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Musings Report #10 3-7-15 2015: Last Gasp or Let the Good Times Roll?
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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Thank You, 2015 Contributors
Key supporters of Of Two Minds continue to make their annual outrageously generous contributions early in 2015. I am in awe of their support and can only hope to repay their generosity with content worthy of their commitment: Herb S., David E., Donald C. and Vera K.
2015: Last Gasp or Let the Good Times Roll?
Is the U.S. "recovery" on its last legs or are the good times just starting to roll? Let's do a quick rundown of the key dynamics that will decide the issue. Given the extremes of current expectations, perhaps both will be wrong and the economy will go nowhere. But it seems the preponderance of evidence is on the side of "last gasp:"
1. GDP/Job Growth: GDP keeps declining while job growth is sizzling? Something doesn't quite add up here, as these two broad measures of expansion should align. US Stock Market: Is the Bell Finally Ringing Loudly Enough?
Either GDP must leap to match job growth, or this is the last gasp of the "recovery," similar to 1999 and 2008 when job growth looked good until it suddenly reversed and cratered.
2. China slowdown: Though Chinese officials claim their economy is growing at 7% a year, other not-easily-gamed statistics such as rail traffic suggest growth has skidded to stall-speed of 3% or less. This has been enough to stall the economies of China-commodity-dependent exporters such as Brazil and Australia.
The commodity exporters are the periphery that is affected first; the core economies that have yet to feel the full impact are the exporters to China: Japan and Germany. They will be crushed in due time as imports to China continue declining.
3. U.S. economy slowing: Is the U.S. truly decoupled from the rest of the global economy? Can the American economy keep generating asset bubbles and more jobs for waiters/bartenders if the source of 50% of U.S. corporate profits roll over into recession? That makes no sense, and these charts show the U.S. economy weakening.
3. Russia is putting on a brave face but its economy is in free-fall. This sets the stage for geopolitical instability. Russia’s Nightmare Dressed Like a Daydream.
4. U.S. Dollar: its continuing rise is crushing U.S. corporate profits earned overseas, which is roughly half of U.S. global corporate profits. Even if U.S. companies maintain sales and profits in non-U.S. currencies, these profits stated in USD will be hammered by 17%-20%. If the USD keeps rising, the profits will fall even further.
5. Valuations: by conventional measures, U.S. stocks are either fully valued or overvalued. In either case, a sharp decline in profits will make them very over-valued.
Preparing for the Crash As Earnings Crumble And Buybacks Exhaust Themselves
The Charts That Matter
6. Wages: Even the Most Educated Workers Have Declining Wages - if this is true, the "recovery" is reduced to a recovery in stock valuations and little else. Household income: still lower than pre-recession levels.
7. Sentiment: Bullish sentiment is off the charts as faith that central banks can keep the stock rally going essentially forever is high. The number of Bears is near-zero. This is the ideal set-up for a trend reversal.
8. Stock buybacks: roughly $2 trillion have been poured into stock buybacks--by some accounts, 90% of Corporate America's net earnings have been "invested" in stock buybacks that push the price of remaining shares higher. As profits slump, will companies just borrow more to keep buying back shares? The endgame of this strategy to boost stocks is in sight.
9. Debt/leverage super-cycle: it is currently assumed there is no upper limit on debt or leverage: the system can always support more debt and leverage. The smart guys who've made billions aren't so sure this is true.
10. Bull/Bear cycles: the 64-month peak-to-peak cycle has been pretty reliable, and that is now overdue. The 7-year cycle is also overdue: peaks in 2000 and 2007, and now ...?
11. Negative interest rates and the super-abundance of capital and labor: capital is chasing anything with a yield, however risky, pushing valuations to the sky while profits are plummeting for structural reasons.
12. Europe: does anyone think Europe is fixed? That all the debt will be paid? That structural problems can be papered over with more central bank easing? Given the size of Europe's market and U.S. exposure to the consequences of a soaring U.S. dollar, how is the recession that's about to swamp Europe going to be positive for U.S. profits?
Add these many factors up and it's difficult to claim the "recovery" is just getting going.
Summary of the Blog This Past Week
Innovation Series 1: All You Need Is Love--and Rivalry 3/7/15
The One Chart You Need to Predict the Future 3/6/15
The Global Problem: Monetary Policy Can't Fix an Economy's Structural Problems 3/5/15
Solutions Start with Innovation and Transparency 3/4/15
What's America's Fragility Score? 3/3/15
The Three Acronyms That Best Describe This Era: TINA, TANSTAAFL and FUGAZI 3/2/15
Best Thing That Happened To Me This Week
Our venerable peach tree is blossoming--always a happy sight. It reminds me of the pink cherry blossoms in the opening sequence of the film The Makioka Sisters by Kon Ichikawa (1983).
Market Musings: One More Pop Higher and Then the Rollover into Q3 2016?
Correspondent Cheryl A. sent me this interesting (and brief) technical analysis by well-respected chartist Louise Yamada: Why S&P could rally 12%.
Let's say this projection works out, and the SPX finds its "recovery" legs again after this brief dip is bought hand over fist. Given the capital flows into the U.S. due to the rising dollar, this is entirely plausible.
But what happens after the 2,300 target is reached? Given the 12 factors listed above, the Bearish scenario calls for a multi-quarter decline in the 3rd quarter of 2016. This gives the Federal Reserve plenty of time to raise interest rates a quarter of 1% and then drop it back as the economy weakens. It gives the Fed time to launch QE4 and for the market to rally and then reverse as everyone realizes QE has hit diminishing returns.
How low could the market go? The previous high around 1,580 beckons, and below that, somewhere around the key psychological level of 1,000 is a potential target. Below that is the March 2009 low of 666.
This is just one possible scenario of many, but if we ponder the impact of the 12 points above, we should keep the Bearish case in mind rather than just assume SPX 2,500 and 3,000 are inevitable because the central banks can print money and buy bonds and mortgages and yes, even stocks. But unless the Fed wants to print another $4 trillion to buy stocks, they won't be able to control the downside of plummeting global profits.
From Left Field
mosaiculture (via U. Doran) -- living art pieces made of plants/flowers...worth a look.
School, Debt, Bohemia: on the Disciplining of Artists -- long screed about the Artists' Eden of 1970s NYC being less wonderful than it is typically remembered; making art with the goal of making a living doing so isn't for the weak...
The Paradox of Oil: The Cheaper it is, the More it Costs -- low prices lead to high prices...
The European Left and the Euro -- the Left may be realizing the euro is not the answer...
America can be a full-employment economy once again -- if we just borrow another couple trillion dollars a year--the unstated "other half" of this argument.
The Coming Chinese Crackup (via David E.) "The endgame of communist rule in China has begun, and Xi Jinping’s ruthless measures are only bringing the country closer to a breaking point" -- every regime will be struggling for legitimacy in 10 years...
Surge in Chinese housebuying spurs global backlash -- shades of Japan's global buying frenzy in the late 1980s... Japan was poised to take over the world back then, shortly after this peak, it entered a 25-year slump....
Tomorrowland: How Silicon Valley Shapes Our Future --long read, worth a look as an overview of New Tech, familiar to anyone who follows the Valley or the California ideology...
Everything I've Written On Education Comes Down To Cultural Capital And Skills (via Sarah M.) -- this fellow must have read my "Get a Job" book...
Why Asians Make It Big in America-- "financial health scorecard": it's not just the income that counts but how you invest it/blow it....
Obesity Is Hurting the U.S. Economy in Surprising Ways -- 1/3 obese, another 1/3 overweight...
1930s Jiu Jitsu with May Whitley - May Whitley was a pioneer for female Jiu Jitsu practitioners. -- some good moves here in 2 minutes...
A Visit to Aoshima, a Japanese 'Cat Island' -- what struck me was the absence of children--the school is closed, no kids. I saw this hollowing out of villages as long ago as 1992 in rural Japan... sad to see fishing villages lose their families and children.
"A little flattery will support a man through great fatigue." James Monroe
Thanks for reading--
charles |
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