Читать книгу The Next Revolution in our Credit-Driven Economy - Schulte Paul - Страница 9

The genesis of this book lies in a simple question that I put to more than a thousand of the M.B.A. students I taught over the past 16 years across five continents, many of whom had degrees in economics from New York University, the University of Chicago, Harvard, Columbia, Berkeley, or the London School of Economics. They would always get it wrong.

I would draw a simple supply-and-demand curve on the chalk board and ask students a simple question: What causes a change in demand for goods and services? They would say it was changes in tastes, technology, demographics, income, substituted goods, and so on. These are the usual suspects peppered throughout economics books. They offer a partial explanation, but something far more fundamental is missing.

Yet when I would ask them how they buy just about anything (how they increase demand in their own lives), almost all of them would say they use credit – credit cards, layaway plans, mortgages, student loans, small business loans, vendor financing, loan sharks, and so on. How on earth can we all look at a supply-and-demand curve and leave out the one thing that seems to be the underlying determinant of demand – the availability of credit? The answer is deceptively simple.

It seems that credit is the lifeblood of the economic body, yet we all just assume it is there and will always be there. Why? Because until a few years ago, it was always there. And it has been there for the past 70 years. Credit is the oxygen of the economy, yet the study of economics has repeatedly left it out of the equation. Look at the first five chapters of any economics book and you might find a few scattered paragraphs on credit, but typically that is it. Incredible!

Think about it. From cradle to grave, our decisions are based on how much credit we can manage to scrounge up. The kind of christening or bar mitzvah we can have depends on it. When we can own our first home depends on it. The scale and timing of our wedding depends on it. It is vital to the kind of education we can receive. How we retire and how we are buried depends on it. The quality of our health care depends on it. All of our major decisions about life revolve around the availability of credit. And yet none of these very bright students – many of them the cream of the crop, and some of them currently serving as money managers and policymakers – recognized that credit is a critical determinant of demand.

I will concede that this is a reasonable mistake. Since the end of World War II in 1945, the Western world has had positive credit growth in just about every year in and out for 70 years – three generations! These students would need to go back in time to the era of their great-grandparents to find a time when credit shrank for a significant period of time. This was during the Great Depression. The reason these students did not realize that credit is a vital determinant of demand is because it has just been there all their lives, like oxygen. Their parents and grandparents depended on it.

Not anymore. In the past few years, we have seen a compression in credit (let's call it a depression in credit) for the first time since the 1930s. What was assumed to be there as a given by a generation of the elite future leaders of our time is simply gone, vanished. As we will see, the warning signs were right there in front of us, just as they were in front of us during the Asian crisis in 1997. Indeed, in the twilight of 2014, we see credit growth for the entire Euro-zone dip into negative territory for the second time in four years.

U.S. credit growth is scrimping along in the single digits after going negative for several quarters from 2009 through 2013. It has only started to take off a little bit since mid-2014. The buoyancy of these numbers is belied by the large amount of credit being thrown at the student loan market (to retrain adults or to keep adults out of the job market?) and the mortgage market (through the FHA, which is blithely giving 95 percent mortgages to questionable buyers) by implicitly guaranteed government credit.

This book is about the importance of credit and the way it drives the prices of just about everything that investors touch: equities, bonds, currencies, real estate. The evidence that shows the connection between consumption and credit during a cycle is obvious and will be laid out clearly and persuasively. A quite reasonable starting point for investment strategy – or even portfolio construction for a high-net-worth individual – should begin with grounded knowledge of the credit cycle for a country.

Equity valuations, house prices, bond prices, and currency values are derived from the credit cycle of a country. Income, inflation, capital formation, and other economic data sets come from credit, not the other way around. Looking at economics without regard to credit is a flawed experiment. The science of economics did not predict in any way, shape, or form the crisis of 2008. Furthermore, it claimed that the crisis of 2008 could not happen. So much for the modern school of economics! Something else must now be tried.

As an investment strategist and bank analyst for more than two decades, I have met with thousands of fund managers globally, and I contest that there are only a handful who understand the credit cycle and its implications. These are often current or former bank analysts or CIOs who have a mixed mandate for both equity and credit. Oddly, bank analysts, for instance, are seen as “separate” from corporate analysts in money management firms and are seldom utilized in asset allocation decisions. This is an astounding phenomenon. Indeed, the bank analysts should form the foundation of the portfolio allocation. Too often their work on credit and liquidity is left alone in the “too difficult” pile, and many corporate analysts are left with examination of such secondary and derivative trivialities as economic variables, revenues, costs, and price-to-earnings ratios (P/Es). These come after liquidity and solvency – not before! If an investment firm can have only one industry analyst, it should be a bank analyst. The rest is superfluous in comparison.

This book will show that trends in credit have an overwhelmingly powerful effect not only on stock prices but also on asset prices (houses and buildings) as well as the price of currency. In other words, when the credit cycle is on the upswing, the prices of equities, real estate, and currencies tend to appreciate at the same time. They are just as driven by these movements in credit as the moon is driven to rotate around the earth. Economic data pour forth from credit dynamics.

The phenomenon we see today is one where new forms of technologies are being created to allocate capital more efficiently. It is that simple. Banks have shown themselves to be out of touch when it comes to the allocation of capital and the management of risk. So, in a world where the cost of capital is zero, firms are attracted like a magnet to inefficient organizations that cannot change with the times and that mismanage their own core businesses. Furthermore, these institutions are so big that they are arguably incapable of change. Banking is a glaring example, although these titanic changes are occurring in education, retail, and many other industries.

While this disruption is happening, there is a great deal of debt from the last cycle that still needs to be warehoused until it matures. Central banks are accommodating this deleveraging (think of deleveraging as shrinkage) of credit by allowing loans that can no longer be held by banks to drop onto their balance sheets. This is contractionary. So, people who say that central banks are printing money are deluded. It is simply not true. In fact, the opposite is the case.

In similar fashion, when the curtain comes down on the credit cycle, equities, real estate, and currencies almost always tumble at the same time. The United States is closer to the end of the cycle, while Europe has a long, long way to go. This is why Euroland growth is so anemic. This book will dissect the various stages of credit trends and show how various asset classes react at these various stages. We will provide a kind of timetable for getting in and out.

These trends in credit have a particularly important effect on the prices of equities. We will see how at certain stages in the credit cycle within a country, equity prices tend to accelerate to the upside and form bubbles at precise moments. We will show that this is a repeatable phenomenon and, therefore, relevant as a powerful starting point in forming a new way of thinking about markets. And we will do this without any equations.

Conversely, the trends in credit will also tell us when to “get out of Dodge” as bubble conditions become unsustainable. There is a consistent and easy to measure marker for all countries in the past two decades that is a highly accurate indicator of a bubble about to pop. Without an understanding of the credit cycle, it is my strong belief that equity investors will consign themselves to a fool's errand of a guessing game.

The second part of this book is all about the new financial architecture. It is not just coming from Silicon Valley but also from London, Frankfurt, Tokyo, Beijing, and throughout Scandinavia. It is truly a global phenomenon in which countries are escaping from the grasp of a banking system that they all too often see as an old-boy's club of poorly managed, overpaid, and incompetent bankers who do not have their customers' interests at heart and are poor at managing risk.

Furthermore, astounding technological advances have been achieved in the past four years, allowing powerful applications to be implemented for the first time. Wide-reaching and powerful programs developed by PayPal, for instance, have migrated to companies like Palantir and are now being used for mass solutions for storage, security, research, applications, and computation. In short, capacity is expanding now at a 2× rate, as predicted by Moore's Law. It is actually happening at a rate that is dozens of times faster.

Companies like Alibaba, Palantir, Intuit, Mint, Indinero, and Tencent, among dozens of others, are at the forefront of new forms of funding, analysis, research, credit checking, trading, and lending that are causing banks deep anxiety. These same banks, however, are so big and have so many entrenched interests to protect that they seem institutionally paralyzed from acting. The resulting tug-of-war is a fascinating phenomenon; in short periods of time, new industries are developing that can offer efficient and inexpensive financial services in a timely, legal, and fair way. These same institutions are also gathering around them the younger people who are disenchanted by institutions they perceive as engaging in criminal activity.

This book asks the question that was posed to me in discussions with Fred Feldkamp while he reviewed the final draft of this book. Fred is probably one of the best financial lawyers I have met and author of Financial Stability: Fraud, Confidence, and the Wealth of Nations.1 Fred challenged me as follows: Does the new world of algorithmic “bots” of financial technology end the ability of banks to extract artificially high spreads forever? Will the world will be better for it? Does the discussion of the toxicity of high LDRs in Part One of this book reveal just how much we let governements and universal investment bankers dupe us into losing trillions of dollars by generating what was, in hindsight, a system that thrived on picking off investors and businessmen, seriatim, by pretending there was a magical myth to the business of banking? We need to ask ourselves this question and whether regulators will allow a new form of finance to thrive and bloom in the face of global universal bankers who are seeing their worlds being swept away – gone with the wind.

Lastly, too much of the intellectual framework of modern finance has been shown up as either insufficient or out of touch with the realities of a broken credit system. I tell my students to explain their ideas as if they are talking to their grandmothers. I do the same when I teach. This book is about credit for grandmothers. We keep it simple. It is a simple “how to invest in multiple asset classes using the credit cycle” and is a useful guide for those who are in the business of political risk analysis. And we can get a front row seat in this technological slugfest as new and exciting upstart companies compete head-to-head with monolithic financial institutions, a few of which may just collapse under their own weight.

Paul Schulte

November 2014