The Great Stagnation


Time to buy stocks…and sell gold?

Nah…Even if you think stocks will rise more and gold will fall more, it’s not a good idea. Because you don’t bet on what you think will happen. You bet on what has the best odds.

With more cash and credit from the Federal Reserve, further stock market gains may be likely. But they’re not guaranteed. And they’re not solid. You’re not buying good companies at good prices. You’re speculating on what the Fed will do… and what effect it will have.

If you bet on higher prices and win, you still have a problem: how to get out before everyone else.

And if you’re wrong…you could lose big.

Our proprietary analysis – done by Rob Marstrand, the chief investment strategist at our family office investment advisory service, Bonner & Partners Family Office – tells us that the S&P 500 would have to fall by 40% before it would even come near to representing good value.

That doesn’t mean stocks won’t go higher. It just means that you’re paying too much for what you get to make them a good long-term investment.

We prefer to pay a little and get a lot…than the other way around.

But some people think that no matter what you pay for stocks, they’ll eventually be worth it. Because things are getting better and better.

Tyler Cowen is a clever man. He wrote a book called The Great Stagnation. In it, he pointed out that Americans are not doing as well as their parents and grandparents – at least in terms of material progress.

His explanation? They had ‘picked the low-hanging fruit’ already. That made sense to us and inspired us to write a book explaining why that was so and what it meant (to be released whenever we get around to finishing it).

More specifically, it was the end of Cowen’s book that motivated us to write one of our own. We discovered that if economic analysis were a highway…we wouldn’t want to be on it at the same time as Cowen was headed home from work.

He described, correctly, how during the first half of the 20th century, investments in education, health, technology, infrastructure and so forth paid off. Test scores rose. People lived longer. Productivity and output increased. This was the low-hanging fruit he was talking about.

Then, in the second half of the 20th century…after about 1980…we continued to make investments in all these areas. But the rate of progress slowed. We still knew where we wanted to go. We just didn’t get far.

Students did no better than they had in 1960. Health care costs rose with little change to patient outcomes. GDP growth rates slowed…and wages reached their peak in the 1970s. (Familiar subjects in these pages.)

But in the last part of the book, he has a chapter titled ‘Can We Fix Things?’ There he runs right into a ditch. He seems to think that economic history is the product of conscious efforts by intelligent and well-meaning people.

But if that were so, what was wrong with people in the 1980s and 1990s? Weren’t they just as well meaning and intelligent as they were in the first half of the century?

Cowen makes a few earnest suggestions, such as we should be nice to each other, improve our public education system and ‘raise the social status of scientists’.

He even suggests that ‘a favorable trend’ is the ‘interest in science and engineering in India and China.’

In our copy of his book, from 2011, we find this annotation written in our own hand here: ‘Huh?’ Weren’t there far more scientists and engineers in the latter 20th century than in the early years? What was wrong with them?

Poor Cowen didn’t understand his own metaphor. Trying harder is not going put more low-hanging fruit on the limbs.

We’re going to have to reach higher…which is going to cost more…and reduce the marginal rate of return. In other words, the rate of progress is going to slow…regardless of how nice we are.

And here he comes again. Cowen wrote in the pages of The New York Times. The Times publishes Paul Krugman and Thomas L. Friedman; it never seems to run out of ways we can fix things. From Cowen:

‘The nation’s high school graduation rate has risen – to 78% in 2010, the Education Department says in its most recent estimate. That’s obviously still not where it should be, but it’s the highest figure since 1974.’

What? America’s real growth spurt occurred near the end of the 19th century… when we had far, far fewer high school graduates. Then the number and percentage of graduates increased until 1974…just when the US went into a decline. C’mon! Put two and two together.
‘More high school grads seem to lead to slower growth, not faster growth.

When it comes to education, an even greater productivity gain may be on the way. This month, for instance, the Georgia Institute of Technology announced a new online master’s degree in computer science, for a price of no more than $7,000.’

Okay…we’ll give him that. Education is often not productive. Better that it is cheap. Less waste.

‘The growth rate in health care costs has been slowing for the last four years. In some years, in fact, it’s been no higher than the growth rate of the economy as a whole.’

Here again. Less is more. He’s right. But stabilizing health care costs at a level where they are wasteful is not a sign of progress. It is a sign of stagnation.

‘We appear to be at the start of a new era of cheap energy. Through advances in both oil and natural gas production, the United States is again becoming a leading exporter of fossil fuels.’

Many of the nation’s economic troubles, like slow productivity and income growth, began about the same time that America’s first age of cheap energy came to a sudden end, in the early 1970s.

Here Cowen is onto something. Probably the most important low-hanging fruit was cheap fossil fuel. It could be used to produce more goods and services.

Trouble is, those advances are already fully exploited in America. Cheap fuel may allow them to remain marginally productive. It doesn’t put more low-hanging fruit on the vine. The low-hanging fruit is in the emerging world – which still uses a fraction of the energy per person that we use in America.

This is all explained in our as yet still unwritten new book!

While the populations of countries like the US are aging, the number of innovative young people worldwide has never been higher. Countries like China, India, Brazil and Russia, despite recent slowdowns in growth, still are making progress in improving their educational systems and scientific networks.

Good for them.

If we could only short Cowen’s stock! He thinks progress comes from ‘innovative young people’‘scientists’…and ‘high school graduates’.

He should read his own writing:

‘If you were born a genius in Shanghai in 1960, for example, your chances of making much contribution to the larger world were small, because China was largely isolated back then…’

Yes, he’s right. Circumstances change everything. Had he been born in the 19th century, Cowen might have contributed manfully to economic progress, bending his back to build a railroad or hammering steel at a village forge. But a strong back is a terrible thing to waste.

Now he’s getting paid to write airy editorials for The New York Times.

There are always smart, potentially innovative people around. But they don’t always have a hammer in their hands or low-hanging fruit within their grasp.

The availability of cheap fuel, the internal combustion engine…a fairly free market… and a sufficient level of technology and infrastructure to benefit from these things made possible a great spurt of growth in the US in the late 19th and early 20th centuries. Now that spurt seems to be over. Again, from Cowen:

‘The first decade of this century was largely a lost one, economically speaking, for the average American household. And in the beginning of this decade, median household income has actually dropped, during a time of ostensible economic recovery. Yet the longer-run picture, finally, can be given a partly optimistic gloss.’

Yeah. You can put an optimistic gloss on it. Or flat, white paint. But as we’ll see tomorrow, underneath, the wood is still rotten.


Bill Bonner
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+
From the Archives…

How a Slowing Chinese Economy is About to Hand Australia a Pay-Cut
24-05-13 – Greg Canavan

Your Forefathers’ Pain Can Be Your Gain
23-05-13 – Vern Gowdie

The Fatal Flaw at the Heart of Modern Economics
22-05-13 ­– Bill Bonner

The Warning Signs for Australia’s Economy
21-05-13 – Greg Canavan

A Simple Interpretation on Gold for Times of Monetary Madness
20-05-13 – Greg Canavan

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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5 Comments on "The Great Stagnation"

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3 years 4 months ago

Don Boudreaux never tires of reminding how stagnation is not only a bad myth,the trend is not showing any signs of turning down -the Ascent of Man is firmly in place.Cheap oil is a red herring.The real reason is economic freedom.Clearly with china and other formerly autarkic nations joining the human resource pool,it has only strengthened.Cowen and Bonner ought to hang out with the ‘singularity’ believers.They might not buy the idea of singularity,but the advances in science and the general life of mankind is not even close to slowing down.

truth and integrity
truth and integrity
3 years 4 months ago
Reminds me of the Peter Principle where people are promoted to their level of incompetence; most prolific in finance, economics, law, politics, bureaucracies and banksters. There is little advance in science when we consider the combustion engine of my 1968 volkswagon had a 50% better fuel economy than any car on the road today! Education is in decline such that children at university have difficulty communicating today; inability to read, write or do arithmetic. Each generation has less ability to use brain power than the previous. Scientists are all in dispute because of social funding. The great thinkers from the… Read more »
3 years 4 months ago

High fuel use air cargo transport at the US’s largest gateway showing no signs of improvement despite the “investors” bidding up house prices:

3 years 4 months ago
@pravin, scientists are playing around with natural systems they admit in offline huddles that they have an insignificant level of understanding in a systemic sense. Hence they have zero understanding of the consequences of their bull-in-a-China chop behaviours. Pulling out short term advances with consequential existential threats embedded in them from the get go is not evidence in support of the misnomer called the singularity. There is another singularity identified and evidenced in physics, it is the extreme one that hides away from the poles. Give the latter a thought and google the claims made that IQ has actually… Read more »
3 years 4 months ago

Looking for more evidence of the great stagnation then go further than the corporate patent trolls and their apologists in congress, the NWO executives, and the sycophantic judiciaries…

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