Soon the brief panic in August and September will be nothing more than a mere blip on the price chart. A convenient toehold where stocks dug in, coiled up, and then sprang to a new record level from. Buy the dip aficionados will point to it for validation and self-satisfaction.
By all accounts, stocks are nearly as expensive as they’ve ever been. No matter how you slice and dice it – be it the Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio or the Buffett indicator – overall stock prices are a complete and total rip off. This simple fact is being largely ignored at the moment.
On top of that, treasury yields – which move inverse to price – are skidding along the bottom of a 30-plus year credit cycle. When yields finally turn, they could rise for the next 20 years. Conversely, when yields finally rise in earnest, asset prices will deflate as borrowing costs increase.
This is a trend reversal that’s been a long time in the making. But it isn’t quite here. Cheap credit and expensive asset prices are still the order of the day. Perhaps a final mania and blow off top are needed before the bull market finally acquiesces.
A Decade of Flailing
But while stocks are going up, the global economy’s rolling over like Jeb Bush in the primary debate. On Tuesday, for example, the Commerce Department reported that new orders for durable goods declined 1.2 percent in September. This marked the second consecutive monthly drop.
Consumer confidence is also on the wane. The Conference Board’s Consumer Confidence Index fell to 97.6 in October. According to the Conference Board, the reason for the decline is because consumers are concerned about the job market…as they should be…
Because big companies are having a tough time making money. Quarterly profits and revenues at S&P 500 companies are on track to decline in tandem for the first time in six years, during the depths of the Great Recession. Maybe that’s because the overall economy is grinding to a halt.
Yesterday, for example, the Bureau of Economic Analysis reported GDP increased at a rate of just 1.5 percent from July through September. That’s down from 3.9 percent in the second quarter. What’s more, the personal consumption expenditures price index rose at a rate of 1.2 percent during this same period, as opposed to 2.2 percent in the second quarter, which flattered the third quarter GDP number.
This, no doubt, is not the type of growth that overcomes colossal debt overhangs. In fact, even with the slight inflation boost, U.S. GDP won’t likely top 3 percent annual growth for the 10th consecutive year. In other words, the last time the U.S. economy grew at an annual rate above 3 percent was 2005.
The Exhilarating Romp to DOW 30,000
This slow growth economy is the world we live in. But not only has growth been slow. The economy continues to slow down even further. Though it may be subtle from one day to the next, like the days getting shorter, over a period of a month or two the change is stark.
Manufacturing and corporate earnings are declining. Consumer confidence is down. Moreover, overall GDP is a hair away from slipping into negative.
Facing these unfavorable economic conditions it is logical to be wary of the expensive stock market. But, remember, the stock market is not logical at all. Given the massive amounts of monetary intervention being undertaken, it is completely illogical. That’s why we fear you ain’t seen nothing yet…
Monetary policy is being executed to stimulate demand – to boost up the economy. Just last week the European Central Bank announced it would continue creating money from nothing to buy European debt. China also cut its benchmark rate for the sixth time within a year. Then, this week, the Fed yielded to Wall Street and extended ZIRP for yet another month. However, they said they’d ‘definitely maybe’ raise the federal funds rate in December.
To the chagrin of central bankers the world over, and quacks like Larry Summers, further monetary stimulus will not stimulate the economy. That is the experience of the last seven years. Despite massive monetary insanity the economy’s lurched about like a dipsomaniac in search of a solid footing. So while additional monetary stimulus won’t stimulate the economy, it will stimulate additional stock price distortions and asset price bubbles.
Hang on to your hat…and your wallet. We may be in for the ride of a life time. DOW 20,000? DOW 30,000?
Who really knows? Regardless, the exhilaration will be too much to hold on to.
From our perspective, DOW 30,000 is not something to cheer and celebrate. For it will not be a reflection of a booming, healthy economy. Rather, it will be an expression of the pure madness and insanity of the world’s central bankers. It will also set up the stock market for the mother of all busts.
Caveat emptor – let the buyer beware.
for Economic Prism