BURNS: Ten Years After

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 this note, it marks a decade since the stock market crash of 2008—2009. I assess this period with commentary about our largest banks, American workers and America in general.

When asked if the magnitude of the 2008—2009 market correction will soon be matched, I answer with an unequivocal “probably not.” I believe a huge reason for the market freefall ten years ago was not due to 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.

While I 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. 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
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

 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. 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
3) Federal Reserve Bank of St. Louis; data as of 12/31 each year.

4) Most recent data as of 3Q2018

As of the 10-year anniversary of the March 9, 2009 nadir, the S&P 500 had returned 400%. Given strengthened banking and more Americans working now than ever, what could go wrong?

Lots,  actually. The federal government currently spends roughly one trillion dollars more than it takes in each year. This is expected to continue. 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 billion according to the Federal Reserve Bank of St. Louis and the US Office of Management and Budget calculates the net interest on our debt was $310 billion. However, 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.

Table 3 expresses net government debt as a percentage of GDP among selected countries. Unfortunately, with the exception of Germany, every country is heading toward—or has long since passed—the 90% debt to GDP threshold some argue is the level above which future economic growth will be compromised. Japan is by far the worst fiscal actor.

Table 3 

Debt/GDP7 2008 2018
United States 52% 78%
Germany 53% 41%
Italy 94% 118%
France 60% 87%
Japan 108% 156%
7) Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. “Growth in a Time of Debt.” American Economic Review Papers and Proceedings.

 In July 2016 T.J. Clark, a British writer, 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.” The market sees “stresses” building on governments—and certainly politics—as Western powers (and China) conclude that growth policies at all costs are better than discovering what an economic down cycle might look like.

Let’s hope our Federal deficit gets closer to balance so I do not have to name a future opinion piece after the British band whose pop hit was, “I Think I am Turning Japanese.”

This commentary is for informational purposes only and the opinions expressed herein are those solely of Andrew Burns, an advisor and principal at Hamilton Point Investment Advisors, LLC, in Chapel Hill, North Carolina. This material should not be considered financial advice.