Frank Trotter, President of Everbank Direct had to contend with a fast stopwatch during his morning presentation since his time slot was curtailed. Despite the abbreviated time, Chuck did a nice job of delivering his message. His presentation was entitled, “Paused at the Crossroads: Inflate to Nirvana or Hangover from a Binge”. I remember first encountering Frank Trotter’s name at Mark Twain Bank in St. Louis when he pioneered certificates of deposit denominated in foreign currencies – quite a novel idea for the time.
Frank sardonically described the current state of the economy. Stocks have been rising for over four years. Our Gross Domestic Product (GDP) is up. Household net worth returned to 2007 levels. The housing market appears to be recovering and interest rates are still near historic lows.
However, early cracks in this state are now emerging. With interest rates on the increase, refinancing activity has taken a hit. He is also concerned about the concentration of wealth in the United States. For example, the top 1% of households controls 27% percent of all financial asset ownership while the next 7% controls 50%. That means 77% of all financial assets totaling $25T are controlled by the top 8%. This makes him nervous.
The current theories on economies are two-fold. First, central banks want to inflate. This makes mortgage debt easier to pay back and ostensibly is better for a recovery. Those holding the debt are the ones penalized. With Quantitative Easing (fill in the blank) the Fed has the stated objective of boosting stock prices and depreciating the Dollar. These were never supposed to be what the Fed supported but this is now part of their evolution.
The second theory holds that fiscal deficits are unsustainable. Such a posture will lead to hyperinflation, currency wars, and potentially default. Certainly this was documented in the book This Time is Different by Reinhart and Rogoff. While there has been criticism of the conclusions reached by the authors, it is difficult to quibble with the general conclusions in their text. The second theory also suggests rather strongly that the U.S. and Euro economies are merely being levitated by government/central bank action.
Regardless of which theory espoused, one cannot ignore the debt issue. Which brings us to the question of how much debt is sustainable. Frank said it quite well by uttering,
Liquidity only matters when it is the only thing that matters.
Never have more accurate words been spoken. As I have written in this section of cyberspace, at the point when the market begins to recognize that the debt is no longer sustainable, a point of inflection, liquidity (cash) will be the only thing that matters. Firms and individuals and perhaps even governments will begin the fire sale to raise cash for debt repayment. Others will find that debt issuance will cease unless at prohibitively high rates. All of these are highly deflationary conditions.
Frank closed by suggesting there is a 60% chance of 1% GDP growth and a 40% chance of sharp slowing. He favors currencies from Norway, Canada, Australia, Singapore, and China.