[David Rosenberg]Screenshot via Bloomberg TV In a truly seminal speech on March 29th, Janet Yellen used the title, The Outlook, Uncertainty, and Monetary Policy. I have been in this business for 30 years and have never seen a central bank chief slip the word “uncertainty” into the headline. Not just that, but she invoked the term no fewer than 10 times to describe the domestic and global macro and market backdrop — this even as we pass seven years since the worst point of the Great Recession and seven years into the most radical easing of monetary policy in recorded history. It begs the question: what has gone wrong? Well, the obvious answer is that monetary policy simply is a weak antidote to the fundamental and structural impediments to global growth. The world is still grappling with a problem of over-indebtedness. This is particularly acute in China as the country simultaneously rebalances from overinvestment in the industrial sector to consumer services. Germany is following a policy of austerity to the detriment of its Eurozone allies (in part due to trust issues with its partners or possibly just a pervasive culture of frugality) -— running a budget surplus, and a current account surplus-to-GDP ratio of over 8% (Germany has now had current account surpluses for 15 years in a row). So yes, there are lingering debt and competitive hurdles in the way of European growth, but Germany’s refusal to share its economic engine with its neighbors has been a hindrance to say the least. In Japan, Abenomics has hit a wall as the country continues to weave in and out of a recession with consumer spending and incomes stagnant. The experiment with negative interest rates has failed so far, highlighted by the firming yen and the renewed stranglehold placed on the country’s export sector. The Brexit vote on June 23rd is a classic fork in the road for the European Union, and the 64% vote (non-binding) in the Netherlands against the treaty with Ukraine (for greater economic ties) underscores the contempt that many in the region have towards the union. All the more so with the refugee and terrorism files, partly the product of open (porous more like it) borders. Spain’s coalition government is about to fall. Italy’s banks are in disarray. Prime Minister Hollande has backed down on French reforms. Greece is at risk of defaulting again this summer. [Greece riot protest]Screenshot via Bloomberg TV So it is clear the European Union is splintering. That said, the soft global background only goes so far in explaining why the U.S. economy has been on such soft ground this cycle. After all, nearly 90% of U.S. GDP is autonomous. The U.S. economy does not reside on an island, that is true, but the global economy really is a two-bit player — a truly decimal place impact. Where it matters is whether global market anxiety leads to an undesired tightening in domestic financial conditions or if the U.S. dollar rises too far too fast. To be sure, both of these have been in play at different times since last summer, but over time, U.S. growth is much more a local story. The big story is how the U.S. has shot itself in the foot many times over. While Obamacare may have been good social policy, it froze the small business sector two years after the detonation of the housing sector and capital markets. One shock layered on top of another. Fiscal policy was never loosened enough and the move to tighten it so dramatically in 2013 via spending restraint and broad-based tax hikes has exerted dampening economic effects to this day. The structural component of the deficit, once as high as 7%, is now close to zero, as revenue growth (the tax take) is exceeding program spending growth currently by a three to one ratio. Meanwhile, the Republican who shut down the government four years ago is now in second spot in the GOP primaries, and the leader has become the poster boy for the anti-free-trade movement. [Ted Cruz]Screenshot via Bloomberg TV The tax code has not undergone a face-lift in three decades. We have a White House now making it up as it goes along when it comes to merger activity, adding to business uncertainty over tax and regulatory policy —which is running at historically high levels. So we have supply side sclerosis in the country, where the lack of budget policy clarity has led to a freeze-up in capital spending and a record-low pace of growth in the private sector capital stock. This in turn has impaired productivity growth, as Janet Yellen herself warned repeatedly before she took over the helm. Sadly, this is more the domain of fiscal policy than monetary policy. Here we are, more than a year later, with no movement on the fiscal front, and a productivity performance that has gone from bad to worse. We have endured an erosion in the growth of the capital stock that is impairing productivity. The other input to the production process, labor, is also seeing ever-present constraints. Because of birth and fertility rates that have gone in reverse, coupled with a decline in immigration (to an extent that would most assuredly bring a smile to The Donald’s face), we have a situation where the growth in the working-age population has slowed to a mere 0.5% annual rate, less than half of what was typical in the past. In contrast to the old boomer-led cycles of the 1970s, ‘80s and ‘90s, female participation rates are no longer rising, and the rapid growth in two-income families that helped juice up the spending power of cycles gone by, is long over. So much of the comparatively sluggish growth this cycle is purely demographic. Then we have a slate of socio-economic factors, many of which have scars from the Great Recession. Employment among males aged 20 to 24 has not increased in eight years and the employment rate for this group is extremely depressed even if off the bottom. Ditto for those aged 25 to 34. [guy reading on a couch books]Screenshot via Bloomberg TV As for those fertility rates, what woman wants to date, let alone marry, a guy who’s still living with mom and dad? Indeed, an unheard-of 35% of males aged between 18 and 34 live at home. Part of the problem, a big part, is the dramatic surge in student debt, now equivalent to $100,000 per college grad, and seven years into the recovery, the delinquency rate sits at 8%. So kiss your FICO score goodbye and kiss your ability to secure a mortgage goodbye, too — and so say hello to a massive reversal in the U.S. homeownership rate which is in such steep descent that it is starting to look more and more European. On top of that, the household sector, at the margin, continues to focus on repairing balance sheets as opposed to embarking on a spending binge, even with incomes picking up recently and the de facto tax windfall from sharply lower gas prices. Debt-to-income and debt-to-asset ratios are still receding and savings rates trending higher as the typical boomer hitting 60 looks at the life expectancy tables and sees he or she has 25 years left on earth and the dread realization sets in that they haven’t come close to preparing financially for the not-so-golden years that lie ahead. There is this other little matter called income inequality, which has become a global issue and indeed part of the discourse during this primary season. Always good to see a revolt being conducted peacefully and within the political process (good thing Maximilien Robespierre isn’t around). But this anti-establishment feel to the primaries, whether it is in the Trump or Sanders camp, certainly does resonate. This feeling of being left out or left behind. [U.S. Republican presidential candidate Donald Trump speaks at a campaign event in an airplane hanger in Rome, New York April 12, 2016. REUTERS/Carlo Allegri]Screenshot via Bloomberg TV I mean, there is nothing wrong with building wealth, but remember that democracy and capitalism are always dancing with each other on a pin. You don’t want to have too many trailing behind because history shows us time after time that this triggers discontent among the masses, instability and inevitably, upheaval. The Gini coefficient— a measure of income dispersion — has risen to unprecedented levels. This by no means suggests that folks at the lower income echelons aren’t better off than they were 10, 20 or 30 years ago, but it means their share of the national income pie is getting smaller, and if you don’t think people, by their nature, aren’t constantly looking over their shoulder, then go and take a Psychology 101 course at your nearest university or community college. It wouldn’t be so bad if the “middle class” wasn’t disappearing, because what its depletion has done is polarize society — which is why the rancor is so loud during this pre-election circus otherwise known as the U.S. primary season. The near eradication of the middle class has coincided with a multi-year decline in the labor share of national income, and only very recently has this started to carve out a bottom and hook up (a clear reason why profit margins have started to roll over). Of course, even as the spoils now are diverted more towards the personal sector, the implications for GDP growth which is all about “spending” are unclear given the uptrend in the savings rate. A rising savings rate amidst lingering high excess capacity in a global basis means that deflationary pressures are not going to go away. Central banks will be forced to offset these pressures by ongoing monetary accommodation, though as we are seeing with quantitative easing and negative rates in the euro area and Japan, central banks are losing their effectiveness. So all this means lower for a lot longer — low growth, low inflation, and low interest rates — from an investment strategy standpoint, it is all about “Safety & Income at a Reasonable Price”, all over again. NOW WATCH: The science behind why you shouldn't pop your pimples
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