Washington, DC -- (ReleaseWire) -- 06/25/2015 --John Maynard Keynes famously wrote, "The long run is a misleading guide to current affairs. In the long run we're all dead." Unfortunately, the markets, the government, and a large segment of our population seem to have adopted this as a personal philosophy, but the long run is approaching at an increasing pace. We can see this in two trends that combine to imply real problems for the future. The first is an economy where cost of living is rising even as the government says inflation is holding steady, where wages are stagnant, and Americans are having to work more and more hours just to maintain a steady income. The second is the rising generation of Americans, the so-called Millennial cohort, highly educated but notoriously self-absorbed. Following the recession of 2008, these young people are behaving less like the Greatest Generation that grew up during the Great Depression and became adults that understood the value of hard work, and more like the person who, after seeing a tornado take out their neighborhood, decides the first thing to do is snap a selfie.
For the first trend, an economy that still feels like a recession to many of us, there are many indicators. A recent New York Times article points out that food banks are experiencing increased demand. New Yorkers now miss about one hundred million meals each year and 37 percent of the food pantries say they have had to turn away needy people because they ran out of food. 1.4 million residents of New York State rely on food banks, and according to one New York City charity, 2.6 million New Yorkers have trouble affording food, throughout the city. The Times is only talking about New York, but millions of Americans are still struggling to make ends meet, despite the recovery that the government and media insists we're in the midst of.
How many of those turning to food banks must be Millennials? This is a generation that never knew a world without the Internet, weren't yet adults on 9/11, and grew up during a period of peak prosperity in the United States. They get a bad rap, and not without some justification. The media, employers, parents, gripe that they come off as entitled, narcissistic, idealistic, lazy, unfocused and spineless, to name a few of the blanket stereotypes floating around. They are watching Netflix on their iPads in their parents' basements. If they do have jobs, they get under the skin of their Baby Boomer colleagues. It seems they might be the target audience for Keynes' assertion about the value of the long run.
Here's the thing, though. We raised them, so they must reflect us in at least some way. We left them an economic climate that is far more difficult to succeed in than for the generation that preceded them at the same age. Going to college or graduating is no guarantee of entrance to the U.S. middle class, and all the trappings that came with that, like a steady job that turns into a career, which inevitably means you can buy a home. We are in an America now where our young have a very difficult future ahead of them.
The Congressional Budget Office released a report last week that speaks directly to the long term. According to the report, the outlook for the budget will steadily worsen over the long term, because our national debt is about $18 trillion, roughly the same as our GDP. And that's not even our biggest liability. It's the entitlements: Social Security, Medicare, Medicaid, military and government pensions. The public believes these are guaranteed by the government, but that's not true in a contractual sense. That guarantee relies more on the promises of the politicians we elected, and any politician we elect now or in the future will have to deal with these past promises for these programs and manage the consequences in terms of taxess and spending and borrowing.
What the CBO's projections show is a substantial imbalance in the federal budget over many years, mainly because of an aging population and rising health care costs. Even in the short term, revenues will be falling. The only previous time in US history they've seen this is the final year of WWII and the year following that. In order to return US debt to 38% of GDP, we will have to either increase revenues by 14% or reduce spending by 13%, and we can't seem to do either with the politicians we have in office. So, an aging population, government too big and too expansive, and increasing welfare spending, which we can't seem to get under control because our economy is so weak: the sheer scale of economic backwardness shown in this report suggests that we're in a time of economic trouble, and it isn't in the future. It's the present, it's the short term.
In a press conference last week, Janet Yellen allowed that the Fed should perhaps have raised interest rates more aggressively during the 2004-6 cycle, but refused to follow the analogy to today's situation. Afterwards, Rick Santelli from CNBC went on a rant saying that the people running the central bank aren't really up to the challenge. He pointed out that the market was clearly not preparing for tightening, much less potentially two tightenings by the end of the year.
Santelli is right. The market just isn't responding. Perhaps it's because the average trader and money manager is thirty years old, and just has no experience of what raising rates actually means. It seems likely, though, that the market and the individuals that make it up are just expecting to live in Janet Yellen's basement and play on their iPads forever. There's a collective assumption that the Fed's got everyone's back, and even if they raise rates it won't bring pain to the bond or stock markets. That assumption is wrong. The long run starts now, and we need to understand that in order to manage our portfolios and protect ourselves against what comes next.
All data sourced through Bloomberg
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