This is a screen shot from my iPhone about a week ago. And really this says it all. Breaking news is highlighting the all time highs again while the underlying economic news is negative across the board. No other time in history could the economy be in such dire straits and have the market completely apathetic to it. Whether it’s total debt, Consumer debt, retail sales, housing, productivity, inventories, full time jobs, GDP, wages, just about any indicator it is negative.
And if we put it in the context of having such extreme monetary policies with the sole intent toward all of these moving in a highly positive direction the above indications aren’t just terrible they are frightening. It’s kind of like when you’re in a fight and you’ve just hit the other guy with your best punch and he doesn’t flinch. You start to think this ain’t going to end very well. I expect the Fed folks are suffering from a case of the ‘oh shit that was the best I got’ syndrome.
Our nation’s ‘best and brightest’ economists and financial ‘experts’ have created policies that are their best ideas to generate economic growth and these policies have failed completely. The only thing preventing this nation from a full on collapse is an all time high stock market. And that is the only reason the market is at all time highs. Volume is sparse, institutional money is on the sidelines and every damn metric you can think of is falling apart yet markets are at all time highs, thanks to the Fed.
Remember we had a 10% sell off over the course of about 8 trading days in October. The Fed stepped in and stated that QE4 was cocked and ready. That reminded investors the market is risk free and with that it once again moved on to new highs. Now understand, this is in the face of 12% unemployment, a dead housing market, declining real retail sales, negative real GDP when adjusted for debt and a middle class that is now completely reliant on consumer debt for basic survival.
You can look to things like real wages and real median income to see if the American consumer, always the bulk of GDP and really the only measure of GDP that should be of concern, is healthy or not. And the data shows us the American consumer has slightly more real income than they did in 1985 (7% more). They have lost 10% of their income since 2000. They have also taken on 150% more debt to compensate for the loss of income during that period. The obvious implication is that the typical American’s real free cash flow has diminished significantly. Yet somehow the market expects future corporate free cash flows to grow forever without the existence of the American consumer driving them? I just don’t get it. Where does the money come from??
For the past three years corporate earnings have been growing by way of contraction. Revs – Costs = Earnings. Reduce costs and earnings will grow. However the obvious conundrum is that costs are limited and thus cost cutting is not a sustainable growth strategy. We do it when we have nothing left to show growth. Share buy backs and cuts to production have been the only reason earnings have been positive. This was true in 2006 and 2007, and by 2008 the cash-flow from cost cutting ran out. I dare say we are entering that phase now and should expect to see a significant slow down in earnings growth despite the fanciest of fancy accounting.
If you have even a slice of common sense you understand that debt being used for consumption is not the sign of economic or financial strength, money pulled away from capex isn’t income and earnings growth by way of cost cutting is not sustainable. So be careful when listening to the bank analysts so willing to get on television to tout American economic prowess and divert attention away from things that portray the real story. They get paid to cheerlead. Seriously it is in the job description. Ok maybe not the short skirt and pom pons but the cheer is in there!
In fact, in an onslaught of research Brian Belski of BMO sent me, produced by his team of analysts, not once did they discuss revenues in their medium and long term market forecasts. Revenue is the one item that every business in the world cannot exist without. It is actually the only item that all businesses would fail without. Yet in all of the research provided by Belski not once did his team discuss revenues. The reason is simple. It would contradict the story he is paid to sell.
Any reasonable and impartial analyst forecasting the future performance of the market will certainly discuss sales or something that relates to the existence and position of a consumer. In fact, Morningstar’s key measure is wherewithal of future cash flows, meaning they put a significant amount of focus on stability of future sales. But not BMO, they suggest a capex resurgence, that has nothing to do with growth in sales, will be the great saviour. Odd given demand growth as measured via sales is the only reason a firm will expand capacity.
The reality is that America’s economy and thus America’s bottom 80% has been at best flat for 6 years and is now actually sliding backwards despite the vast amount of money being injected. Even according to the Fed’s own reports, we have yet to see 3% annual growth in GDP since 2007. And that figure includes all of the growth in consumer credit. Take out the consumer credit, which we know cannot count as growth as it has a negative net effect, and the reality of negative GDP sets in. That is udder failure! Don’t tell me next year again. You folks at the Fed have absolutely failed! Who gets 6 or 7 or 8 years of burning through trillions of dollars with no results??? Who gets that?? Come on give me a f#cking break already!! YOU HAVE FAILED! PERIOD! YOU’RE FIRED! GET OUT!
Those are the words that every American in the bottom 80% would receive if their performance was as poor in their respective jobs, should they be lucky enough to have one. It absolutely boggles my mind that these arrogant fools who have so clearly made every wrong choice available to them still walk around and talk as though we are to believe they know anything about anything. Who are these clowns and what world do they live in?? Is there absolutely zero accountability anywhere in our nation’s leadership??
What could possibly change next year that hasn’t changed after 6 years? What input has a 6 year lag? These are the common sense questions that nobody seems to be asking. If these clowns are seriously just going to say next year then give me an explanation of why it hasn’t happened despite their calls each year that next year will be the year. And why this year’s call of next year is different? What is the lag effect that hasn’t yet come to fruition that we are now expecting to hit? Housing??
People are beginning to realize housing is not going to be the saviour. In fact, we almost don’t hear about housing anymore. But for years after the great credit crash, housing was touted as being the thing that will pull us out of recession. I have been very clear that the housing effect is dead. So not only is the expansion of jobs in the construction sector improbable but the wealth effect of home ownership too is dead. Subsequent to 2008, the typical home owner simply doesn’t see home equity as stable enough to live against because surprise surprise house prices do decline.
The above chart tells us that housing, now higher than its been in 6 years has only made it back to the historic lows. And with home loans more difficult than ever to obtain this is not going to change anytime in the near future. So we can write off housing as the catalyst for true economic growth.
So then what is it that will pull us out of the economic doldrums in which we’ve experienced for so many years now? Well as discussed above, BMO Capital Markets believes a resurgence in capex will be the answer. Driven by weakening emerging markets and a behavioral change in the American consumer to a move away from cheap products into more expensive products that are produced closer to home, BMO is predicting capex will surge and with it will lift America.
And while I agree with the premise that capex is a very important part of turning the economy around I fail to see a catalyst for a resurgence in capex. You see capex correlates highly to revenues, not earnings. The reason is that revenues correlate significantly to demand. When revenues are growing it is a signal that demand is growing requiring more capacity. More capacity means capital expenditures. There is nothing outside of strong demand that drives capex on a large scale. Tax incentives can push capex forward but not often and not on a large scale. The continuing decline in capital expenditures is proof that demand is not strong for the two states do not coexist. In fact, capacity utilization is the lowest it’s been in decades despite declining capacity which all else equal should increase capacity utilization, which tells us that everything is not equal. Utilization has declined faster than capacity!
The chart depicts degrading efficiency in capital assets over time. While companies have streamlined the workforce they are still in process of streamlining capital assets. This should continue as the average capacity utilization before 2000 was around 85% and currently we are just inching back to around 80%. The interesting thing about this that absolutely nobody on television dares to mention is that capex is the basis for a trickle down recovery. That is, make borrowing costs relatively very cheap and corporations will use that low cost period to increase capex because it lowers the break-even for a given project and thus increases return on capital. And ROC growth equates to big bonuses for C-suite executives.
But why didn’t C- suite executives take advantage of low cost capex? Well you can thank both fiscal and monetary policies for destroying corporate capital expenditures. As a CEO you must allocate your cash to maximize shareholder value. And when the US has implemented a fiscal policy with the highest G20 corporate tax rate it means the break-even is higher than every other developed nation. And so when demand is weak there is no reason to invest in capex unless costs are relatively very low, which the tax has ensured is not the case.
From a monetary perspective, borrowing costs are extremely low and corporations are borrowing to take advantage of the cheap cash. However, the Fed has guaranteed an upward moving stock market. And so the CEO is required to maximize shareholder value and thus must take the lower risk, higher return investment, which is most certainly the stock market over a high cost, high risk consumer market. Essentially between fiscal and monetary policy there is no way the CEO can in good conscience build out capacity.
So housing and capex are off the list as a growth function for the economy. How about jobs? Well according to the mainstream media, the Fed and the government, unemployment is down to 5.7%, which is historically pretty good. But then why the lack of economic or wage growth? This too is pretty basic stuff. If we look to the U6 unemployment figure we see unemployment and underemployment remains well into the double digits at 12%. This is certainly improved from the 2009 17% print but it is still higher than at any point between 2000 and 2008.
So despite all the calls of a radiant job market the reality is much more grim. Again, the proof is in the pudding. If the job market was so very strong, wages and median incomes would see material increases. That is just the law of supply and demand for labour. Because we actually see weakening wages and incomes it tells us there is increasing slack in the job market.
And so housing, capex and jobs then are off the list as potential growth drivers. Essentially we’ve just determined that we won’t have a wealth effect, a supply side or a demand side recovery. Outside of that I’m not sure what type of recovery exists. I suppose a central banking recovery or at least that’s what the Fed is telling us. But 6 years on and we are still waiting for all that wealth, created by the Fed’s trickle down policies, to actually trickle down.
Instead the cheap money has been used to compliment the corporate layoffs with share buybacks. Money saved from layoffs and from 0% loans go to share buybacks, which actually take money outside of the economy and into secondary markets that have no positive impact on the economy. But it has created immense unearned wealth to .1% of the population. Just so happens that the same folks holding onto these policies are part of that .1%. All starting to make a bit of sense now??
Now none of this is earth shattering. I’m certain most, when really focused on such things, understand that jobs, capacity expansion and housing are all in pretty bad shape. Yet we allow these central bankers to simply continue the same policies. It is imperative for the typical American consumer to understand that the Fed will carry on with these policies until it all collapses. It’s exactly what they did in the lead up to the 2008 debacle. They deny there are any existing problems that are not being overcome by their intellectual wizardry.
And the pundits laughed anytime cooler heads attempted to speak the truth about the coming collapse.
My point to all of this is while the overwhelming message continues to be everything is strong and the future is absolutely as bright as ever, as measured by the all time high markets, the facts and the data clearly tell a different story. What the videos remind us is that the pundits will always tout the ‘everything is great’ story until it is too late. They laugh and ostracize anyone who attempts to rock the boat with a message of reality. And they do it to deter others from delivering such a message.
That message is that there exists no catalyst mechanism to pull us out of this economic slumber. If you listen carefully to the pundits they never actually state a way out. They state the fundamentals are very strong but they never point to any specific fundamentals because there aren’t any strong fundamentals. And so here we go again with analysts touting strong fundamentals, pundits vehemently calling for economic growth and yet we haven’t seen any of it. Year after year after year we accept their story and the whole time the typical American gets poorer (median net worth is down 40% since 2007) while the top .1% is getting richer and richer.
Inevitably this all time high market overvaluation will blow up the same as last time despite the pundits laughing at such predictions. There is no escaping it and the real shit of it is that more retail cash is in the market than in 2007. Because net worth is down 40% that means a much higher total percentage of total household wealth is going to be lost in this next crash. The devastation will be more than most folks can sustain and the government will again look to reimburse the banks rather than the citizens. So you can listen to and laugh along with the ‘all knowing’ pundits or you can take heed of history and protect yourself now. But do remember the choice was yours. You will have nobody to blame but yourself when and if it all comes tumbling down and you were too busy laughing.