By Deron McCoy, CFA®, CFP®, CAIA, AIF®, Chief Investment Officer
Happy Birthday America! Happy Birthday Cycle!
On July 1st, the current business cycle turned 10 years old. That’s a long time and in fact breaks the record for the longest economic expansion ever by eclipsing the previous record set during the 1990s1. No doubt a litany of articles will be written about this milestone, but while most publications will likely focus on the negatives in the aftermath of the Great Recession, we would like to focus on the positives and the true underlying reason why this expansion has endured so long—you!
The “Big Government Stimulus” Fallacy
Hopefully the history books won’t try to credit big government for the expansion. If they do, however, they may praise the early efforts of the Troubled Asset Relief Program (TARP bailout) or Fed Chair Ben Bernanke and his use of exotic zero interest rate (ZIRP) and Quantitative Easing (QE) monetary policies. But pay close attention to how the writers artfully avoid drawing any overseas comparisons. Think about it: if big government action and their acronyms saved the day and provided the groundwork for our expansion, shouldn’t we be seeing epic growth everywhere around the developed world?
Let’s first look more closely at monetary policy. While the U.S. flirted with ZIRP, interest rate policy overseas went even further – actually moving rates into negative territory! Now 10 years later, overseas debt floods the marketplace with over $11 trillion worth of bonds sporting a negative yield to maturity2 (yes, you must in fact PAY Switzerland, Germany, and Japan for the privilege of loaning them your money for 10 years!). And QE? Again, countries overseas took the idea and went one step further. Like the U.S., the Bank of Japan (BOJ) bought government bonds in their QE program but the BOJ also purchased Exchange-Traded Funds (ETFs) and now owns 80% of all outstanding ETFs in their country and is the top-10 shareholder in 40% of Japanese public companies3.
The cumulative results of these big government initiatives? Europe stands on the cusp of their third recession in the last 10 years, and Japan has had 11 quarters of negative growth this decade—an average of more than one per year4!
Different Scoreboard – Same Results
So, if big government deserves praise for this prolonged expansion but we can’t keep score via GDP, perhaps we can more accurately keep score via stock prices. From the market bottom in March 2009, French equities have roughly doubled, Japan is up around 170% and Germany is up a little over 200% leading all large overseas developed countries. Certainly, these are reasonable returns; but they are nowhere near the American market. Over the same period, U.S. Large Cap stocks (S&P 500®) gained more than 300% (plus dividends) before slightly pulling back here in Q25.
And what if we don’t confine ourselves to monetary policy or to just developed nations? If you want to analyze Emerging Markets and centrally planned economies, you have to look to China—the world’s second largest economy. Yet once again, the U.S. comes out miles ahead as the Shanghai stock index is up just 40% since the depths of the Great Recession6.
Rethinking The Narrative
As financial analysts we value facts. If the overseas experiments don’t corroborate the original thesis, then we must revisit the underlying premise. Maybe our record expansion wasn’t because of big government initiatives. Maybe, in fact, it was despite them. Perhaps it was American ingenuity, grit and perseverance that saved us…the spirit of U.S. citizens and corporations to unearth problems and quickly solve them. Maybe, dare we say it, it’s our capitalistic profit motive that has spawned a work ethic and a dynamic economy that can morph and shift with the times. Did stock prices go up in this expansion because of QE? No. Stock prices went up because corporate profits went up—plain and simple.
Consider the technology innovation and dynamism of U.S. corporations over the last decade—you can find great examples in every sector of the economy.
Consumer Goods and Services: This one is easy and it’s not just about sharing pictures. Over this expansion, we have witnessed the launch of the iPad and maturity of the smartphone, as mobile technology has evolved from limited 3G to the cusp of life changing 5G. Ten years ago, the App Store was barely a year old. Today, it has changed and enriched our lives in too many ways to list. Just grab your phone and think about all the apps you’ve come to rely on. When planning a vacation, we now browse beach resorts on Instagram, book flights on Kayak, rent a house on Airbnb, Venmo friends to split costs and make dinner reservations on OpenTable. We post pictures on Facebook for grandparents, Facetime kids to congratulate them on their baseball that we watched on Game Changer, use Ring to answer the doorbell from half a world away, and rely on Uber to get around or deliver food to us. And now, most activities can be accomplished simply by speaking into a hockey puck-like personal assistant!
Energy: In case you missed it, the United States is now energy independent. U.S. scientists and entrepreneurs not only developed the method to frack an oil well, but then spent the next 10 years perfecting it. Originally, it took nearly two and a half months to frack a well; now it takes just 10 days. As a result, we’ve gone from the world’s biggest oil importer to its largest exporter – with Texas now pumping more oil than Iraq or Iran7. In 10 years, the Bakken and Eagle Ford went from pumping 1.1 mil to 5.2 mil barrels a day, and future estimates continue to climb8.
Manufacturing: The current rhetoric is that emerging markets have stolen all our manufacturing jobs as greedy corporate CEOs have outsourced everything overseas. Yet the undeniable data shows that U.S. manufacturing output is at an all-time high! And a recent study by Deutsche Bank finds that the U.S. is more immune than most other countries to the risk of automation9. Why? We provide manufacturing jobs that are higher up the food chain. Need a tool? We can now print one using 3D printing technology. The jobs that we have outsourced are the lower skilled tasks that will eventually be automated away.
Healthcare: The breakthroughs in this sector have been nothing short of amazing. Robots can now perform surgery (but that’s already old news). To cite just a few breakthroughs on an exceedingly long list; we can now modify someone’s DNA to treat a disease, send signals to a patient’s retina or brain, and create human body parts using 3D printers!
Climate: Well, maybe this is the one area where big government can do good. While there’s certainly a great deal more work to do, it’s good to know that forty-nine years after the birth of the EPA in 1970, Aggregate Emissions (of the six common pollutants) are down 73% since the birth of the EPA in 1970. Although CO2 emissions are up 25% over the same time period—they are down a couple of percentage points in the last 10-years, even as GDP, population, and vehicle-miles traveled are all up considerably10. How? Again, perhaps we can point to capitalism’s helping hand, as clean transportation has evolved from the dreaded EV1 to the much sought-after clean rides from Tesla, Bird, and Lime.
The Next 10 Years?
How we live and how we work will inevitably evolve – from resource efficiency solutions to smart homes and the continued extension of Internet connectivity into physical devices and everyday objects (IoT). How we travel (e.g., self-driving cars) and where we travel (e.g., space) are likely to change. Biotech, nanotech and fintech all will change. And this list likely doesn’t even touch on your specialty! But that’s the ultimate point of this article—the litany of American capitalistic ideas in the next decade is bound solely by the limits of your collective imaginations.
This article will seem very dated by the time 2029 comes around and there is no way I’m going to go on record to opine on what exactly the future will hold. But I do believe we will likely have a recession—maybe two. And when it occurs, it won’t be big government that saves us. It will be you. It will be the dynamism of capitalism and the next generation of scientists, doctors, engineers, and entrepreneurs that will seek out problems and fix them. And as we lap into summer and will soon celebrate our nation’s birthday, we’ll conclude by saying ‘congratulations’ to the recent graduates. We look forward to your ingenuity, energy, and profit-seeking endeavors over the next 10 years! Happy Independence Day everyone!!
7 AEI (https://www.aei.org/publication/map-chart-of-the-day-the-texas-miracle/)
8 EIA (https://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf)
9 Deutsche Bank: https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000469843/Automation_%E2%80%93_not_a_job_killer.pdf
10 EPA: www.epa.gov