Good Morning Everyone.
I'm going to change gears a bit. Yesterday I sent out my newsletter with an
example of how to invest in a medium term strategy using gold miners. Within the context of gold miners is the
threat the USA stock market will make a major correction, and I also indicated
how I could contain the risk.
However, that brings up a question regarding the economy and
ultimately the stock market pricing.
Some analysts I respect have been saying that we are just at the
beginning of a "boom" in stocks because the Federal Reserve has chosen
to keep interest rates so low, that all the Baby Boomers (and others with their
401Ks) will move out of treasuries into stocks.
In Dr. Bernanke's own words last September: "We are trying to meet our maximum
employment mandate, so that's the objective… [T]he tools we have involve affecting
financial asset prices, and … those are the tools of monetary policy… [M]any
people own stocks directly or indirectly.
The issue here is whether or not improving asset prices generally will
make people more willing to spend… And if people feel that their financial
situation is better because their 401(k) looks better … they are more willing to
go out and spend, and that’s going to provide the demand that firms need to
invest.".
Until 2013, this strategy has not been working, but the
strategy is working in spades at this point, as retail traders move out of
treasuries into the stock market looking for better returns (including yours
truly). This was the Fed's objective to move people into risk assets.
Now we can conclude that those who are suggesting a stock
market boom have got a point. On the
other hand, there are more analysts that suggest a huge correction is
coming. Who is correct?
Well, be if far from me to suggest exactly what the stock
market will do. I never ever thought the
Federal Reserve could keep this going for this long. Dr. Bernanke has a heart of steel to keep up
pumping fiat money into a system and buying debt (creating more money) at a
level that has never been tried in history with no exit strategy (at least they
are telling us about).
Question: Is the
stock market a good proxy for the economy?
The answer is absolutely not, but that does not keep everyone (including
me) looking at the DOW Average everyday to attempt to understand where we stand.
Even though I know through education and experience the DOW has no meaning in
terms of the economy, I cannot help but feel more confident when it is going up
(or at least I feel better).
Question: Is the
Economy improving? Well, that depends on
who you listen to does it not? The labor
report was released this morning, and there is absolutely no doubt the labor
market is improving, and the media is spinning this in the most positive way
imaginable. What that report does not
reveal is that full-time employment is down, while part-time employment is
rising. Yes, part-time employment does
not get reported in that report as unemployed looking for full-time work. OK, Zeb you are just being a wet-blanket -
nothing is good enough. Sigh... guilty
to some degree, but having spent 3 years in graduate school studying advanced
subjects in economics, I have some knowledge that all is not well in Tweedville
(Lomax).
Economic Business Cycle
No matter how politicians try every free market (free more
or less) has a business cycle. The 4
year business cycle is debunked by most leading economists, but everyone of
them had to study and comment on it in the University and Grad Schools. What happens around the economic turning
points is always of interest, and those turning points come on a regular
basis.
When an economic crisis happens around one of these cycles,
the economies tend to experience weak growth.
What Dr. Bernanke and Mr. Obama would like to observe is
that once the de-leveraging after the financial crises (starting with Leman
Brothers) the economy will return to a much stronger trend growth.
THE GREAT RECESSION - this is the term we hear quite often
in the press. At this point, (again
depending on your viewpoint), up until 1 month before the Presidential election
in 2012, there was very little sign of improvement, and I will attempt to show
you there has been no improvement actually no matter how much rejoicing has
occurred.
"The rich get rich and the poor get children In the
meantime, in between time, Ain't we got fun? " (Richarard A Whting / Gus
Kahn / Ray Egan) Well, things have not
change that much since the 1920's when this was written.
Nominal GDP Growth
Most people would agree that the
GDP is a pretty good indicator of the health of the economy. In 2009, GDP was negative. It has been up
more or less since, until now. The last
GDP report indicates that GDP dropped to 1.6% in Q4. This is a rare occurrence except in a
recession.
Do not forget, that this is after
$trillions of dollars in money printing by the Federal Reserve. And even more trillions by other central
banks around the world.
Approximately two years ago the
Federal Reserve published a study that investigated various
"stall-speed" measures including GDP and GDI (Gross Domestic
Income). They concluded that when the annualized
growth rate of the real GDI fell below 2% it was a recession signal because the
economy would stall.
Observe the chart which indicates
according to the Federal Reserve, the market stalled in the second quarter of
2012 at 1.5%. In the third quarter it
dropped to .4%, and that was already two quarters below "stall
speed". NOW! does this make sense
to you why the Federal Reserve pledged in September of 2012 to provide
QEternity?
Now you should draw your own conclusion
about the US economy, but the USA economy is not healthy no matter what spin
you put on it.
Financial Assets (Stock Market and Commodities) Are Misleading
When the Central Banks around the
world are coordinating, the whole range of financial markets are unlikely to
reflect actual economic fundamentals.
Most educated people recognize this in the stock market and
treasuries. It is also true of
"exchange traded commodities" - copper, gold, silver, corn, soybeans,
sugar and so-on.
How is this the case? Because hedge funds and even retail traders
move into risk-on trades in commodities to improve return. Unless we become Ostriches, we know this to
be the case, and the hedge funds have even moved into Farm Land and
housing.
What this leads one to conclude is
that market prices are misleading indicators of economic fundamentals in the
current Central Bank circumstances. The
Central Banks (all of them) can boost market prices without any improvement in
economic fundamentals.
They are acting as politicians -
trying to make you feel good when nothing has changed -- the rich get richer
and the poor have children.
Hopium - The Congressional Budget Office Keeps Forecasting Growth
The CBO is quite optimistic,
although Mr. Obama wishes they were more optimistic. The CBO through February of last year was
forecasting better than 4% growth for 2014.
They have pulled back (as you know), but they are still project 4% grown
by mid-2015 and that it will stay there for years.
They have been doing this for years
(after Mr. Obama got after them in his 1st year) in hope the rebound is just
around the corner. Wall Street is no
better really, as they predict stagnation (not stagflation) for 2013 and
accelerating GDI and GDP through 2015.
Do you know what? The USA's average GDP growth since the turn
of the Century is 1.6% annualized. And
remember according to the Federal Reserve itself, the GDI is below stall
speed.
Please note also, that in principle
the Central Banks can influence the nominal GDP. In attempting to do so, they have pushed
$Trillions of dollars into the banks, and yet the net effect is nominal GDP
growth has dropped into recession territory.
Operating Earnings
There is no easy way to get the
information to indicate what is occurring with USA Corporate Earnings. However, I will assure you the data is
available on the S&P (a McGraw Hill company), and it is not susceptible to
the kind of revisions one sees with the government data.
In 2012 we have 2 quarters of
negative earnings growth. (Please note, this means that all the S&P stocks
taken together have shown negative earnings (not negative sales or losses)
). In all of history, there have never
been two or more quarters of negative earnings growth outside of a
recession.
As the S&P analysts point out,
this type of earnings fall is not surprising when GDP growth falls below
3.5-3.7%.
Therefore, even though corporate
profits are high, the growth in earning is negative -- consistent with an
unhealthy economic outlook. Now is it
surprising that many of the corporations during earning season provided warning
about earnings?
Velocity of Money -- the Ratio of Nominal GDP to Money Supply
The Velocity of Money is the
average frequency with a unit of money is spent on new goods and services
produced domestically. http://en.wikipedia.org/wiki/Velocity_of_money
There is an argument that this is
not a good indicator of money circulation because it does not start with the
actions of individuals and take into account the psychological effects in
determining currency value. Leaving that
out, it is still a useful indicator
The ratio has plunged to record
lows.
Does this indicate that the Fed Monetary
Policy has lost traction? And did QE
become ineffective in 2011 when the Velocity of Money Fell so fast? Well, many people say "this time is
different", and that it does not matter as people's confidence in the
currency is improving.
Time will tell.
Final Musing
- · The economy is growing below stall speed with nominal GDP growth below historical recessionary levels.
- · There is no significant sign that an imminent up-turn is going to happen
- · Then the stock market is a very risky place to be at this point.
- · If my analysis about the stock market is correct, then sadly, Dr. Bernanke's strategy will be directly responsible for getting retail people to invest their life savings in a very risky market.
Other Items of Interest today.
- 1. Offshore Cash Hoard Expands by $183 Billion at Companies http://www.bloomberg.com/news/2013-03-08/offshore-cash-hoard-expands-by-183-billion-at-companies.html If you have gotten this far, read this article. If you own a business or work for one of these companies, this should make your blood boil.
- 2. Copper Futures Delcine as China Imports Decline to 20-Month Low http://www.bloomberg.com/news/2013-03-08/copper-futures-delcine-as-china-imports-decline-to-20-month-low.html
a.
Please note: Copper is often used as a leading
indicator to the Global Economy. I've written about this previously, and showed
charts (in my newsletter). The concern
for the Global economy is that China's growth will slow even more than
forecasted. This will affect Australia,
although it is not good for anywhere.
b.
China has been the engine for growth in the
global economy. Keep your eyes on copper
and news about copper.
Sigh...
There are not many positive areas
of the economy, even though the employment report was good news.
At some point (when who knows), the
USA stock market will make a significant correction.
Be very cautious about committing
your retirement funds to RISK-ON investments.
Did you know that "cash"
is an investment? And yes, that is why I
follow currencies closely.
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