by Anthony Harrington
It’s the nature of deepish markets for every buyer to find a seller, and vice versa, so it should be no surprise to find some voices raised predicting that everything is about to drop off a cliff, precisely when everyone else is piling in, boots and all. However, Adam Taggart, a regular contributor to Chris Martenson’s Peak Prosperity site, argues the contrarian view with a greater mastery of detail than most.
There are a number of “warning signs” that worry him. U.S. growth is “awful,” he says. Racking in 1.8% growth in Q1 was terrible, but with Q2 looking like coming in at 0.3% that’s way worse. Markets are heading for the skies, but earnings are going the other way, and price cannot trump earnings over even the medium haul. Big U.S. companies are doing fine on earnings per share (EPS), but badly on revenue growth. The EPS figures are a factor of companies mastering their costs after five years of belt tightening, but sales are stubbornly hard to achieve. QE cash is definitely not percolating through to the real economy, though it is manifestly creating a boom in stock prices.
Price appreciation through July has been “nearly vertical,” Taggart points out, and this despite all the negativity. Partially, he argues, this is a function of a surge in demand. Bank of America points out that there have been absolutely huge weekly inflows into developed market equities. People fear that with QE ending, U.S. Treasuries are going to rise and they are shifting their cash by the boatload out of bonds and into equities, boosting demand for equities and chasing the price up and up.
Moreover, with the slowdown in emerging markets, there are now significant outflows from these into developed markets. Once again, this becomes yet another factor chasing the price of household name stocks onwards and upwards.
What particularly dismays Taggart is the similarity between the bottom-left-to-top-right chart of the S&P500’s (SPY) massive rise, to the point where it now exceeds $15 trillion in value for the first time ever, and the oil price chart. That, he points out, is just daft. Rising oil prices are terrible for business and take huge bites out of profit, but investors have the bit between their teeth and just don’t seem to care about fundamentals at all. When that happens, think tulip mania and go find yourself a hard hat and a safe place to hunker down.
Another, even more famously negative voice, that of SocGen’s Albert Edwards, predicted in a note released at the end of May 2013 that the S&P500 was headed for a record smash. The Wall Street Journal’s MarketBeat picked up on his commentary, quoting him as follows: “Many think I am mad. But I am not the only commentator expecting a deflationary bust—the sort of bust that will take the S&P down to 400 from the current 1300.” Since Edwards wrote his note, the S&P has thumbed its nose at his prediction and at the time of writing stands ready to break through the 1700 barrier, 400 points higher!
However, these negative voices are as nothing by comparison with the real master of doom, namely the Nortwestern University professor of economics, Robert Gordon, who wrote a paper in August 2012 called "Is US Economic Growth Over". Gordon's paper has become a hugely contested arena and will be the subject of a future blog, so I won't go into it here. But his point sums up as an assertion that prior to the start of the first industrial revolution in the 1750s, human life had basically stagnated as far as the standard of living is concerned, with millennia passing and not much being achieved. With the onset of the second industrial revolution and the invention of the internal combustion engine and the electricity grid, gigantic strides forward were taken.
That big leap forward is now grinding slowly to a halt and none of the supposed modern equivalents of the industrial revolution, namely the hi tech breakthroughs, artificial intelligence, genomics or anything else is going to deliver anything like the leap forward of those first two industrial revolutions. They were a lucky one off, and there isn't much chance of a repeat. Therefore, life is going to get progressively harder and the economic malaise that seems to be setting in is just the forerunner to a leveling down that we still have to come to terms with.
In my humble opinion, this is just so much doom-speak and wildly underestimates the dislocating, game changing transformations that the next generation will see filtering through into everyday life. Nevertheless, it makes discussion of a percentage here or there on national GDP figures seem a bit tame, doesn't it?