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Paul Gambles Co-founder of MBMG Group


Update February 21, 2015

In the US, Generation X is poorer than its predecessor

I recently noticed a report which concluded that members of Generation X are poorer than those from the Baby Boom generation.

The Pew Charitable Trusts’ financial security and mobility project released the report late last year.1 It concluded that in America, those born between the 1960s and the 1980s - what has come to be known as Generation X2 - have, on average, larger incomes than those of their parents’ generation (the post-war Baby-Boomers).

That may seem logical; as would the assumption that this would make Generation X-ers wealthier than their elders. Yet this is where the report’s findings really catch the eye.

Believe it or not, the report found that the average Gen. X-er has an accumulated wealth of USD 29,100 - as opposed to the Baby Boomers’ average of USD 65,200 (see chart 1).

Chart 1 Source:

This is because Pew measured wealth by including savings, retirement funds, value of homes and other investments. Once these factors were taken into account, the report revealed that only around one third of Gen. X-ers have more wealth than the Baby-Boomers.

Predictably, it is private debt that’s the key. The post-war generation owes less money, thus is wealthier. Major sources of debt for the Gen. X people are student loans and credit cards.

The Pew report found that four in ten “upwardly income mobile college-educated Gen. X-ers have education debt, with a median balance of USD 25,000.”3 Of course, it can be argued that because college graduates tend to come from families at the wealthier end of society, it is inherently more difficult to become richer than their parents, in comparison with those with less education. Amongst those raised at the bottom, two-thirds exceed the wealth and home equity of their own parents, but fewer than 3 in 10 of those raised at the middle and higher rungs have more assets than their parents held at the same age.4

Nevertheless, the debt levels are staggering. The Federal Reserve Bank of New York reported5 that while the level of house-based debt fell by 1.1% between Q3 & Q4 2013, non-housing debt rose by 3.3%, including increases of USD 11 billion on credit cards and a huge USD 53 billion increase in student loans.

Also according to the Federal Reserve Bank of New York, at the end of 2012 people between the ages of 30 and 39 held about $321 billion in total student debt at the end of 2012 - almost 260% more debt than in 2005. Those between 40 and 49 owed $168 billion, up from $53 billion.6 Overall, the typical household had $5,000 less wealth than their parents did at the same age, once debts were subtracted from assets.7 Considering that, according to the last official census taken in 2010, around 27% of the US population was aged between 25 and 448, there are a lot of people in debt.

In fact, the Pew report found that although the bottom of the income ladder was understandably dominated by those without a college degree, 17% of Gen. X-ers in the low income bracket had actually graduated.9 These people actually hold a higher median level of debt than their peers without a degree. That said, 22% of the bottom of the income ladder from their parents’ generation were college graduates as well.

Whilst share values may be up and the US government’s unemployment figures may look more encouraging than in recent times, private debt levels are still worryingly high (see charts 2 & 3).

S&P 500 Prices last 3 years

Chart 2 Source: Bloomberg

Chart 3

This is a concern; despite former Fed chairman Ben Bernanke’s claims that private debt levels have “no significant macroeconomic effects.”10 After all, if Fed policy is aimed at encouraging people to kick-start the US economy by consuming more, how are they expected to do that if they are choking in debt?

A look at the levels of real median income in the US is far from encouraging - in 2013, median household income levels were that of 1995 (see chart 4).

Chart 4

The underlying issue with the type of debt America has won’t go away; neither metaphorically nor physically. Student loans put people in debt while they’re still young; meaning people are playing catch-up right from the beginning of their careers. The system has barely changed in the last twenty years; thus if both Gen. X-ers, their children and future generations spend large parts of their lives in debt, when will Americans start to have the confidence to consume, increase demand and boost the real economy?



2 A term popularized by Douglas Coupland’s book Generation X: Tales for an Accelerated Culture, St Martin’s Griffin (1991).


4 idem






10 Ben Bernanke (2000), Essays on the Great Depression. Princeton: Princeton University Press.

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update February 12, 2015

Thailand in 2015: What next?

Once again it’s the time when finance experts try to make predictions for the new year.

Global economy is turning Japanese

The global economic backdrop in 2015 remains a debt deflation. This means that private debt reaches levels where further expansion is simply not sustainable; and the reductions in levels of debt and rates of debt-increase act to constrain spending. This leads to economic weakness, falling asset prices and vicious circles. Presently this is being largely masked by artificially stimulated unsustainable asset bubbles.

This is the situation Japan has been in for the last 25 years. The 1980s saw private debt rise to nosebleed levels, then came the 1989 crisis, followed by private debt to GDP continuing to rise - largely as a result of contracting GDP. For the last, lost 2 decades, private debt has been slowly edging down.

Debt expansion was a period of strong GDP growth and the period of debt reduction has been a period of anaemic often negative GDP growth (see chart 1).

Chart 1 - Source: IMF

The real key is to compare the GDP variations in chart 1 with changes in private debt shown in charts 2 & 3.

Chart 2

Chart 3

Nowadays, Japan seems once again to be heading into recession. Following similar policies, other developed economies seem to be on the same track; an observation which recently prompted Professor Steve Keen, the Chief Economist of IDEA Economics, where I sit on the Advisory Board, to issue his 2015 Outlook1, whose main theme is that America seems to be turning Japanese (see chart 4).

Chart 4

To avoid this scenario, Central Banks need to avoid the same policy prescriptions and stimulus solutions attempted by Japan over the last quarter of a century.

However, most of them seem reluctant to let go of quantitative easing (QE) and austerity, which only delays the inevitable re-set. Until then, for capital markets and for asset prices, central bank policies remain the only game in town.


For Thai capital markets the same 3 challenges identified last year by the Bank of Thailand’s Monetary Policy Committee2 remain as headwinds:

• Political stability

• International trade

• Private debt levels

Political stability is always unpredictable, especially in Thailand today. Trade is a much clearer, although not brighter, picture: exports continue to trend down in a weak global backdrop (see chart 5).

Chart 5 - Source: Bank of Thailand

Added to that, the balance of trade looks ominous, bearing in mind its contribution to Thailand’s strong current account. Invisible earnings, such as tourism, seem to be facing understandable headwinds, also increasing the overall balance of payments and current account risks (see chart 6).

Chart 6 - Source: Bank of Thailand

This is especially a concern as one other bright spot for Thai trade, export growth in the neighbouring LVMC3 countries, may not be able to maintain its previous trajectory.

The idea of increased domestic demand compensating the softer export market has to counter higher consumer debt. Household debt is high and has been the fastest rising in the region - this seems to be unsustainable in its existing form; although the worst levels are at the lowest income groups, and thus require smaller absolute amounts to negate. Any significant improvement in income for households earning below THB 9,000 per month (around US$ 276) would help to improve this ratio, but incomes need a boost.

The Government has approved THB 3.3 trn (US$ 101 bn) of infrastructure projects, which could have both primary and secondary benefits for Thailand (trickle-down into the lowest income sector). If, or when, this happens then, in addition to the direct investment flow and related private-sector opportunities (e.g. in materials, construction, finance), indirect investment flows to consumers would also benefit.

However, it’s far from certain when these disbursements will be effected. The stagger of spending is significant and the delay before the secondary impact is felt means it has to happen quickly to have effect in 2015.

Without this, the aggregate picture would be looking pretty gloomy (not to say that there wouldn’t be very specific opportunities within certain sectors or stocks).

Effects of the AEC

I’m very sceptical of the argument that the inauguration of the ASEAN Economic Community (AEC) will have any noticeable impact in 2015. It will be a long process, and in comparison to the readiness of European Union single market in 1992, ASEAN has a lot to do. Unlike the EU, it does not have a parliament, watchdog or dispute resolution system in place.

The Baht

There are a number of factors that will lead to support for the Baht and others that will drive the Thai currency lower. The Baht will strengthen when:

* It becomes apparent G7 interest rates won’t rise;

* There are periods of ongoing political stability and calm;

* The successful infrastructure disbursement is executed.

* G7 governments and central banks resort to further stimulus measures.

Conversely, Baht will weaken when:

* There are any indications that the BoT may cut interest rates;

* During any political or legitimacy crisis;

* When capital outflows take place ahead of taxation reforms.

Overall, it’s highly likely that we could see swings of +/- 5-10% through the year.

Capital Markets

Ultimately the Thai capital markets are hostage to the rest of the world - leaving the SET and risk assets especially vulnerable to exogenous shocks this year. Thailand is both a cork bobbing uncontrollably in a wide ocean and very much dependent on the domestic story.


1 http://www.ideaecono

2 /MonetaryPolicy/Documents/MPC_Minutes_42014.pdf

3 Laos, Vietnam, Myanmar and Cambodia

Update February 8, 2015

2015 Global Outlook: Hazimemaste!

It was a great pleasure to speak with the economist Prof. Steve Keen at the IDEA economics Asia launch in December.

Steve is one of only 13 economists in the world who predicted the global financial crisis.1 Not only that, he’s the chief economist of IDEA (of which I am an advisory board member) - a non-profit organization suggesting alternative solutions to the failing policy alternatives of quantitative easing and austerity measures which dominate central bank economics throughout the world today. Its board also includes respected economists Ann Pettifor and James K. Galbraith.

I’ve been reading a lot in the past year how the crisis is apparently over in some countries2 - even Mario Draghi, the head of the European Central Bank, has said so!3 From what Steve said during his talk in December, he shares my lack of faith regarding Draghi and others. Anyone who has read the excellent Lords of Finance4 by Liaquat Ahamed would know that we’ve only come full circle and returned to our roots when central bankers are once again ostracized as little more than charlatans, as they were following the Great Depression and World War II, two catastrophic events for which they were largely responsible.

So forgive my scepticism when I read that apparently quantitative easing (QE) has saved the day. According to some sections of the media, QE involves central banks printing money5. Central banks claim that eventually this new money gives incentive to financial companies to lend to business and individuals, stimulating spending.6

The ‘printing money’ claim is just not true. What the Federal Reserve, Bank of Japan and the Bank of England have been doing is buying assets, such as bonds, mainly from non-bank financial companies. Instead of using the huge amounts of cash received, these financial institutions did not pump it into the economy as a whole: their traders started to speculate with it to bring in greater returns. The London Whale case is one example of what has been happening.7

Any claim that QE has given people confidence to borrow money again is blown away by a look at the Federal Reserve’s own data. There was indeed a spike in private borrowing but that was temporary and soon tailed off back to immediate post-crisis levels (see chart 1).

Chart 1 - Source: US Bureau of Economic Analysis

The effect of QE on the overall economy has been minimal. In 2010, then Federal Reserve chairman Ben Bernanke claimed that, “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”8

I don’t claim to be an expert in behavioural science but I really don’t see the connection between stock market prices and consumer confidence. If I hear on the news that the prices on the TSE, the SET or the S&P have gone up, it doesn’t inspire me to go out and buy anything. I’d hazard a guess that it’s disposable income and confidence in paying back credit that influences our purchasing decisions. But I’m not the head of a central bank.

One of the many interesting things mentioned by Steve at the event is the incredible practice of conventional economists to ignore private debt levels. They do this on the assumption that it represents a “pure redistribution” which should have “no significant macroeconomic effects” - as described by none other than Ben Bernanke.9

Frankly, this suggestion is absurd. I would venture to say that the rate of unemployment is a significant microeconomic indicator. A quick look at empirical data in the US since 1990 reveals that there is a massive correlation (0.93) between private debt levels and unemployment (see chart 2).

Chart 2

It is incredulous that, in spite of the global economy crashing under the colossal weight of debt, central bankers of major economies universally refuse to challenge the status quo. What is more worrying though, is that there are indications that another crisis is looming and we still haven’t learnt how to deal with the current situation.

It’s difficult to say when the crisis will come, or what will trigger it, but the recent crash in oil prices has all the hallmarks of such a trigger.

Some analysts believe that lower crude oil prices will act as a catalyst to make the booming shale oil industry more efficient.10 That’s all very well, but the rise in the shale oil industry has been financed by junk bonds.11

Junk bonds. Remember those? High-yield bonds with a high risk of default. In 2008, illiquidity of junk bonds - repackaged and backed by overvalued subprime mortgages - led to the GFC. A J.P. Morgan analyst estimates that, should prices for crude oil remain at the relatively low level of around US$65 a barrel for the next three years or so, up to 40% of all energy junk bonds could default.12 He added that even if default rates hovered at 20% to 25%, the consequences would be “dire”.

In fact it doesn’t necessarily take actual default to trigger a crisis. Merely the threat of default can make bonds illiquid: if everyone is trying to get out of them at the same time, no-one wants to buy them.

Does this mean we’re heading for the abyss?

Possibly, but more likely Japan. If there isn’t a fundamental re-think amongst central banks, we could well be facing a prolonged period of deflation, with low economic activity as products and materials become less affordable. If that sounds familiar, that’s because it’s been happening in Japan for the last 25 years.

Since 1990, each tentative revival in Japan has given way to another collapse back into recession. This has happened because the Japanese government uses QE to stimulate the economy; just as the economy shows shoots of recovery, the government tries to reduce its own haemorrhaging debt. That starts a return to private sector deleveraging - where the rate of change of private debt is actually negative. This takes money out of the economy, and causes another recession. To offset this the government invests a fortune to provide stimulus and so it continues.

The US - and, given their penchant for QE, the UK - look likely to fall into this private debt trap. So, while 2015 may see some economic revival, it will be just a part of the vicious cycle.

4 Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World, Penguin, 2009.
9 Ben Bernanke (2000), Essays on the Great Depression. Princeton: Princeton University Press.
12 ibid

Update February 1, 2015

Abe Nonsense?

Many of Shinzo Abe’s fellow party members disagreed with his decision1 when he dissolved the Diet in November. But the gamble paid off and he has won another term to become one of Japan’s longest-serving Prime Ministers.

Calling a snap election may have been a shrewd political move but it also raised questions about the timing, given Japan’s current economic state. “Now is not the time to dissolve the Lower House,”2 said Hiroshi Shikanai, Mayor of Aomori - a city in the north of Japan’s largest island, Honshu. “We’re faced with issues that require co-operation between the central and local governments, such as measures to boost regional economies and fight population decline, but the election will create a vacuum,” he added.

The Land of the Rising Sun is certainly in a situation which is a far cry from the heady days of the 1980s boom period, when the Japanese corporate world was nicknamed Japan Inc. because of the close relations between the business sector3 to the government, which seemingly aided the former in exporting goods.

When in the late 1990s Japan’s huge post-war economic growth came to a halt and the asset price bubble burst, the government’s reaction was to embark on public works projects to stimulate demand. These projects included massive spending on roads but only resulted in a huge increase of public sector debt and the economy continuing to stagnate (see chart 1).

Chart 1

The next attempt to check the slump was to implement structural reforms; but these only led to deflation. Falling prices may sound like a favourable thing, particularly when it comes to the cost of living. However, it is bad news if you have investments, it increases the real price of any debts and can counterbalance the shoots of economic recovery (see chart 2).

Chart 2

In 1998 Princeton economics professor Paul Krugman published a paper entitled Japan’s Trap, which recommended embarking on a policy to boost inflation and thus cut long-term interest rates and promote spending, even though this was precisely the form that Japanese policy took in the 1930s under Korekiyo Takahashi’s finance ministry, and we all know where that led.

In the early 2000s, the government embarked on its own version of Krugman’s recommendations. The policy came to be called quantitative easing and was not about printing huge amounts of new money, but in fact increasing the money supply in the banking system by buying bonds and similar products.

The effect of this was some small improvement in demand; however, deflation remained. That hasn’t stopped the Bank of Japan though, which has continued to implement quantitative easing policies ever since. If you thought the Federal Reserve was dogmatic, the Bank of Japan is on a different level altogether.


Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


HEADLINES [click on headline to view story]

In the US, Generation X is poorer than its predecessor

Thailand in 2015: What next?

2015 Global Outlook: Hazimemaste!

Abe Nonsense?