Correcting Some Misconceptions About A New Secular Bull Market
I recently penned a post discussing the idea of a “new secular bull market,” which, not surprisingly, garnered a good bit of push back from the “always bullish crowd.”
However, while the thesis of a new secular bull market is interesting, it is based on some flawed assumptions on interest rates, valuations and time frames.
The first assumption was that interest rates have now begun a secular shift higher based simply on the premise that rates are so low they must now go up.
While the chart clearly shows that interest rates have hit the same levels as last seen in 1946, the view rates will rise strongly from current levels assumes that the same economic drivers exist today. In 1946, the United States had just exited WWII which left Europe and Japan in ruins. The United States became the manufacturing center of the industrialized world as we assisted in the rebuilding of Germany, Britain, France and Japan. That is no longer the case today as much of our industrial manufacturing has been outsourced to other countries for lower costs, technology has replaced jobs by increasing productivity, and demographic trends now weigh against stronger economic growth rates.
Importantly, interest rates are a reflection of actual economic growth, rising pricing power for goods and services, and wage growth across the bottom 80% of employees. The chart below shows interest rates overlaid against the annual changes in those factors.
While there are many “hopes” currently economic growth will pick up in 2017, just as there have been in every year since the financial crisis, the structural and demographic headwinds remain present. With the consumer heavily indebted, wage growth muted and global economies running at very weak rates, the ongoing demand for lower prices on goods and services will require continued wage suppression through “job exportation” and lower financing costs to maintain profitability. Therefore, there is very little room for rate increases before an “economic dampening” occurs which will keep a lid on interest rates in the future.
This has been the ongoing problem for Japan which has seen interest rates stuck at low levels for the last two decades.
While there are many arguments that we are not Japan, with which I agree, there are many similarities from an economic perspective.