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staringclown

Satyajit Das thread

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It's big picture, it makes intuitive sense to me and is widely published. IMHO Satyadit Das deserves a thread all his own.

 

Why we need to lie to ourselves about the state of the economy

 

 

Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies. 

The official policy is "extend and pretend", whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles. 

 

 

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Good read. Pretty much along the lines of what we're all thinking here on this forum.

 

This bit is strange:

 

Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world's gross domestic product

 

Gross World Product for 2014 is estimated to be US$77.868 trillion, which would make the global debt level 73% of global GDP (assuming he got the debt figure right).

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Good read. Pretty much along the lines of what we're all thinking here on this forum.

 

This bit is strange:

 

 

Gross World Product for 2014 is estimated to be US$77.868 trillion, which would make the global debt level 73% of global GDP (assuming he got the debt figure right).

Agree with AndersB. A good read.

And that 73% of global GDP would be an amazing reset, if that is what it takes to get us back on fundamentals.

I wondered which one of the seven deadly sins would eventually take us out.

I hadn't bargained on "greed" being the culprit.

Batten down the hatches people. We are in for a bumpy ride to the bottom.

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I should have listened to it before I posted it (I was at work!). You need to subscribe ($$$) to listen to the full interview.

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There is an audio interview but I have attached the transcript as the audio links often don't last long.

 

 

 

TIM PALMER: A slowing China and the slump wiping billions off stock markets around the world have dominated day-by-day coverage on financial pages of just how bearish global investors have become.

But economist Satyajit Das says focusing on the wipe out on the markets is a mistake.

He says the problem remains, as it was before the global financial crisis, debt - debt that's growing even now.

Satyajit Das is qualified to comment, having predicted the 2008 meltdown. Now he says policy makers, having fixed nothing, are pursuing a failing strategy and the outcome could be even more terrifying than the GFC and even worse than the Great Depression.

SATYAJIT DAS: We are now living in a time which has no precedent and people don't understand that. And everybody's assuming this is all a cyclical event and it'll - things will go back to normal. What I suspect is we missed the opportunity in 2008 to reset and we wanted to perpetuate a model which has failed and we're now going to pay an awful price for this. 

And there's really three possible scenarios. One is what I call the Lazarus economy: I'm wrong and everything suddenly recovers. The second one is stagnation, which is what the central banks are trying to do, is manage through QE (quantitative easing), just to keep the thing rolling along. And if they can't do it, the last option is terrifying, basically a repeat of the Great Depression but on a much worse scale. 

And now we don't have the capacity to cope with it because we've used up all our ammunition. And that's where we are and it's very, very interesting and our Prime Minister's statement that it's a very exciting time to be an Australian might well turn out to be correct, but not perhaps in the sense that he meant.

TIM PALMER: There's an almost daily head scratching about how far Chinese equities might fall, despite government's attempts to hold the market where it is. Is that the real story of what's happening economically in China and is that the real threat to global economic stability? 

SATYAJIT DAS: I don't think so because if you just take the Chinese stock market in isolation, it's not very well integrated into the global economy. And I think the real thing we are seeing, both in terms of stock market volatility and currency and interest rate volatility, is these are symptoms of several underlying problems. 

The first is that we never, ever really addressed the problems that surfaced in 2008, the main one being debt, which has actually increased by 17 percentage points of global GDP in the eight years, and if you look at it in nominal terms, by $57 trillion. 

And also, the hope for recovery in growth and the higher levels of inflation which are required to deal with this debt problem have not emerged. And what is also now apparent is that the policy prescriptions and tools that central banks have are not going to actually work to bring about the recovery. So, what we are seeing in terms of market volatility is really a symptom of the focus of people on these unresolved issues.

TIM PALMER: Talking of growth, the IMF has I think four times in recent months downgraded its global growth expectations. China duly reported its latest growth figures at around 6.9 per cent. What do you think the real growth figure is in China?

SATYAJIT DAS: Well I think the Chinese growth figures have always been highly problematic. Li Ka-shing was caught on WikiLeaks confessing to the US ambassador that he didn't take much notice of GDP figures because they were, quote, unquote, "manmade". China may be growing much more modestly or even shrinking. 

And the other thing which is interesting is if China is on track, then why is the central bank cutting interest rates? They've cut interest rates about half a dozen times in the last year. Why are they trying to push money out the door, to restart some of the infrastructure projects? Why are they starting to devalue the dollar? Because if everything is okay, then these measures would not be required.

TIM PALMER: The effects in the real economy of this fall on the Chinese stock markets are real though. If a large number of people were to get market calls on these leveraged investments into equities at a time when China's said it's built its new economy on consumer demand, what happens to its economy?

SATYAJIT DAS: The real issue is the leverage and how much margin lending went against these stocks, and none of us really know. The one thing we do know is that the official figures are probably understated. Most of that investment is not necessarily by individuals. Some companies have also partaken of this particular habit. 

And the real issue is going to be how that affects the Chinese banking system. And if you look at the Chinese banking system, they have a whole series of problems. The first is the slowly deflating property problems, then the fact that they've lent to industries which have massive overcapacity and no real hopes of paying back their loans and now on top of that they have the problem of people who've borrowed against stocks which have obviously fallen very, very significantly in value. 

And really, what we have to watch is whether China ends up with a financial system crisis and that'll have two effects. One is the write-offs that the banks will have to take, which may indeed be very, very large, but also what it will do to the projected reform agenda which you were actually alluding to, which is basically switching the economy from basically investment to consumption, and also from heavy industry to services. And what I see is a slowing down in that process of reform or a reversal to actually deal with some of these problems and boost growth at the same time.

TIM PALMER: What about the political system in China because if the success and celebration of the bull run on the Chinese stock markets were attached to Xi Jinping, does he face political problems, especially having purged members of his party for corruption and made plenty of enemies, which you've written about, does he face a real threat to his power if the collapse in stock values is also attributed to him?

SATYAJIT DAS: What unfortunately the economic problems do is undermine the legitimacy of President Xi and what it does it basically give some oxygen to people who are resisting the corruption scandals and so forth and effectively it sets off power struggles. And this is a power struggle between President Xi and the group surrounding not the last president, but the one before that, which is President Jiang Zemin. 

There's an old saying that Sun Tzu, the famous author of The Art of War, once wrote about that if you sit by the side of the river long enough, the bodies of your enemies flows past. And those people who are resistant to President Xi's initiatives will gain quite a degree of heart from the weakness. How that will play out is very difficult to see.

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SATYAJIT DAS: We are now living in a time which has no precedent and people don't understand that. And everybody's assuming this is all a cyclical event and it'll - things will go back to normal. What I suspect is we missed the opportunity in 2008 to reset and we wanted to perpetuate a model which has failed and we're now going to pay an awful price for this. 

And there's really three possible scenarios. One is what I call the Lazarus economy: I'm wrong and everything suddenly recovers. The second one is stagnation, which is what the central banks are trying to do, is manage through QE (quantitative easing), just to keep the thing rolling along. And if they can't do it, the last option is terrifying, basically a repeat of the Great Depression but on a much worse scale. 

And now we don't have the capacity to cope with it because we've used up all our ammunition. And that's where we are and it's very, very interesting and our Prime Minister's statement that it's a very exciting time to be an Australian might well turn out to be correct, but not perhaps in the sense that he meant.

I personally think DAS is right.

Australia's own private debt level is close to 130% of GDP. This is getting up there towards levels of unsustainability. I cannot even calculate what that might be in nominal terms.

But even if that debt were to be controlled deleveraged by 30% we can only imagine what the state of the Australian economy might look like.

I think we would have unemployment rise to close to 10%.

This could also cause a spiral and further deleveraging.

So far, I have been hopelessly wrong about Australia.

I thought it would take a hit in 2007 - 2008 and that home prices would fall off as a result.(I joined GHCP in 2007 thinking that we were headed towards a depression like recession)

It didn't even go into recession!!

Since 2009 our debt levels have actually risen, and our home prices have continued on the same trajectory.

There is now some talk and conjecture that maybe we have seen the peak in Sydney and Melbourne high end homes.

 

I like Satyajit's 3 possible scenarios, and I have even said similar to some of my friends. Especially those that are still bullish on homes, and optimistic about the economy under Turnbull.

I could be wrong, and Australia will defy global trends and remain set on a trajectory to the moon!

We could see a stabilising of the economy and people start to pay down debt at a higher rate, to get us below 100% GDP.

Or we could have a horrendous crash and lots of people are going to get severely hurt, or have to stay in their current homes much longer than they anticipated.

This scenario has ramifications across the whole spectrum of the economy.

Time will once again tell - I guess. (Remember, I've been wrong before - many times)

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You're Not as Rich as You Think

 

 

The idea that the world is awash in savings -- one factor driving the theory of secular stagnation -- is, on the surface, a persuasive one. Too bad it may not be true.

Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world's accumulated wealth -- around $250 trillion, according to Credit Suisse’s Global Wealth Report -- is almost certainly incapable of realization at its paper value. The headline number thus vastly overstates the supposed savings glut.

Most of these savings are held in two forms: real estate, primarily principal residences, and retirement portfolios that are invested in stocks and bonds.

Both are rising in value. A combination of population growth, higher incomes, increased access to credit, lower rates and, in some cases, limited housing stock have driven up home prices; those who got in early have done especially well. Meanwhile, increased earnings and dividends, driven by economic growth and inflation, have boosted equity values. So have loose monetary policies designed to counteract the Great Recession since 2009.

Yet the appreciating value of one’s own home doesn't automatically translate into purchasing power. A primary residence produces no income. Indeed, maintenance costs, utility bills and property taxes -- which often rise along with home prices -- mean that houses are cash-flow negative.

To monetize one's gains would require borrowing against the value of the property. Those loans cost money to service and expose owners to fluctuations in property values. The property can always be sold, of course. But much of the profit is likely to be eaten up by transaction and relocation costs -- not to mention the cost of a new home, which will also have risen in value. 

High property prices depend on there being enough potential buyers who can afford the increasingly large mortgages that have helped boost real estate values over the last half a century. Their number may be shrinking: Stagnant incomes, the decline in secure, long-term employment and rise in contracting jobs all undermine the appetite and ability to borrow. Demographic changes and new barriers to immigration will shrink the size of populations as a whole. Similar considerations apply to real estate investment.

Share prices, on the other hand, represent future rather than current earnings streams. Low interest rates, which have to rise eventually, have artificially increased the discounted value of these cash flows. Much of the gains merely reflect higher PE multiples, not higher revenues and earnings. Slower growth and lower inflation mean future income streams may be weaker.

In recent years, equity valuations have also benefited from the rising share of national income captured by corporate profits, which may be unsustainable. Debt-funded share buybacks and corporate activity that boosts valuations -- including mergers -- may slow. Companies can't repurchase more than a certain level of outstanding shares if they want to maintain their stock-exchange listing and trading liquidity. Mergers eventually may run up against competition concerns.

Fixed-income instruments don't necessarily offer a safe haven. The credit quality of government and corporate bonds has declined. Regulatory changes mean that bank-issued bonds may be written down in cases of financial distress. With investors having assumed more risk to compensate for falling returns, they face increasingly uncertain returns on capital.

An important factor is changing funds flows. Rising wealth, in part supported by forced or tax-incentivized pension savings, created strong markets for financial assets in the postwar era. Now, many aging investors are set to draw down on those savings at the same time to fund their retirement. Given fraying safety nets across the developed world, those withdrawals could well be large -- indeed, greater than new inflows. That will reduce the funds available for investment, as well as demand for property, equities, bonds and other assets.

All this could set off a vicious cycle. Lower asset prices will shrink tax revenues. At the same time, demand for essential services will increase as many find themselves unable to finance their own needs. Fiscal positions will take a hit, resulting in lower government spending and higher taxes. That will only accelerate disinvestment.

The inability to convert investment into cash at current valuations means that individuals may be a lot less wealthy than they assume. They may have to consume less now in order to ensure sufficient cash for future needs, reducing economic activity. Lower levels of wealth also limit policy options for governments and central banks, which rely on mobilizing savings to boost growth and manage high debt levels.

That's perhaps the final irony. Whether real savings are higher or lower than currently believed, the result may be the same: a global economy mired in a prolonged period of stagnation.

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