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Summary

  • Momentum stocks do well when easy money policies are in effect.
  • But they fall apart when liquidity levels are reduced, or worse, removed.
  • It is time to see what the economy will look like without stimulus.

Stocks that have benefited from free flowing liquidity, like Netflix (NFLX), Facebook (FB), and Tesla (TSLA), just to name a few, have come under serious pressure lately, and it may have everything to do with an underlying theme that smaller investors are missing.

Economic growth has been inflated by 66% as a result of the stimulus efforts of the FOMC. Natural growth rates have declined between 2007 and 2014, which explains why the $4 Trillion of stimulus has not had more influence, but the capital infusions by the FOMC have indeed distorted natural growth temporarily.

Instead of declining between 2007 and now, the growth rate in our economy has increased as a result of the liquidity packages. The difference between where the economy is now and where it should be on a naturalized basis suggests a 66% exaggeration in the growth rate we have been witness to.

Be careful not to misunderstand the conclusions. Our analysis does not suggest negative growth rates, but just declining rates of growth over this time span, but instead the growth rate has been positive and the difference in the growth rate that we have been witness to and the growth rate of the naturalized economy, which is the one that would exist without stimulus, is 66%.

Our definition of the natural economy is first, and probably clearly, one that does not have fabricated liquidity injections from the FOMC. In addition, the natural economic conditions that I am referencing here are based on societal norms and individual investors, who ultimately govern economic cycles in the United States.

Some might argue that economic cycles and maybe even stock market levels are determined by the spending decisions of consumers, but spending does nothing more than offer a chaos like boundary around the longer term economic cycles that the investment patterns of our population define.

More precisely, it is the systematic and aggressive investment decisions of our population, not the one off investment decisions being made after a bonus or an inheritance, but the ones that are systematic and aggressive that matter to the longer-term naturalized economic cycles.

This demographic that is exactly what is contracting and that is exactly what defines the differential between the growth rates of our economy today and what the natural growth rate in our economy actually is.

Source: The Economy Without Stimulus