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Can We Trust Mr. Market’s Booming Economic Outlook?

Can We Trust Mr. Market’s Booming Economic Outlook?
Tyler Durden
Wed, 12/16/2020 – 09:05

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The Sopranos- Season 1 Episode 5 “College”

Meadow Soprano speaking to her father Tony: “Are

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Can We Trust Mr. Market's Booming Economic Outlook? Tyler Durden Wed, 12/16/2020 - 09:05

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The Sopranos- Season 1 Episode 5 “College”

Meadow Soprano speaking to her father Tony: “Are you in the mafia?”

Tony: “That’s total crap. Who told you that?”

Meadow: “I lived in the house all my life. I’ve seen police come with warrants. I’ve seen you going out at three in the morning.”

Tony: “So, you’ve never seen Doc Cusimano going out at three in the morning on a call?”

Meadow: “Did the Cusimano kids ever find $50,000 in Krugerrands and a .45 automatic when they were hunting for Easter eggs?”

Tony: “There is no mafia.” 

As we discussed in The Fed’s Monetary Animal House, appearances can be deceiving. Most major stock indexes are up double-digit percentages year to date, implying significant economic growth and a booming outlook for businesses, workers, and households.

Economic activity is well off the lows seen in April and May. The same data also suggests we are nowhere near the same level of activity seen pre-COVID. To quote New York Fed President John Williams, “we are still in a profound recession”-12/2/2020.

Is the economic rebound real and durable, or a false positive supported by record levels of artificial stimulus? Does current investor confidence hinge on more trillion-dollar stimulus agreements? Although we have our suspicions, we won’t know the answers for quite some time.

Maybe the mafia doesn’t exist, and perhaps Wall Street’s exuberance is correctly foreshadowing an economic boom.

The Economy Versus The Market

In Bloomberg’s Opinion section, Nir Kaissar analyzes the historical relationship between the economy and equity market returns. Using GDP and corporate sales, Kaissar finds a historically weak correlation to S&P 500 returns. His conclusion is simple: “The stock market doesn’t care about the economy.”

Based on his analysis and what we see today, it is hard to disagree.

Regardless, if we are to invest in stocks, we must understand what we are buying. A shareholder of a publically traded company is an owner of the company. The share price represents the present value of a future stream of earnings. It is no different from buying a restaurant, dry cleaner, or a financial advisor.

Shareholders assess many factors that drive future earnings. Of them, broad economic activity ranks at or near the top for most companies.

The following graph compares the 10-year growth rates of corporate profits and GDP.

The correlation above is not statistically strong with an R-squared of .40, but visually you can see a relationship exists. The relationship would be more robust if not for fluctuating profit margins.

The fact of the matter is there must be a relationship. Corporate revenue is almost entirely dependent on consumer and government spending. In 2019 those two factors accounted for 87% of GDP.  

Since the 1980s, the percentage of S&P 500 companies with sales growth over 15% has been declining in line with economic growth.

Regardless of what anyone tells you, the underlying long term basis for investing in stocks is future earnings and, ultimately, the economy.

How Much Economic Growth Should We Expect?

In The Decade Long Path To Recovery, we highlight following the last three recessions; each economic expansion has been sequentially weaker.

As we wrote: “To predict a post-COVID growth trajectory, we need only look at the ratio of Federal debt to GDP. As shown below, the trend lines of that ratio to trend economic growth are negatively correlated. Since 1990 the relationship has a very high r-square of .928. As the ratio of Federal debt to GDP rises, economic growth declines.”

The fiscal response to the COVID crisis dwarfs the responses to prior recessions. Keep in mind there are likely many more trillions of stimulus coming in 2021 and beyond. The ratio of Federal debt to GDP has surged from 107% to 127% in just two quarters and will proceed higher.

Fiscal spending is mostly non-productive. It boosts economic activity for a short period. However, and this is important, it also:

  • Pulls growth forward from the future resulting in less future demand

  • Further increases the amount of debt that must get serviced, resulting in less money available for consumption or investment.

  • Worsens productivity growth rates, again further dampening future economic growth

Barring an unexpected burst of productivity, inflation, or maybe even Martians landing on earth and buying our goods, we find it nearly impossible to forecast longer-term economic growth matching the historically paltry 2.25% rate of the 2010s.

How Much Economic Growth Is The Market Predicting?

Given the link between corporate earnings and economic growth, we can use stock prices and earnings estimates before COVID arrives at an implied economic growth rate.

To help with this task, we share Lance Robert’s article- Is The Narrative All “Priced In?”

The article compares one-year forward earnings expectations from December 2019 to the current estimate for year-end 2021. As he wrote, “However, earnings for 2020 will not come in at $167/share, but rather closer to $93/share. Such is more than $74 lower than estimated, leaving investors holding assets that have doubled in valuation from 19x to 38x earnings.” He then explained analysts expect earnings to be $143.09 per share at the end of 2021.

S&P 500 earnings per share from 2012 through 2019 grew at a six percent annualized rate. Had they continued at that rate in 2020 and through 2025, earnings would increase to $199 per share.

Current EPS estimates for December 2021, implies that earnings will grow 30% next year.

Let’s assume the market is right for 2021, even though forward earnings tend to decline as the year progresses. We can then solve a growth rate that brings EPS back to where a 6% growth rate would have put earnings in 2025 ($199). With these assumptions, math implies a growth rate of 8.5% for the years 2022-2025, as shown below.

Let that sink in. After an assumed 30% growth rate in 2021, the market assumes earnings will grow 2.5% faster than in the seven years before COVID.

Who Is Lying?

Is the market correct in pricing in more robust economic growth than was witnessed during the last expansion?

Should investors consider historical data showing that economic growth will likely be slower than during the prior expansion?

Might Mr. Market be lying?

The problem in answering the question is there are many other factors affecting stock prices. Below are a few influencers that cloud reality and potentially provide fodder for even more precious equity valuations and higher prices.

  • Continuation of unprecedented monetary and fiscal policy

  • Potential for the Fed to buy stocks (they buy corporate debt already)

  • Passive investors do not care about fundamentals or valuations.

Summary

**PRESIDENT TRUMP SAID U.S. IS IN MIDST OF AN ECONOMIC BOOM, LOOK AT NASDAQ

Yes, Mr. President, the NASDAQ implies the economy should be booming. Facts, however, tell us something vastly different.

Further, and often disregarded, is the fact that the economy was not organically strong before the pandemic hit. Swift monetary and fiscal actions boosted economic activity and provided significant liquidity to markets. Yet, at the same time, they handicap future economic activity.

As a result of factors other than earnings and the economy, stock prices are at record highs. The implication is that the basis for owning stocks, earnings, have failed to keep up with stock prices. Worse, it is highly unlikely earnings will meet the market’s lofty implied expectations.  

Should we believe Tony? Or should we ask the right questions like his daughter Meadow?

In February and March, the 34% selloff offered a painful reminder and glimpse of the consequences for ignoring the truth.

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International

United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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March 8, 2024

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

Shutterstock

United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

More Travel:

"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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International

Walmart launches clever answer to Target’s new membership program

The retail superstore is adding a new feature to its Walmart+ plan — and customers will be happy.

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March 8, 2024

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It's just been a few days since Target  (TGT)  launched its new Target Circle 360 paid membership plan. 

The plan offers free and fast shipping on many products to customers, initially for $49 a year and then $99 after the initial promotional signup period. It promises to be a success, since many Target customers are loyal to the brand and will go out of their way to shop at one instead of at its two larger peers, Walmart and Amazon.

Related: Walmart makes a major price cut that will delight customers

And stop us if this sounds familiar: Target will rely on its more than 2,000 stores to act as fulfillment hubs. 

This model is a proven winner; Walmart also uses its more than 4,600 stores as fulfillment and shipping locations to get orders to customers as soon as possible.

Sometimes, this means shipping goods from the nearest warehouse. But if a desired product is in-store and closer to a customer, it reduces miles on the road and delivery time. It's a kind of logistical magic that makes any efficiency lover's (or retail nerd's) heart go pitter patter. 

Walmart rolls out answer to Target's new membership tier

Walmart has certainly had more time than Target to develop and work out the kinks in Walmart+. It first launched the paid membership in 2020 during the height of the pandemic, when many shoppers sheltered at home but still required many staples they might ordinarily pick up at a Walmart, like cleaning supplies, personal-care products, pantry goods and, of course, toilet paper. 

It also undercut Amazon  (AMZN)  Prime, which costs customers $139 a year for free and fast shipping (plus several other benefits including access to its streaming service, Amazon Prime Video). 

Walmart+ costs $98 a year, which also gets you free and speedy delivery, plus access to a Paramount+ streaming subscription, fuel savings, and more. 

An employee at a Merida, Mexico, Walmart. (Photo by Jeffrey Greenberg/Universal Images Group via Getty Images)

Jeff Greenberg/Getty Images

If that's not enough to tempt you, however, Walmart+ just added a new benefit to its membership program, ostensibly to compete directly with something Target now has: ultrafast delivery. 

Target Circle 360 particularly attracts customers with free same-day delivery for select orders over $35 and as little as one-hour delivery on select items. Target executes this through its Shipt subsidiary.

We've seen this lightning-fast delivery speed only in snippets from Amazon, the king of delivery efficiency. Who better to take on Target, though, than Walmart, which is using a similar store-as-fulfillment-center model? 

"Walmart is stepping up to save our customers even more time with our latest delivery offering: Express On-Demand Early Morning Delivery," Walmart said in a statement, just a day after Target Circle 360 launched. "Starting at 6 a.m., earlier than ever before, customers can enjoy the convenience of On-Demand delivery."

Walmart  (WMT)  clearly sees consumers' desire for near-instant delivery, which obviously saves time and trips to the store. Rather than waiting a day for your order to show up, it might be on your doorstep when you wake up. 

Consumers also tend to spend more money when they shop online, and they remain stickier as paying annual members. So, to a growing number of retail giants, almost instant gratification like this seems like something worth striving for.

Related: Veteran fund manager picks favorite stocks for 2024

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Government

President Biden Delivers The “Darkest, Most Un-American Speech Given By A President”

President Biden Delivers The "Darkest, Most Un-American Speech Given By A President"

Having successfully raged, ranted, lied, and yelled through…

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March 8, 2024

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President Biden Delivers The "Darkest, Most Un-American Speech Given By A President"

Having successfully raged, ranted, lied, and yelled through the State of The Union, President Biden can go back to his crypt now.

Whatever 'they' gave Biden, every American man, woman, and the other should be allowed to take it - though it seems the cocktail brings out 'dark Brandon'?

Tl;dw: Biden's Speech tonight ...

  • Fund Ukraine.

  • Trump is threat to democracy and America itself.

  • Abortion is good.

  • American Economy is stronger than ever.

  • Inflation wasn't Biden's fault.

  • Illegals are Americans too.

  • Republicans are responsible for the border crisis.

  • Trump is bad.

  • Biden stands with trans-children.

  • J6 was the worst insurrection since the Civil War.

(h/t @TCDMS99)

Tucker Carlson's response sums it all up perfectly:

"that was possibly the darkest, most un-American speech given by an American president. It wasn't a speech, it was a rant..."

Carlson continued: "The true measure of a nation's greatness lies within its capacity to control borders, yet Bid refuses to do it."

"In a fair election, Joe Biden cannot win"

And concluded:

“There was not a meaningful word for the entire duration about the things that actually matter to people who live here.”

Victor Davis Hanson added some excellent color, but this was probably the best line on Biden:

"he doesn't care... he lives in an alternative reality."

*  *  *

Watch SOTU Live here...

*   *   *

Mises' Connor O'Keeffe, warns: "Be on the Lookout for These Lies in Biden's State of the Union Address." 

On Thursday evening, President Joe Biden is set to give his third State of the Union address. The political press has been buzzing with speculation over what the president will say. That speculation, however, is focused more on how Biden will perform, and which issues he will prioritize. Much of the speech is expected to be familiar.

The story Biden will tell about what he has done as president and where the country finds itself as a result will be the same dishonest story he's been telling since at least the summer.

He'll cite government statistics to say the economy is growing, unemployment is low, and inflation is down.

Something that has been frustrating Biden, his team, and his allies in the media is that the American people do not feel as economically well off as the official data says they are. Despite what the White House and establishment-friendly journalists say, the problem lies with the data, not the American people's ability to perceive their own well-being.

As I wrote back in January, the reason for the discrepancy is the lack of distinction made between private economic activity and government spending in the most frequently cited economic indicators. There is an important difference between the two:

  • Government, unlike any other entity in the economy, can simply take money and resources from others to spend on things and hire people. Whether or not the spending brings people value is irrelevant

  • It's the private sector that's responsible for producing goods and services that actually meet people's needs and wants. So, the private components of the economy have the most significant effect on people's economic well-being.

Recently, government spending and hiring has accounted for a larger than normal share of both economic activity and employment. This means the government is propping up these traditional measures, making the economy appear better than it actually is. Also, many of the jobs Biden and his allies take credit for creating will quickly go away once it becomes clear that consumers don't actually want whatever the government encouraged these companies to produce.

On top of all that, the administration is dealing with the consequences of their chosen inflation rhetoric.

Since its peak in the summer of 2022, the president's team has talked about inflation "coming back down," which can easily give the impression that it's prices that will eventually come back down.

But that's not what that phrase means. It would be more honest to say that price increases are slowing down.

Americans are finally waking up to the fact that the cost of living will not return to prepandemic levels, and they're not happy about it.

The president has made some clumsy attempts at damage control, such as a Super Bowl Sunday video attacking food companies for "shrinkflation"—selling smaller portions at the same price instead of simply raising prices.

In his speech Thursday, Biden is expected to play up his desire to crack down on the "corporate greed" he's blaming for high prices.

In the name of "bringing down costs for Americans," the administration wants to implement targeted price ceilings - something anyone who has taken even a single economics class could tell you does more harm than good. Biden would never place the blame for the dramatic price increases we've experienced during his term where it actually belongs—on all the government spending that he and President Donald Trump oversaw during the pandemic, funded by the creation of $6 trillion out of thin air - because that kind of spending is precisely what he hopes to kick back up in a second term.

If reelected, the president wants to "revive" parts of his so-called Build Back Better agenda, which he tried and failed to pass in his first year. That would bring a significant expansion of domestic spending. And Biden remains committed to the idea that Americans must be forced to continue funding the war in Ukraine. That's another topic Biden is expected to highlight in the State of the Union, likely accompanied by the lie that Ukraine spending is good for the American economy. It isn't.

It's not possible to predict all the ways President Biden will exaggerate, mislead, and outright lie in his speech on Thursday. But we can be sure of two things. The "state of the Union" is not as strong as Biden will say it is. And his policy ambitions risk making it much worse.

*  *  *

The American people will be tuning in on their smartphones, laptops, and televisions on Thursday evening to see if 'sloppy joe' 81-year-old President Joe Biden can coherently put together more than two sentences (even with a teleprompter) as he gives his third State of the Union in front of a divided Congress. 

President Biden will speak on various topics to convince voters why he shouldn't be sent to a retirement home.

According to CNN sources, here are some of the topics Biden will discuss tonight:

  • Economic issues: Biden and his team have been drafting a speech heavy on economic populism, aides said, with calls for higher taxes on corporations and the wealthy – an attempt to draw a sharp contrast with Republicans and their likely presidential nominee, Donald Trump.

  • Health care expenses: Biden will also push for lowering health care costs and discuss his efforts to go after drug manufacturers to lower the cost of prescription medications — all issues his advisers believe can help buoy what have been sagging economic approval ratings.

  • Israel's war with Hamas: Also looming large over Biden's primetime address is the ongoing Israel-Hamas war, which has consumed much of the president's time and attention over the past few months. The president's top national security advisers have been working around the clock to try to finalize a ceasefire-hostages release deal by Ramadan, the Muslim holy month that begins next week.

  • An argument for reelection: Aides view Thursday's speech as a critical opportunity for the president to tout his accomplishments in office and lay out his plans for another four years in the nation's top job. Even though viewership has declined over the years, the yearly speech reliably draws tens of millions of households.

Sources provided more color on Biden's SOTU address: 

The speech is expected to be heavy on economic populism. The president will talk about raising taxes on corporations and the wealthy. He'll highlight efforts to cut costs for the American people, including pushing Congress to help make prescription drugs more affordable.

Biden will talk about the need to preserve democracy and freedom, a cornerstone of his re-election bid. That includes protecting and bolstering reproductive rights, an issue Democrats believe will energize voters in November. Biden is also expected to promote his unity agenda, a key feature of each of his addresses to Congress while in office.

Biden is also expected to give remarks on border security while the invasion of illegals has become one of the most heated topics among American voters. A majority of voters are frustrated with radical progressives in the White House facilitating the illegal migrant invasion. 

It is probable that the president will attribute the failure of the Senate border bill to the Republicans, a claim many voters view as unfounded. This is because the White House has the option to issue an executive order to restore border security, yet opts not to do so

Maybe this is why? 

While Biden addresses the nation, the Biden administration will be armed with a social media team to pump propaganda to at least 100 million Americans. 

"The White House hosted about 70 creators, digital publishers, and influencers across three separate events" on Wednesday and Thursday, a White House official told CNN. 

Not a very capable social media team... 

The administration's move to ramp up social media operations comes as users on X are mostly free from government censorship with Elon Musk at the helm. This infuriates Democrats, who can no longer censor their political enemies on X. 

Meanwhile, Democratic lawmakers tell Axios that the president's SOTU performance will be critical as he tries to dispel voter concerns about his elderly age. The address reached as many as 27 million people in 2023. 

"We are all nervous," said one House Democrat, citing concerns about the president's "ability to speak without blowing things."

The SOTU address comes as Biden's polling data is in the dumps. 

BetOnline has created several money-making opportunities for gamblers tonight, such as betting on what word Biden mentions the most. 

As well as...

We will update you when Tucker Carlson's live feed of SOTU is published. 

Tyler Durden Fri, 03/08/2024 - 07:44

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