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The Muddle Through Economy


... a Shock and Awe Arsenal of Recession Fighting Weapons. a. George Bush's Tax ... A recession will mean a falling stock market and. falling retirement accounts. ... – PowerPoint PPT presentation

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Title: The Muddle Through Economy

The Muddle Through Economy
  • A Presentation by
  • John Mauldin,
  • Author of Bulls Eye Investing
  • And the Editor of Thoughts from the Frontline

I have a confession to make, a sinful
predilection to divulge. Every week as I sweep
through my emails, inadvertently zapping precious
letters from my children I find myself
helplessly clicking through to the weekly
commentary of John Mauldin thus joining some
million morbid folk avidly consuming his casual
doom-laden prose.
- George Gilder -
Heres the Good News
  • Inflation-adjusted consumer spending is up 3.6
  • Residential housing investment is up 13.2
  • Capital-goods investment by business is up 13.9
  • Spending on machine tools for heavy-industry
  • manufacturing is up a whopping 54.2
  • Exports and imports are up nearly 11

  • After-tax corporate profits are up 19
  • Industrial production is up 5.2
  • High-tech production is up 23.7
  • Productivity has reached an astonishing 4.6 rate
  • Household wealth is up 11.1 hitting a record
    high of 45.9 trillion
  • The GDP deflator is up only 2.2

  • The GDP deflator is up only 2.2
  • The core consumer-spending deflator (excluding
    food and energy) is up only 1.4
  • Interest rates are at 45-year lows, with
    short-term rates at less than 2
  • 15-year mortgage rates are just above 5
  • Home ownership stands at a record 69.2

R D Spending is Booming
  • While regularly incurring trade gaps and
    budgetary deficits, our economy has grown since
    the early 1980s from a level, depending on dollar
    valuation, between one-fifth and one-fourth of
    global GDP to close to one-third of global GDP
    last year. During this upsurge entirely
    unexpected by the same economists now advising
    Sen. Kerry, U.S. per capita GDP surged from 4.7
    times per capita global GDP in 1980 to 6.5 times
    per capita global GDP in 2003.

  • The U.S. created some 36 million net new jobs
    at even higher levels of productivity and
    earnings, while Europe and Japan created scant
    employment at all outside of government and
    entered a productivity slump that continues
    today. Meanwhile, the U.S. won the Cold War, and
    since 1990 its stock markets soared from less
    than one-third to roughly one-half of global
    market cap.

  • The net wealth of U.S. households in real terms
    trebled to all-time records (45.9 trillion at
    last report). Debt has been shrinking as a share
    of overall national assets, which now stand at a
    level near 80 trillion.

Why did we experience such an economic
renaissance after the malaise of the 70s?
  • Because we had the

Perfect Economic Environment
Perfect Economic Environment
  • 1. Ronald Reagans Tax Cuts

2. Paul Volkers war on inflation and a two
decades long drop in interest rates
3. The Birth of the Next New Thing The
Information Age
Perfect Economic Environment
  • 4. The lowest Stock Market valuations in
  • decades which rose five times in
  • the next 20 years

5. The Evolution of the US Financial Markets
It also brought about significant imbalances in
the markets resulting in the Stock Market Bubble.
When coupled with 9/11, we should have seen
one of the worst recessions in five decades.
Why didnt we?
Because We had a Shock and Awe Arsenal of
Recession Fighting Weapons
a. George Bushs Tax Cuts
b. Alan Greenspans Aggressive Interest
Rate Cuts
c. The Stimulus of Deficit Spending
d. Massive Mortgage Refinancing
The Muddle Through Economy
  • - A long period of Below Trend Growth caused by a
    series of economic headwinds and the potential
    return of Stagflation

When we come to the next recession, the Recession
Fighting Arsenal is bare of Conventional Weapons
Headwind 1
a. No more tax cuts
b. Mortgage Refinancing is over
c. No more deficit spending
d. Only a few interest rate cut bullets left
A Secular Bear Market
Headwind 2
A period when overall market valuation falls
rather than rises.
If valuations were at 1982 levels, the SP 500
would be below 450 Over the Long Run, Value is
They all start with periods of high price to
earnings (P/E) ratios
Secular Bear Markets
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Consumer Spending Will Slow Down
Headwind 3
  • A recession will mean a falling stock market and
  • falling retirement accounts. Consumers,
    especially Boomers, will have to save more
  • for retirement.

b. Rising oil prices
c. Little Room for Increased Debt
Source Hoisington Investment Management Company
Source Northern Trust
d. We have tapped the home equity lines
e. Income Growth is Slowing
Source Bureau of Labor Statistics and Hoisington
Headwind 4
  • We are Approaching Stall Speed on the Jobs Arena

We need roughly 150,000 jobs per month to simply
meet the growth in population
a. Lack of corporate investment
b. Low average hours
c. International Labor Arbitrage
d. Lack of job growth means lack of consumer
spending growth
Headwind 5
  • Interest Rate Will Rise Over the Longer Terms

a. This will impact the housing market and home
b. Rising rates hurt consumers and corporate
Headwind 6
  • The Federal Reserve

The use of Unconventional Weapons
Will bring us to a falling dollar and our old
friend Stagflation
Headwinds 7 8
  • The Dollar and The Trade Deficit

Headwind 9
  • The Shakeout from the Information Age

Economy Innovation Growth Boom Shakeout Maturity Boom
Agricultural / Commerce -- -- -- -1809
Cotton / Textile 1762-1794 1794-1834 1834-1843 1843-1861
Railroad / Industrial 1831-1847 1847-1888 1888-1895 1895-1917
Mass Production 1882-1908 1908-1937 1937-1944 1944-1973
Information 1961-1981 1981-2007? 2007-2014? --
Why I am a Long Term Optimist