pollution somewhere in the chain? It’s something of a fantasy without some quantum leap in technology.
LikeLike
It’s not entertaining to say 30 yrs from now you will pay more taxes, more for the stuff you really need not the bullshit you can live without then die – Plan accordingly to reduce essential expenses, reduce tax burden and save for old age and the unexpected…
LikeLike
Yes, millions of ‘labour deflationators’ are pouring in from south to north across the globe.
The only solution to this deflationary impulse is to keep them out of the labour force by giving them free everything from the get go.
Our wise leaders are on top of this.
Welcome to AGD (Anthropogenic Global Dimming )
LikeLike
Supply of labour is the big deflator, with demographics.
Until standards of living begin to equalise globally there will be lower labour input costs across borders.
This could be a reason for the push to green. Increased energy costs might spur the CBs much loved inflation as it won’t come through the cost of people.
Thoughts?
LikeLike
I consider immigration as demographic infilling, doesn’t matter if immigrants are on benefits even, as they are a debt number hence money supply and some kind of support to asset values….at least until it all goes Roman.
Wider labour price deflation is going to effect advanced economy wages, but increased national debt levels, private debt levels, can inflate prices ‘finding something for someone to do and get paid’ … even for just waiting around… and green energy may be part of that… anyone got a better idea how to shake off some of the wests energy dependence? Sure some have, but green energy is worth its place too, shame that it has been over-politicized, misleadingly so.
Maybe the bigger question though is if we like or accept this framework, or if not, who is going to roll up their sleeves first. We certainly aren’t training people for tedious labour, quite the opposite, to the point of sometimes promising privilege to all.
LikeLike
Demographic infilling?
There’s a mind twisting way to peddle invasion.
I hope we can pitch it to the Native Americans so they’ll STFU about us stealing their land
LikeLike
Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
….
Well well well … all I can say is – Welcome To The Party … I think there is still a few brews in cooler.
Now about your recurrent “The $US will start rolling over … NOW” call the past few years …
LikeLike
On second thought that is a rather strong statement for the next 30 years.
We’re definitely headed for a deflationary period ( a few years?) then where we go from there will be determined by not yet made policy decisions – both fiscal and monetary.
But until the debt overhang addressed … at best US faces disinflationary winds.
LikeLike
Sometimes I think it must be quite hard for asset prices to go down…just thinking aloud…. because there are all the assets owned by someone or other and there is all the money going round… if the money completely stops going round all the asset prices just stay at their last price… so people actually have to want to sell them for less for the drop in value to occur…which means they have to be short enough of cash to take a loss… assuming they did not buy an asset only for performance, which for the average person is probably so…and short of becoming unemployed the main cash pressure is likely to be either debt service or some new horizon to pursue… at investment level I really don’t see any great new horizons opening up that promise to be THE future. . so it just looks pretty much stagnant, but also fragile to adversity or knocks given how finely balanced or over-extended many current themes are, the promise of far greater losses being the most decisive pressure a whole market might decide to react to at some point… I don’t think the US would tolerate the Japanese approach.
LikeLike
Some of the most pertinent long term predictions of the past received scant exposure when made.
Exposure to the prediction operates against its ultimate unfolding – reflexivity?
LikeLike
Or fate is so profound that it is unapproachable.
LikeLike
Think on this Steen, from Tim Price:
“While quantitative easing (QE) was inflationary in theory, but deflationary in practice, shall the withdrawal of QE be deflationary in theory but inflationary in practice?”
Thoughts?
A very sensible question.
LikeLike
Reblogged this on World4Justice : NOW! Lobby Forum..
LikeLike
Reblogged this on John Barleycorn and commented:
Well done.
LikeLike
Thanks for sharing sir. if the credit impulse is indeed dropping, what to make of the recent rally in commodities – copper, oil etc
LikeLike
Gold makes sense if you believe the Fed will not hike as expected.
Copper makes sense in light of the falling dollar.
LikeLike
Unless someone invents a capacitor (not a battery) that provides the equivalent in energy as a tank of gasoline at a reasonable price, electric cars will remain expensive toys for the wealthy.
While battery technology has improved, the improvements have not addressed the flaws inherent with batteries: Batteries have to be heated (don’t work well in cold weather), cooled (due to internal resistance.. capacitors don’t have this issue) and would require much more energy intensive mining (lithium is relatively rare).
When you look at the life-cycle costs in energy (mining, manufacturing recycling), added costs to the electric grid, and the added energy to heat / cool the batteries, electric cars are not competitive. The UK’s mandate of everything going electric will just make the people of the UK poorer and will do little to nothing for the environment.
LikeLike