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Sunday, February 10, 2008

Reversion to mean

Echoing recent comments by Vitaliy Katsenelson (also on Barron's), Jeremy Grantham thinks profit margins will decline towards normal and the Standard & Poor's 500 will head from its current c. 1334 to 1100 in the year 2010 - a drop of about 18%.

Grantham is emphatic that borrowed money is not a stimulant to the economy:

I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology.

That last sentence is really pregnant. I'm not sure about the man-hours (the closer we approach peasanthood, the harder we'll work), but I think that on both sides of the Atlantic, we've been falling down on the other three.

In Britain, our government has failed to distinguish between investing in education, and managing it - and where it has tried to do the latter, has pursued a Romantic-heritage political agenda. Capital investment? Going abroad. Technology? Ditto - and eagerly taken up (if not positively filched) by our Eastern trading partners.

I live in what used to be Car City; now, the vast Longbridge site is being redeveloped for housing and shops - in other words, open prison for the new ex-industrial underclass.

But Rome, too, kept control of its plebs with bread and circuses for a couple more centuries, before it fell.


RobW said...

Damn those economic realities. If only we could all be rich.

Sackerson said...

Define rich; on analysis, you may find you are already.

James Higham said...

How can debt do other than eventually cause an economy to implode?

Anonymous said...

I remember those lugubrious liars of the car industry trade unions on the radio in the late 50s and early 60s, advancing preposterous reasons why they were on strike. It made me decide that I would never work in the their industry. That's how the unions effectively selected their own dud bosses - by repelling anyone who might make an intelligent boss.

Sackerson said...

The hungry sheep look up, and are not fed.

Betrayed, not only by their leaders, but by the politicians who are supposed to know better.