The economic cycle we are experiencing is very different from most economic cycles we have experienced to date in our lifetimes. This means that we are in an income-led expansion, but also in an income-led consumption expansion, meaning that citizens in the US are enjoying wage growth of 6% per year, with personal consumption spending coming in at about 6% per year over the of total economic activity.
So the spending just becomes someone else’s income, which then flows back into the wage picture, unlike some of the other cycles we’ve had, say the 2008 cycle or the 2000 cycle, where we had a huge increase in debt that fueled economic activity.
At this point, debt growth for households and businesses is actually at a 75-year low. And so we don’t have a credit-fueled recovery.
Commercial properties
The commercial real estate market, long battered and threatening to domino collapse, is a chronic problem. The issue has to do with working conditions that have changed, resulting in pain in the shiny office buildings of major metropolitan centers.
Many buildings are empty, but occupancy is returning. It is true that rising interest rates have made financing these buildings more expensive, and that much of this borrowing comes from banks. However, most of this lending is on the balance sheet, meaning banks only have to recognize these problems when the debt matures.
On average, these debts last between five and ten years in term and can be renewed, extended, modified. At the same time, there is plenty of regulatory relief. In other words, commercial real estate is a problem focused on a very small segment of the commercial real estate market.
Monetary policy
If you look back at the history of monetary regimes you will see fluctuations with moves from hard money regimes such as gold standards, to lower quality alternative money, and finally to the world of fiat money.
And the world of fiat money is more efficient, because it allows control of the money supply, thus tightening and quantitative easing, preventing crises. The big challenge that there is always an incentive for the private sector to over-borrow and for public authorities to continue to stimulate until the point at which that stimulus is felt.
This creates enough volatility and anxiety for money, which practically feels that inflation is too high in the economies. And then that creates a reactionary force, to instill restrictions on fiat or to go back to hard money.
This is a very typical cycle that we have seen play out time and time again. Excessive easing brought inflation and tightening, yet global deflationary impulses appear to have largely ended.
Gold
Gold is a unique asset in the sense that it is truly a contrarian currency in relation to other fiat currencies. And it is historical, because it has existed in the system for thousands of years, in unconnected geographies. Some of the most interesting things happening in the market today have to do with Chinese demand for gold.
But in China there is a problem: demand is sluggish, the stock market is not doing well, there is no real access to bonds and wealth management products that have been sold by banks. And Bitcoin is illegal. So the Chinese are hoarding gold.
FED
Right now, the Fed doesn’t seem to be changing its target on where it wants to take inflation. The failure to get there quickly, according to its mandate, is mostly a function of a poor understanding of what drives this cycle and, therefore, thinking that what they are doing is much stricter than it actually is. This has to do with who is in the FED and does not mean that it cannot change.
But the 2% inflation target may change in the future. Given the above, it is reasonable to assume that the markets will not collapse immediately, nor is a 2008-style crash on the cards.
