The End Of The Age: 2022

It is interesting that more and more analysts are claiming that 2022 (or 2020) is the end of an “Age.”

The “Age” began in 1980.

Jonathan Levy, a professor of history at the University of Chicago, has published a book, “Ages of American Capitalism,” published by Random House in 2021.

Then there is the opinion piece written by Andy Kessler, in the Wall Street Journal.

In the August 8 piece, Mr. Kessler writes,

“The bull market started 40 years ago this week.”

“On August 12, 1982, the Dow-Jones Industrial Average bottomed at 776.91….”

“It peaked on January 4, 2022, at 36,800, a gain of 47 times, or a 9.6 percent annual rate, until inflation slew the super bull.”

I myself have written about the “age” of “credit inflation” and have been wondering whether or not that age has ended here in 2022.

My starting point is a little different from the others because I have looked back historically at the start of government economic policies. My conclusion is that the actual government strategy behind the policies that produced the next sixty years or so of “credit inflation” began in the Kennedy administration, policies that were expanded and executed in the Johnson administration and then incorporated into the Republican playbook by Richard Nixon.

The Kennedy administration built its economic policies around the foundation created by John Maynard Keynes.

The Johnson administration added the ideas behind “the Phillips Curve” to the program, and Nixon took over the whole package with the claim, “We are all Keynesians now!”

The “credit inflation” policy began in the Sixties, spread in the Seventies, and then served as the predominant government policy through until the 2020s.

The crucial point in all three pictures of this period is that the government policies executed during this time resulted in rising asset prices…in rising stock prices, in rising housing prices, in rising commodity prices, and so on.

The feeling of the current “end of the age” concern, follows the actions of the Federal Reserve during the spread of the Covid-19 pandemic, the small recession, and up through the explosion of inflation altered past relationships and resulted in an economy facing a disarray that must, some way, reorganize.

The government policy is going to have to be different now.

Credit inflation can no longer reign. The next economic expansion cannot be asset-led.

The “New” Age

Andy Kessler writes in his Wall Street Journal article,

“But, what now?”

“Like it or not, we’re in a new era.”

“Capital, as always, sloshes around the globe searching for its highest return.”

And, then he looks to the future.

“Of course, a new bull market could start anytime, but don’t even think about another big one driven by interest-rate declines until, well, interest rates go up enough.”

“Instead, the next bull will be fueled by earnings growth from whatever drives productivity next.”

“Forget last cycle’s winners, find new ones….”

And, Jonathan Levy?

“Much like all expansions since the 1980s, the post-2008 economic expansion that ended in 2020 was asset-led.”

“In another of the age’s jobless recoveries, after 2008 the owners of capital watched their liquid assets appreciate first–before the recovery of ordinary labor incomes.”

“This time, the asset class was not homes, but largely corporate equities much like the 1990s.”

“Conforming to the post-1980 trend, the rally was supported by the extension of debt.”

Stock buybacks and rising dividend levels, assisted by debt, supported the rising level of stock prices.

“An important cause of the surge in debt was the price of credit…The Federal Reserve, hoping to stoke recovery, engaged in multiple rounds of quantitative easy through 2012, and kept interest on credit low.”

“The Great Recession already appears to have only been a dress rehearsal for 2020.”

Mr. Levy emphasizes the fact that “this is not a capitalism that works in the interests of a large part of the American citizenry, who do not rely on appreciating assets for their incomes.”

The “new” age will see a transformation in the structure of investment.”

And Mr. Kessler ends up where Mr. Levy seems to be. We need to move away from and will move away from an asset-led recovery.

The answer is that the next “Age” needs to be based upon capital expansion, upon investment in capital, whether in physical or intellectual capital.

Mr. Kessler states it best.

The next bull market will be driven by earnings growth, but earnings growth driven by productivity.

It will be driven by things like:

“next-generation machine intelligence, geothermal energy, gene therapy, insta-vaccines, nuclear fusion, or, more likely, something completely out of left-field that starts out expensive, is dismissed by skeptics and then gets relentlessly cheaper over decades, creating wealth for society.”

My View

I take on a similar view.

The investment in capital, physical and intellectual, has not been the driving force behind the recent economic expansion. The environment of rising asset prices, driven by the Federal Reserve, has had little or no impact on the growth of labor productivity.

Especially during the 2010s, the growth of labor productivity has rested somewhere between zero and one percent.

The government’s economic policy was guiding stimulus money into asset prices.

Economic growth during the “teens” was just above 2.0 percent, the lowest level of post-World War II economic expansions.

The government’s economic policy was demand-driven, aiming to spur on consumer spending. And, it was successful, consumer spending rose steadily, and the economy grew steadily, although modestly.

Capital investment was mediocre, at best.

The approach now must be different.

The approach must focus on the supply side of the equation.

Look at all the areas that Mr. Kessler suggests might drive the future stock market.

All the areas Mr. Kessler mentions come from intellectual capital.

This is the future…the spread of information.

Pumping up aggregate demand is not going to do the job going forward.

The “new Age” must come from the supply side, it must be driven by the growth and spread of information.

More and more people are beginning to realize this fact. We must now get our public servants, our elected officials, to comprehend this vision of reality.