In 2014, ESPN analyst Skip Bayless tweeted his prediction that Johnny Manziel would, one day, be an even bigger superstar in Cleveland than LeBron James ever was.
Well, LeBron just won an NBA championship for Cleveland, while “Johnny Football” finds himself in trouble with the law after being cut by the Cleveland Browns following two short seasons.
Needless to say, Bayless’ prophecy was spectacularly wrong.
Like misguided sportscasters, economists are also known for some truly horrible forecasts.
For example, Irving Fisher claimed that the stock market had reached a “permanently high plateau” – right before the crash of 1929.
Only slightly less embarrassing was Alvin Hansen’s Presidential address at the American Economic Association in 1938, where he posited that the U.S. economy was stagnating. Waning population growth and a lack of investment were key assumptions for his secular (long-term) stagnation thesis.
Hansen’s speech didn’t age well, either.
The 1950s and 1960s turned out to be a period of great economic prosperity, as a surge of births gave rise to the “baby boomer” generation following World War II.
However, unlike Bayless and Fisher, Hansen wasn’t entirely incorrect. He was just early – seven decades early.
Let’s Dish Some Truth to Janet Yellen
From 1950 to 2007, the annual real U.S. GDP growth rate for the United States was 3.6%.
Following the financial crisis, many economists expected the economy to strongly bounce back. However, the real GDP growth rate has only averaged about 2.1% from 2010 to the present.
In fact, during Congressional testimony last week, Federal Reserve Chair Janet Yellen commented, “Well, growth has been disappointing. I’m not sure of the reason.”
What a stunning admission!
It’s illegal to lie to Congress, so let’s take her statement as the truth and help Yellen out a bit.
The private sector’s debt burden is surely a contributing factor. Unfortunately, debt dynamics seems like a topic too complex for the Ph.D. economists at the Fed to grasp.
Population trends should be easier to understand, though.
Indeed, demographic shifts help explain why economic growth has been underwhelming in developed economies.
The problems aren’t limited to slowing population growth or rapidly aging societies, either.
The total size of the population within the key middle-age window – the years during which people tend to spend the most amount of money – has peaked in Japan and Europe. The size of this crucial age cohort will also decline in the United States until around the year 2020.
Secular Decline in Rates
I analyzed these broad demographic trends in the May 2016 issue of The Shockproof Investor.
One of the main takeaways was that we can’t expect global and U.S. economies to grow as fast as they did when population trends were more favorable.
Basically, demographic changes are a long-term economic headwind – and, thus, a root cause of our secular stagnation.
In turn, falling long-term interest rates are a symptom of this malaise.
Case in point: The 10-year U.S. Treasury rate dipped below 1.5% yesterday.
Of course, the most recent plunge in rates has a lot to do with the fallout from “Brexit.” But the long-term decline in rates is being driven, in large part, by secular stagnation.
Through the Fed’s December 2015 “dot plot,” we know that a certain Fed governor was expecting a 2% Fed funds rate by the end of 2016.
This shows an unconscionable lack of understanding of the secular forces buffeting the economy.
The Fed had better wise up to the fact that we’re not dealing with cyclical or temporary impediments to economic growth.
Alas, the Fed’s bullishness on the economy and over-optimistic rate hike forecasts are already looking as laughable as Skip Bayless’ bullishness on Johnny Manziel.
All of the Fed governors should read Alvin Hansen’s secular stagnation speech from 1938 and ponder its relevance to our current situation.
Safe (and high-yield) investing,
Alan Gula, CFA