More dismal charts

In the past few days I’ve come across another couple of charts which emphasise the “dismal decade” stance.

Firstly, in the transcript of Andrew Haldane’s speech, there’s a chart of lending growth in the aftermath of financial crises, comparing the UK currently with the Nordic countries in the 1990s. This suggests that the UK is likely to see bank credit contraction (in real terms) for at least a further three years (the same is probably true for the US and eurozone as well). Apart from anything else, it suggests that economic growth will be sluggish for the foreseeable future, even if we don’t suffer another recession (which I think we will). The two things that worry me most about the UK banking sector are the knock on effects of the euro crisis and the huge latent bad debt problem in the UK housing market.

The second chart is from some research from the San Fransisco Federal Reserve which looks at the relationship between the equity market P/E and demographics. To cut a long story short, the ratio of the middle age cohort (40-49 years old) and the old age cohort (60-69 years old) seems to have a relationship with the P/E of the equity market. The possible mechanics are explained in the paper. The contention is that the equity market will suffer a decline in P/E during this decade, regardless of what happens to earnings. The two most negative implications are for the value of retirement savings and the cost of equity for companies.

Projected P/E ratio from demographic trends

Source: San Francisco Federal Reserve

It all adds up to more reasons to believe that we are facing a dismal decade.