The 30-Years Bubble—Why America Ain’t That Rich


by David Stockman, David Stockmans Contra Corner:

The entire financial and economic narrative in today’s Bubble Finance world is virtually context- and history-free; it’s all about the short-term deltas and therefore exceedingly misleading and dangerous.

So when a big trend or condition is negative and unsustainable, you generally can’t even get a glimpse of it from the so-called “high-frequency” weekly, monthly and even quarterly data on which the financial press and its casino patrons thrive. And that’s not merely because most of the data from the government statistical mills is heavily massaged and modeled and often “adjusted” beyond recognition over 3-5 year intervals of statistical revision.

Beyond that, however, even medium term trends get largely ignored. That’s because the purpose of economic and financial data today is to facilitate daily (and hourly) trading in the casino—not inform long-term investors about underlying trends, conditions and prospects.

The investor class of yore, in fact, has largely been destroyed by the last 30-years of monetary central planning and the Wall Street deformations it has fostered—-meaning that, increasingly, headline reading algo-traders and trend-following speculators are the main consumers of the “incoming data”.

For instance, scratch a talking head today and you get the “strong economy” meme as purportedly reflected in two back-to-back quarters of 3% real GDP growth. Yet there is absolutely nothing “strong” about the picture below or compelling about the last two quarters.

After all, during Q2 and Q3 2014 there were back-to-back growth quarters of 4.6% and 5.2%, respectively. But that didn’t last long—-nor did the 3.1% and 4.0% growth rates of Q3 and Q4 of 2013 or the three-quarter average of 3.0% in Q2-Q4 of 2010.

All of those “strong” quarters seem to have disappeared from the groupthink narrative, as well as the punk quarters strewn in-between. In part, that’s because most of them were reported at far lower or higher levels at the time, meaning that the underlying trend has simply disappeared from the high-frequency narrative about good deltas and excuses for ones which are not.

Still, the heart of the problem is the foolishness of annualizing 90 days worth of preliminary data with seasonal adjustment factors that are rarely up to the task.

Moreover, the large aggregates like GDP are inherently buffeted by short-term shocks ( e.g. severe hurricanes not embedded in the seasonals), inventory stocking and destocking mini-cycles and the ebb and flow of global trade, exchange rates and credit impulses. These, in turn, reflect the machinations of what has now become a worldwide convoy of hyper-interventionist Keynesian central banks.

Even modest adjustments to deal with some of these disabilities give a starkly different picture. For example, consider what happens when you remove the inventory contribution to quarterly GDP—-which washes to essentially zero over time—and also set aside the highly volatile impact of net import/export trade, which has actually averaged a -0.28% contribution to GDP growth over the last 11 quarters.

What remains might be termed “core GDP” and includes consumer spending, fixed investment and government output. On that basis, growth was 2.4% in Q4 2016; 2.4% and 2.8% in Q1 and Q2 2017, respectively; and just 2.0% in Q3 2017. That is, the latest quarter showed the weakest annualized expansion rate in the last year and there was no “3” in it or any of the previous three periods.

In fact, a true long-term investor would only need to know whether the trend of year-over year growth in real final sales—which removes the volatile inventory component—is accelerating or decelerating and where the economy stands in the business cycle.

The chart below answers that question and there is no awesome 3% about it: Real final sales growth during the current so-called recovery peaked 10 quarters ago; has always been exceedingly weak given the unusual depth of the Great Recession; and it now exceedingly long in the tooth by all historic standards at 102 months.

Even on a near-term basis, its pretty hard to say that the 2.3% year-over-year expansion of real final sales in Q3 2017 was meaningfully different from the 2.2% year-0ver-year rate of gain recorded in Q1 2016.

Indeed, the contrast between the “strengthening” direction of the last four green bars in the chart above and the “weakened” position of the last four blues bars on the chart below highlights why the Wall Street narrative is so chronically incomplete and misleading. The stock peddlers who moonlight as “strategists” and “economists” at Goldman, Morgan Stanley etc are essentially selling a short-term trading “edge” to fast money clients, not proffering fundamental analysis about the state of the business cycle and its implications for PE multiples and stock prices.

That’s more than evident in the fact that when the growth trend peaked at 3.8% in Q1 2015, the S&P 500 stood at 2070 and was valued at 20.8X LTM reported earnings, compared to 2660 today, which represents 24.9X reported earnings.

That is, there has been a 40% downshift in the real final sales growth rate accompanied by a 400 basis point expansion of the PE multiple—and from what was already the nosebleed section of history. And the current PE inflation is occurring at a point when the business expansion is approaching the longest one in recorded history.

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