- Stimulus have inflated the growth rates in the US.
- When stimulus is over growth rates will revert to normalized levels.
- As of April 1, 2014,real net Stimulus was officially over.
It's time to party like it was 1999. Coincidences between then and now are many, but one thing has defined every one of the asset bubbles of modern history, the existence of cheap money. The Internet revolution that caused the bubble back then was in part fostered by the existence of cheap money, and the asset bubble we are in today has been fostered by stimulus.
As the turn of the millennium came after the Internet bubble, and cheap money began to disappear, so did the free flow of liquidity that drove the stock market higher. I know this first hand because I started my company, Stock Traders Daily, in January of 2000, at the virtual peak of the Internet bubble. Everyone was riding a high horse, everyone thought they were better than they were, and I was also living in San Francisco at the time, so this was exponential eyes for me.
However, I was also recommending that clients short stocks like Yahoo (NASDAQ:YHOO), Amazon (NASDAQ:AMZN), CMGI, and virtually anything with.com in its name. I was doing this because the market was clearly in a bubble, and it was poised to decline both on a fundamental level and on a technical level at the same time.
Fundamentally, back then, valuations were exorbitant due to the free flow of liquidity that was largely induced by the easy money policies of Alan Greenspan. Today's liquidity was offered by Ben Bernanke in the form of constant stimulus dollars, and it too has brought the market to a comparable bubble like state. On the surface, it may not seem as if the bubbles are similar because valuations today do not seem nearly as out of whack as they were back then, but the growth rates upon which those valuation levels are based distorts those traditional valuation models.
The constant stimulus dollars finally found their way into the economy and to the stock market and real estate specifically in 2013, it took a while for those stimulus efforts to be realized, but they did influence the growth rate in the United States. Those fabricated dollars in turn falsely inflated the growth rate of the economy and of corporate America, and in doing so it distorts the valuation models of traditional economists and analysts.
Therefore, it is important for us to understand just how distorted the growth rates are in the United States as a result of the stimulus efforts. My macro economic analysis is called The Investment Rate, and since 1900 it has never been wrong about identifying longer term economic cycles here in the United States. It is a demographic analysis based on societal norms and the lifetime investment patterns of individuals in our country. It tells us that we are in the third major down period in US history, not unlike the great depression or stagflation, and the natural rate of change in the amount of new money available to be invested into the economy declines every year between 2007, the year this down period began, and 2023, the year the down period comes to an end.
Without stimulus, the Investment Rate tells us that economic growth would actually have declined between 2007 and 2014, but the growth rates clearly stabilized and began to increase after the fallout in 2008. My analysis also suggests that the decline in 2008 was an overshoot to the downside, and a return to parity was necessary from there, but in 2011 the market came back to parity only to be met shortly thereafter with additional and aggressive stimulus, which significantly distorted economic growth and masked the economic weakness that otherwise would exist.
Quantifiably, the economic growth that brought our economy and stock market to these levels was 66% higher than it should have been according to the natural growth rate proven by the Investment Rate, which has been accurate at predicting longer term economic cycles since 1900. That 66% exaggeration can also be translated directly into risk, and it was risk that followed the Internet bubble as well.
When the free flow of cheap money comes to an end, the music stops, and some people are left without a chair. That was true at the turn of the millennium, and I expect that to be true again sometime soon. You see, stimulus is already over, and soon the combined efforts of the U.S. treasury and the Federal Reserve will begin to drain substantial amounts of liquidity from the US economy instead.
I don't know that Yahoo or Amazon are as attractive as they were as short candidates back in 1999, but I can tell you that the stock market is significantly overvalued due in large part to the fabricated growth rates induced by stimulus and the cheap money programs that Ben built. That makes this a coincidence on a fundamental level, and as soon as the technicals line up, short signals will too.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.