Economics Gets Interesting As Economy Darkens While Stocks Bubble
Fabius Maximus | Mar 26, 2015 02:01AM ET
Summary: These economic status reports grow more interesting as the data shows slowing while the stock market bubbles. It’s nothing like 2007, except in our blindness to events and disinterest in preparing for obvious risks. When the recession arrives (we can’t know when), I believe it will mark the start of a new economic order. The next generation will listen with astonishment to tales of these days. {2nd of 2 posts today.}
h3 Contents/h3“In a nutshell: Things are looking better — in fact, they’re looking downright good. The economy is showing solid momentum and there’s good news in virtually every sector. I expect U.S. growth to be about 2½% in real GDP. I see the continued improvements in the economy pushing wages and prices up, and inflation moving back toward its target. I expect to reach full employment by the end of the year.”
— John C. Williams (President of the San Francisco Fed), 23 March 2015 . Be very afraid when you hear such things while the indicators tumble.
- One of the big indicators: new orders durable goods
- GDP on recession watch
- Stocks: bubbling again because we don’t learn
- A bear market will wreck the investment biz
- For More Information
The February numbers were weak, as they have been so often during this long slow expansion. The big picture is that they have been flat during the past 2 years (easily missed if you read the news by the hyperventilating over the little swings). They’re the same level as September 2006, and 5% below the pre-crash peak of December 2007. Almost unchanged from a year ago, any breakdown from here will warn of an imminent recession.
GDP forecasts are notoriously inaccurate (we have good estimates of GDP in the 3rd release, in the 3rd month after the quarter ends). But they’re too important to ignore, especially the trend of the forecasts. In this cycle forecasts have tended to drop over time; this quarter the drop has been fast and large. Much slowing from the current +0.3% estimate gives us a negative print for Q1, which would be the 3rd red number since the recession ended in 2009.
Get The News You Want
Markets long ago decoupled from fundamentals, as investors embraced our centrally planned economy where the central bank manipulates not just interest rates, the money supply and lending, but also risk preferences (the target for quantitative easing) and “animal spirits” (aka public confidence).
Valuations are quite mad for such a slow growing economy, late in the business cycle, with profit margins at historically peak levels (they have always reversed back to average levels). People tend to forget that the price to earnings ratio represents what you pay for future earnings, so comparisons to the past when America grew faster will mislead you. The carnage will be immense when this bubble pops (more about the consequences on another day).
More specific indicators are the stratospheric valuations of social media stocks, investor euphoria over Tesla, and — my favorite — investors’ love for profitless biotech stocks. Forget the tech bubble. It’s the biotech bubble you should worry about “.
Here is a graph of theS&P Biotechnology Select Industry Index showing the classic parabolic rise of an investment mania.
The finance sector is ripe for disruption as the combination of new technology and new business methods will rip its profitability, producing massive overcapacity. The status quo has been supported by the bull markets in stocks and bonds, plus negligent regulation. I suspect that a bear market will reveal that they (including me) have been walking on air for years. The drop will be painful, but produce a financial sector better able to serve America. More on this coming soon.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.