14 August 2013


One of the minor themes of these endeavors is that, as physical capital (which is the only version which is actually productive, let the flames begin) is assigned to "tech" sectors (as opposed to legacy uses, such as steel mills and other stable technologies), we find that payback periods shorten rapidly. The inverse, of course, is lower real return on such capital. The implication of this, of course, is that the interest rate which can be supported by the macro-economy must fall. Ultimately, fiduciary interest can only be paid out of increase in real production in an at least stable macro-economy. Otherwise, it's a zero sum game, and consumption must fall, further diminishing output and thus returns to said capital. A death spiral, so to speak.

But I've not found much hard (ish) data. Until now. This JP Morgan report, a puff piece labeled "For Institutional and professional investor Use Only | Not For retail use or Distribution" (who'd a thunk it?) makes the following observation (page 9):
Nominal U.S. equity returns of 8% equate to average annual real returns of 5.25%, after subtracting our core inflation estimate. While at first blush those real returns appear rich, they are below the historical long-term average of 6.2% dating back to 1850, a stretch that includes a mix of bull and bear markets, and takes in two world wars, the Great Depression and a secular bear market (see Exhibit 4B).

Now equity returns, as used by Morgan, aren't directly return on real investment, but on stock shares. But close enough for my purposes. The balance of the report is an ad for JP Morgan "services" so I'm not inclined to buy their doom and gloom. On the other hand, when paybacks shorten, the only way to counter that is to monopolize, and we see that in tech.

The Wiki quotes Greenspan:
Alan Greenspan testifying at the Financial Crisis Inquiry Commission in 2010 explained, "Whether it was a glut of excess intended saving, or a shortfall of investment intentions, the result was the same: a fall in global real long-term interest rates and their associated capitalization rates. Asset prices, particularly house prices, in nearly two dozen countries accordingly moved dramatically higher. U.S. house price gains were high by historical standards but no more than average compared to other countries." [my emphasis]

So, has the GPoM been soaked up? Or is it still out there?
In their July 2012 report Standard and Poors described the "fragile equilibrium that currently exists in the global corporate credit landscape." U.S. nonfinancial corporate sector NFCS firms continued to hoard a "record amount of cash" with large profitable investment-grade companies and technology and health care industries (with significant amounts of cash overseas), holding most of the wealth.

By January 2013, NFCS firms in Europe had over 1 trillion euros of cash on their balance sheets, a record high in nominal terms.

Yes, yes it is.

No comments: