April 2019
Most rock bands had random handles (Turtles, Zombies), but the 1960s British band Ten Years After was thoughtfully named to honor the related anniversary of the start of Elvis Presley’s career. In the case of naming this newsletter, Hamilton Point marks a decade since the stock market crash of 2008-2009. In this note, we assess the last ten years with commentary and comparative statistics about our largest banks, American workers and America in general. Hint: The subheadings are from the counter-culture 1971 Ten Years After song, “I’d Love to Change the World.”
Bees Make Honey, Who Needs Money, Monopoly
When asked if we think the magnitude of the 2008-2009 market correction will soon be matched, we answer with an unequivocal “probably not.” Our rationale is that we believe a huge reason for the market freefall ten years ago was not because of the real estate correction per se, but more importantly, because we completely lost our banking system at the same time. Using an anatomical analogy you might say we had failure in one kidney (a real estate bubble popped), but our nervous system (banking system) shut down in tandem. The world learned that markets cannot function when major banks are failing.
While we disagree with some of the fiscal and monetary methods used to foster recovery—and the complete lack of personal responsibility taken by individual regulators or the regulated—the fact is that our “bank nervous system” is indeed strong again and unlikely to fail when we next face a pullback. It is indefensible, however, that we solved our “too big to fail bank problem” by allowing the top five banks to get even bigger. As shown in Table 1, banks generally have far more capital cushion now and are experiencing few losses.
Table 1
| American Banks1 |
2008 |
2018 |
| Bank Equity as % of Assets |
5.9% |
12.8% |
| Non-Performing Loans as % of Assets |
1.3% |
0.7% |
| Top Five Bank Assets2 ($t) |
$7.5 |
$9.3 |
Population Keeps On Breeding
As shown in Table 2, America added over 23 million people to our census in the last ten years and we now have 150 million civilians working—the highest figure in our history. Some may consider population growth a given, but some major countries like Japan and Spain are actually shrinking and therefore face major structural financial problems. Notably, our demographic trends for the coming decades are not as positive as in the past, but may improve with sensible immigration policies (an alien thought?). As will be discussed later, all is not necessarily rosy as the nation’s federal debt obligations divided by each civilian worker has doubled and is now $105,000 per head.
Table 2
| Americans3 |
2008 |
2018 |
| Population (th) |
305,827 |
328,393 |
| Civilians Working (th) |
134,857 |
150,275 |
| Unemployment Rate |
7.3% |
3.9% |
| National Debt Per Civilians Working4 |
$47,255 |
$105,000 |
Nation Bleeding, Still More Feeding Economy
As of the 10-year anniversary of the March 9, 2009 nadir, the S&P 500 had returned 400%. Given strengthened banking and that more Americans are working now than ever, what could go wrong?
A bunch can, especially if and when the economy slows. The federal government currently spends roughly one trillion dollars more than it takes in each year and similar deficits are expected to continue. Fortunately, the economic growth of the last decade (when we added $3.5 trillion in annualized GDP3) has generated enough new tax revenue to service the interest on the ever-growing debt (thumbs up for low interest rates) but not enough to forestall trillion dollar deficits.
Some economists argue that if the growth in GDP is greater than the interest on the Federal debt held by the public, all is well. Last year, for example, our GDP grew over $500 billion5 while the net interest on our debt was $310 billion6. The US Office of Management and Budget expects interest rates to climb and projects the net interest costs of our debt growing to $515 billion in just three years—so any slowdown in growth will upset the math very quickly. In fact, during the next economic stall, annual deficits of $1.5-2.0 trillion could be possible—before accounting for any new government stimulus to allay the downturn; it could be an unpleasant scenario even if interest rates decline as is often the case during recessions.
Table 3 expresses net government debt as a percentage of GDP among selected countries. With the exception of Germany, every country is unfortunately heading toward—or has long since passed—the 90% debt to GDP threshold some economists have argued is the level above which future economic growth is hindered in advanced economies.7 Before congratulating Germany, let’s not forget their implied guarantee—through membership in the European Union—of the debts of Italy, France and many others, some of whom face riotous citizen reaction from even minor structural reform tweaks. Japan is by far the worst fiscal actor but survives due to a confounding near-zero interest rate policy that may teeter at some point.
Table 3
| Debt/GDP8 | 2008 | 2018 |
| United States | 52% | 78% |
| Germany | 53% | 41% |
| Italy | 94% | 118% |
| France | 60% | 87% |
| Japan | 108% | 156% |
I’d Love To Change The World
We have quoted previously T.J. Clark, the British writer who in July 2016 said, in response to Brexit, “There is a connection. Capitalism needed saving (in 2008-2009), but in bailing out the financial institutions with taxpayers’ money, governments transferred the stresses from markets to politics.” Hamilton Point sees “stresses” building on governments—and certainly politics—as Western powers (and China) conclude that growth policies at all costs are better than finding out what an economic down cycle might look like.
Ten years after, the state of our banks and most Americans is good and there are reasons for continued optimism; however, America’s federal financial picture is stressed due to the debt it took to reach this point, and it is hard to know the short-intermediate term consequences. We cannot predict the timing or magnitude of the next correction but believe we are fully prepared by owning liquid bonds, high-quality global equities and a solid dose of emerging market stocks where demographic and growth prospects are solid. Let’s hope the Federal deficit gets closer to balance so Hamilton Point does not have to name a future newsletter after another British pop hit, “I Think I am Turning Japanese.”
1) Large domestically chartered commercial banks, seasonally adjusted—Federal Reserve Bank of St. Louis as of 12/31 each year.
2) Top five banks in S&P 500 as of 12/31/2018—FactSet
3) Federal Reserve Bank of St. Louis; data as of 12/31 each year.
4) Most recent data as of 3Q2018
5) Federal Reserve Bank of St. Louis
6) US Office of Management and Budget
7) Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. “Growth in a Time of Debt.” American Economic Review Papers and Proceedings.
8) International Monetary Fund, World Economic Outlook Database, October 2018