John... This is an interesting argument Moskow makes.
I believe Bill Gross's latest essay shoots a lot of holes in the productivity myth being able to sustain and stimulate the market going forward however... at least in the near/forseeable future.
...Shiller’s chart would suggest as much, but there is additional theoretical smoke here to be concerned with. The following chart, advanced by Secular Forum guest speaker Stephen Roach, who along with Northwestern’s Robert Gordon ranks at the top of the world’s productivity experts, shows a pronounced disparity between what is known as “labor” and “total factor productivity” or TFP....
pimco.com
It’s the labor productivity that markets and corporations have been focused on, and that productivity measure has indeed accelerated in recent years, rising at a faster rate than at any time since the 1960s. But TFP, which includes not only labor but plant and equipment, has barely produced a ripple – in fact, it has gone down over the past few years. That means that labor productivity is up and corporate profits are up because of “capital deepening” (the amount of capital employed per worker) – not necessarily higher total factor productivity (the efficiency with which both capital and labor are used). It means that Americans have invested in more machines but not necessarily ones that are any more productive than during the past 130 years – to cite Shiller’s example again.
So? Why don’t we just keep on buying more machines? We will, but not as many, and that makes all the difference. Because prior levels of investment have been made possible via increasing amounts of debt as well as IPO, venture capital, and other equity financing which now is much harder to come by, the ability of corporate America to “deepen” capital at anywhere close to recent levels is more than suspect. This link of the New Age Economy’s chain falls under the category of “all good things must end” or at least slow down. Productivity’s recent downturn, based upon serious disruptions in business investment has begun to influence the economy and investment markets alike, suggesting that the peak has been seen, even if the end is not near.
But is it a cyclical or a secular peak you imbecile? Good question, Anne. Because if the Fed can pump up the economy with its 250 basis points of cheaper money, then why not party-hearty for another 10 years. Maybe, but not likely. With private consumer and corporate debt at historically high levels and with investors finally believing that stocks are not just a one-way winning lottery ticket, the next cycle is almost certain to be less exuberant than the last. And there is after all not only business investment but consumer spending that must slow down. |
