Friday, September 28, 2018

Strong Towns: The Growth Ponzi Scheme

Just reading an article on Strong Towns called "A Texas Sized Pavement Problem":

A PAC called Collin County on the Move is supporting a $750 million bond measure to expand roads in Collin County. $600 million of it would go to new, untolled freeways.
Collin County is the northeastern Dallas suburbs, population almost a million. One key observation in the article is that the county has a pretty low ratio of private real estate wealth to roads.

Along the lines of Granola Shotgun (which we often link), Strong Towns calls the Collin County development pattern a "Growth Ponzi Scheme":
We experience a modest, short-term illusion of wealth in exchange for enormous, long-term liabilities.
That should be the U.S. motto, not E Pluribus Unum. The enormous, long-term liabilities from the boomers' lifetimes are coming due now: Social Security, Medicare, Medicaid, and state/local pension obligations.

We seem to be surfing the crest of the tidal wave, but in retrospect we should have remembered that Charles Kirkpatrick already told us in 1993 that the falling interest rates post-"GFC" would cause an equity market bubble. (Calling 2008 the GFC is kind of like calling WWI the "Great War" prior to WWII.)

He said that, "declining interest rates force yield-conscious investors into alternative investments of lesser quality in order to maintain yield. Since stocks are the most risky and least quality investments, they become the final alternative, especially when their price continues to appreciate as a result of increasing cash flow into the stock market"
So how long does that part of the cycle last? Nothing lasts forever. By Kirkpatrick 's logic, one key to ending the bubble cycle would be a rise in interest rates. I have been thinking about this recently - if the bull market in bonds was ever going to end, it would end when net new borrowing by the federal government was exceeding $1 trillion annually. If the market does not choke on that supply, resulting in higher rates, then the bond market is bulletproof. But we are already seeing a steadily rising ten year yield - the low in ten year rates was two years ago, and they never went meaningfully below the low six years ago.

Some other interesting signs are the slowdown in the real estate market and rising short term interest rates. Whether you think that the Federal Reserve controls the short term interest rate or not (I am a skeptic), it certainly does rise at the end of the business cycle.

I also think that the Tesla crackup is a very interesting sign. Theranos was a mere $10 billion fraud - this could be a $60 billion fraud unwinding, complete with a world's first "fake LBO" by the CEO to squeeze the shorts. Why didn't he decide to squeeze the shorts with good results from operations, or by raising equity to address the deteriorating balance sheet and upcoming debt maturities?

Be sure to read John Hussman's tweetstorm this week.

1 comment:

Midwest Pete said...

If you've not seen it, TheReaderApp makes a nice way to read & share tweetstorms.


Ironically, if you pay for a subscription at TheReaderApp you can save tweets permanently (well, as permanently as TheReaderApp is permanent), something that Twitter itself does not guarantee, should you cross the tender sensibilities of their social activitistas.