Thursday, June 20, 2013

Buy Stocks Now!

Why is the US economy stuck in low gear? Why can’t we grow the way we did before the Crash? Why are so many people unable to find work? Of course, one wants to blame our socialist president with his redistributive ideas, but he is not the problem. Socialist economies can grow. If you don’t believe me, then you have never heard of the country called China. It is run by the Communist Party, and it has enjoyed amazing growth since Mao died. The Soviet economy boomed after the war, and they did almost everything wrong. Don’t blame the Left for our current malaise; it’s not their fault. Socialism hurts everyone, and it limits growth, but socialism is not the problem today. The problem is 100% capitalist.

To understand the modern capitalist economy, one must consult Hyman Minsky. Minsky’s contribution to economic thought is that stability is destabilizing. Remember the 19th century, when the boom-bust cycle was decennial? The depressions were horrible, and people really did starve to death. But economic growth was quite rapid. We had creative destruction. There was no central bank to cushion the crashes. It was a Darwinian process.

Today we live in an era of safety nets. We just can’t stomach the awfulness of the 1890s. We can't stand it when kids starve to death. We want stability. The problem with stability is that it leads to complacency and an endless build up of debt. Debt capacity expands when everything is peachy. But trees don’t grow to the sky, and there is ultimately a limit to indebtedness. That limit comes when operating cashflow can’t pay the interest, let alone the principal. It comes when rents can’t pay the mortgage. It comes when Dad loses his job and throws the keys to the bank. It happens when a bank will make a 10 year loan on a Kia Sportage.

We hit that moment on Sept. 15, 2008. That was our Minsky Moment. That’s when the debt motor went into reverse. That was the Day of Reckoning. I remember saying to my friend Chester Murray: “Paulson let Lehman default on $700 billion of debt?”. In the immortal words of Christine Lagarde: “Hank, how could you?”.

Days of Reckoning like Lehman Day occurred with monotonous frequency under the gold standard. Every ten years, credit contracted and the price of everything collapsed. Popular virtue was something called thrift, which meant that you saved money to survive during the periodic depressions. If you don’t believe me, ask your grandmother how her grandmother felt about debt.

America has been living in a post-Lehman world for the past four and a half years. We have spent that time paying back debt. Instead of buying a boat or a BMW, we have been paying off credit cards and servicing underwater mortgages. That is why QE hasn’t worked. Delevering has overwhelmed the Fed’s bond-buying. Richard Koo, Nomura's chief economist, has labeled this phenomenon a “balance sheet recession”, which is accurate. As long as credit growth is negative, it’s hard to grow the money supply or the economy. (Not impossible, just hard.)

Since the Fed has rejected the use of creative ideas to grow the money supply, economic growth has faced very strong headwinds caused by credit contraction. Now that Bernanke has thrown in the towel and is planning his retirement party, we can forget waiting for the Fed to get off the pot. Economic growth now depends on a revival of private-sector credit growth.

The outlook for a resumption of credit growth is good, which is why I am bullish. Business credit is already growing briskly. Household credit has finally stopped shrinking. If, by the grace of God, household credit growth resumes, we are looking at stronger growth and a bull market.

As I have said before, stocks today are selling at bargain prices. Whatever fundamental yardstick you use, it will show stocks are cheaper than they have been since Millie was writing her memoirs. Today’s prices are a screaming bargain; whoever was selling their portfolio today was either an idiot or on margin. Anyone who doesn’t buy stocks now, meaning today, deserves to live on Social Security.

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