Wednesday, March 31, 2010

Paulson Adviser Warns of Shifting Bubble

Former UCLA Anderson Forecast economist Chris Thornberg, founder of Beacon Economics and who sits on the advisory board of the John Paulson hedge funds, has come out with a forecast that is significantly in line with our own forecasts here at EPJ.

WSJ provides details of a new Beacon Economics report:
The firm’s stance is that the $787 billion federal stimulus package and the Federal Reserve’s near-zero interest rates have propped up the economy but will prove unsustainable and are actually exacerbating some of the imbalances that led to the recession. “The nation seems to be trading in its private bubble for a public one, swapping one set of unsustainable economic drivers for another,” the report said...

The gist is this: The stimulus and other such measures have prevented a shedding of debts that needs to happen before the economy can return to sustainable growth. The saving rate has grown from its record lows, but has been propped up by tax cuts that have exacerbated the mountain of debt at all levels of government. Property values have fallen, but accounting changes have prevented banks from acknowledging a lot of underwater loans. Even the roaring stock market is artificial, in the firm’s view.

“The rally in the equity markets seems to be occurring despite the fact that overall asset prices still seem too high given our long-run potential for growth. And the bounce in the asset markets overlooks the fact that overall the national deleveraging that needs to occur to shed off record levels of debt has yet to really get underway,” the report said.
This is pretty much in lockstep with our analysis that the "recovery" has been a manipulated recovery, and given the Fed's near zero money growth (M2), the capital structure as it currently exists can not be supporetd by the current level of savings.

As for the equity market strength, we concur that it appears to be an anomaly, and do not believe it can be sustained.

Beacon sees to possibilities from here:
“The best-case scenario is that the Federal Reserve and the Obama administration manage to draw down the public bubble slowly, a possibility that private bubbles typically don’t share,” the report says.

The downside? “The worst-case scenario is that the bubble pops rapidly, putting the economy squarely back into another recession — the double dip."
In our view, it's down to the latter. Soft landings are always tough, and as far as EPJ is concerned we are much too far down the road for anything other than a second dip--led on the downside by the stock market.


  1. Just remember that the stock market dip will have to be big enough to wipe out enough 401k's so that the people will run to the government when the government publicly proposes to manage their 401k's.

  2. Thornberg is a "one-trick pony" who relies on his supposed prediction of the real estate bubble and a flood of charts, graphs and statistics to overwhelm his audiances. Most recently he has distinguished himself by joining in the government-led criticism of the only report suggesting california's AB32 (global warming legislation) will cause higher unemployment and slower economic growth. Which in fact seems to be happening - yet Thornberg and others critque a Small Business Council report for supposed poor methodology and biased statistics. Guess who funded the 3 or 4 other reports that support AB32...various state-funded organizations. But Thornberg is silent on these. Are you sure you want this charlatan on your side?

  3. Ouch. So, the government may actually want a painful "double" dip.

    (Did the first dip ever end? Can you have a double dip that just points straight down?)