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The Great Divide Between Stocks & The Economy

The Great Divide Between Stocks & The Economy



The Great Divide Between Stocks & The Economy Tyler Durden Sat, 06/13/2020 - 11:52

Authored by Lance Roberts via,

“There is a ‘Great Divide’ happening between the near ‘depressionary’ economy versus a surging bull market in stocks. Given the relationship between the two, they both can’t be right.” – May 12th.

The optimistic view currently is that stocks have it right. Such was a point made in a recent CNBC interview with Ed Yardeni:

“The market has been a ray of sunshine. Basically investors are convinced that we’ll get out of this, and the economy will recover along with earnings. So far, that forecast seems to be working out pretty well. The economy may very well be catching up with the stock market rather than the stock market going off on its own.”

I want to come back to this point in a moment, but we need some historical context.

Relationship Between Stocks & Economy

While the media is a bit ecstatic with the markets rise, I disagree with Yardeni a bit. Historically when stocks have deviated from the underlying economy, the resolution has always been lower stock prices.

There is a close relationship between the economy, earnings, and asset prices over time. The chart below compares the three going back to 1947 with an estimate for 2020 using the latest data points.

Since 1947, earnings per share have grown at 6.21%, while the economy has expanded by 6.47% annually. That close relationship in growth rates should be logical, particularly given the significant role that consumer spending has in the GDP equation.

Stocks Vs. The Economy, Which Is Right?

While over short periods, the stock market often detaches from underlying economic activity, this is due to psychology as investors latch onto the belief “this time is different.” 

Unfortunately, it never is.

While not as precise, a correlation between economic activity and the rise and fall of equity prices does remain. In 2000, and again in 2008, as economic growth declined, corporate earnings contracted by 54% and 88%, respectively. Such was despite calls of never-ending earnings growth before both previous contractions.

As earnings disappointed, stock prices adjusted by nearly 50% to realign valuations with both weaker than expected current earnings and slower future earnings growth. While the stock market is once again detached from reality, looking at past earnings contractions, suggests it won’t be the case for long.

The relationship becomes more evident when looking at the annual change in stock prices relative to the yearly GDP change.

Again, since stock prices are driven in part by the “psychology” of market participants, there can be periods where markets become detached from fundamentals. However, where history disagrees with Yardeni, fundamentals never play “catch up” with stock prices.

Stocks Running Of Bad Economic Data

As Mr. Yardeni noted, the market is hopeful that the economy will quickly recover, bringing earnings growth back. Bolstering that view was last Friday’s employment report which CNBC continues to tout:

“The Bureau of Labor Statistics’ latest release trounced expectations, revealing the unemployment rate dipped to 13.3% from 14.7% while economists anticipated a jump to roughly 20%. Payrolls increased by more than 2.5 million, beating estimates for a 7.5 million decline.”

It was certainly good news at the headline. Unfortunately, the report was rife with errors that suggest the “real” unemployment rate is markedly higher.

There was a significant decrease in the sample rate of households, which sharply increases the margin of error in the report.

BLS In Error

More importantly, there was a miscalculation of the data in the report:

The drop in the unemployment rate is due precisely to the substantial decrease in the labor force. Since February, according to the BLS, 6.3 million people have decided they no longer wanted to work. Such is substantially more than would be expected even based on the massive increase in unemployment.

Therefore, if we adjust for the labor force, and count the extra 4.9 million people who were “not at work for other reasons,” the “realistic unemployment rate” was 17.1 percent in May.

While that number is down from April, it is still higher than any other unemployment rate in over 70 years. (But the 13.3% number was as well.)

From the BLS:

“There were also a large number of workers classified as employed but absent from work. As was the case in March and April, household survey interviewers are instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff

However, not all such workers were so classified.

If the workers were classified as unemployed on temporary layoff, the overall unemployment rate would be about 3 percentage points higher than reported (on a not seasonally adjusted basis).

If we make the proper adjustments to the unemployment rate for both April and May, it reveals the ugly truth.

In other words, the unemployment rate was 16.3% using their data, which suggests the number of unemployed is closer to 26 million.

If my numbers are close to correct, there will be implications to earnings and profits.

One Time Bump May Fade Quickly

Furthermore, there is a difference between a one-time bump and an economic recovery based on growing economic activity.

“The labor market data suggested an economic recovery is arriving sooner than expected and revived hopes for a V-shaped trendline for gross domestic product.” – Yardeni

While “hope” is high, the virus is behind us, there will be no “second-wave,” a vaccine will be available by year-end, and more stimulus is on the way; there are many issues which can go wrong. Like this:

I am certain the economy will not be “locked down” a second time regardless of the severity of the outbreak. Politicians have learned their lesson. As Steve Mnuchin said on Thursday:

However, the risk is a secondary infection will deter consumers from returning to the economy. 

The partial reopening of the economy did lead to some hiring last month, but going from zero staff to a skeleton crew with a limited opening is one thing. Getting back to full-employment, which will require substantially increased demand, is quite another.

Importantly, the government’s Paycheck Protection Program (PPP) certainly boosted employment in May. However, while the program “encouraged businesses to keep people on payroll,” if demand doesn’t return before the money runs out, layoffs will rise.

JOLTS May Have It

Looking at the latest Job Opening and Labor Turnover Survey (JOLTS), openings continue to decline suggesting the initial rehiring may be a one-time bump.

The same was the case in the areas that saw the biggest jumps in employment last month. In other words, businesses have rehired the workers they need, but may not be hiring any more for a while.

Such was further confirmed by another 1.5 million individuals filing for initial unemployment claims last week. While initial claims from unemployment are falling, such is expected as employers reach the limits of staffing needed to remain in business. However, these numbers could rise as the wave of forthcoming bankruptcies ensue and PPP ends.

Economy May Disappoint

“We’ve been talking about the ‘V’ — this is better than a ‘V’. This is a rocket ship.” – President Trump

“Real GDP could be down 40% to 50% in the second quarter. But the worse it is in the second quarter, the greater the likelihood we’ll see something like a 20% increase in the third quarter.” – Yardeni.

The COVID-19 pandemic has triggered one of the most severe global recessions in nearly a century and will leave the world scarred for years. Such was the warning from the Organization for Economic Cooperation and Development (OECD) on Wednesday.

Their warning, based upon the expectations of a “second-wave” of the virus, would derail the initial economic bounce. The OECD offered two forecasts for global growth: 

  1. The assumption a second wave of the coronavirus arrives in the back half of 2020; and,
  2. A strict social distancing measures is enough to avoid the emergence of new virus cases and deaths.  

The OECD forecasts global growth will plunge by 7.6% in 2020, and “remain well short” of its growth activity levels from 2019, suggesting no V-shaped recovery. If a second wave can is avoided, the world economy will contract by 6% in 2020, and again fail to recover to pre-corona levels by the end of 2021.

The OECD makes the case for either a “Nike Swoosh” or a “W-shaped” recovery. Both are well short of current expectations, but align with our analysis from last week:

Recovery To Nowhere

“However, the “return to economic normality” faces immense challenges. High rates of unemployment, suppressed wages, and elevated debt levels, makes a “V-shaped” recovery unlikely.

Such is where the “math” becomes problematic. A 50% drawdown in Q2, requires a 100% recovery to return to even. In the more optimistic recovery scenario detailed above, two-quarters of record recovery rates still leave the economy running in a deep recession.”

“Even if the economy achieves high recovery rates, it won’t change the recession. The resulting 2.5% economic deficit will remain one of the deepest in history.”

While such a recovery would be welcomed, it is not enough to support stronger employment, wage growth, or corporate earnings.

Here is the issue missed by the majority of mainstream economists.

“Before the “Financial Crisis,” the economy had a linear growth trend of real GDP of 3.2%. Following the 2008 recession, the growth rate dropped to the exponential growth trend of roughly 2.2%. Instead of reducing the debt problems, unproductive debt, and leverage increased.”

If our analysis is correct, which agrees with the OECD and the World Bank, such would suggest President Trump’s pumping of a V-shaped recovery is overly optimistic. Importantly, the markets may suffer disappointment as expectations fall short.

The Stock Market Isn’t The Economy

The economic destruction playing out in real-time will eventually weigh on markets. There is a negative feedback loop between employment and consumption. As unemployment rises, consumption falls due to a lack of income. Since businesses operate based on demand for goods and services, the correlation between PCE, fixed investment, and employment are high.

As noted, even with the reopening of the economy, businesses will not immediately return to full operational activity, until consumption returns to normalized levels. Such will frustrate policy-makers and the Fed.

Profits To GDP

It isn’t just the economic data that will be horrid over the next few months, but earnings will likely be just as bad. Earnings can not live in isolation from the economy. As shown below, corporate profits ebb and flow with economic activity.

You shouldn’t dismiss the fact markets are deviated from long-term earnings. Historically, such deviations don’t work out well for overly “bullish” investors. The correlation is more evident when looking at the market versus the ratio of corporate profits to GDP.

Again, since corporate profits are ultimately a function of economic growth, the correlation is not unexpected.  Hence, neither should the impending reversion in both series.

The detachment of the stock market from underlying profitability guarantees poor future outcomes for investors. But, as has always been the case, the markets can certainly seem to “remain irrational longer than logic would predict.”

However, such detachments never last indefinitely.

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system, and it is not functioning properly.” – Jeremy Grantham

Reversions Happen Fast

There are a tremendous number of things that can go wrong in the months ahead. Such is particularly the case of surging stocks against a depressionary economy.

While investors cling to the “hope” that the Fed has everything under control, there is more than a reasonable chance they don’t.

Regardless, there is one truth about stocks and the economy.

“Stocks are NOT the economy. But the economy is a reflection of the very thing that supports higher asset prices – corporate profits.”

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Yom Kippur is coming soon – what does Judaism actually say about forgiveness?

Many religions value forgiveness, but the details of their teachings differ. A psychologist of religion explains how Christian and Jewish attitudes co…




Two women embrace before a Yom Kippur service held outdoors during the COVID-19 pandemic in Los Angeles. Al Seib/Los Angeles Times via Getty Images

The Jewish High Holidays are fast approaching: Rosh Hashana and Yom Kippur. While the first really commemorates the creation of the world, Jews view both holidays as a chance to reflect on our shortcomings, make amends and seek forgiveness, both from other people and from the Almighty.

Jews pray and fast on Yom Kippur to demonstrate their remorse and to focus on reconciliation. According to Jewish tradition, it is at the end of this solemn period that God seals his decision about each person’s fate for the coming year. Congregations recite a prayer called the “Unetanah Tokef,” which recalls God’s power to decide “who shall live and who shall die, who shall reach the ends of his days and who shall not” – an ancient text that Leonard Cohen popularized with his song “Who by Fire.”

Forgiveness and related concepts, such as compassion, are central virtues in many religions. What’s more, research has shown that it is psychologically beneficial.

But each religious tradition has its own particular views about forgiveness, as well, including Judaism. As a psychologist of religion, I have done research on these similarities and differences when it comes to forgiveness.

Person to person

Several specific attitudes about forgiveness are reflected in the liturgy of the Jewish High Holidays, so those who go to services are likely to be aware of them – even if they skip out for a snack.

In Jewish theology, only the victim has the right to forgive an offense against another person, and an offender should repent toward the victim before forgiveness can take place. Someone who has hurt another person must sincerely apologize three times. If the victim still withholds forgiveness, the offender is considered forgiven, and the victim now shares the blame.

The 10-day period known as the “Days of Awe” – Rosh Hashana, Yom Kippur and the days between – is a popular time for forgiveness. Observant Jews reach out to friends and family they have wronged over the past year so that they can enter Yom Kippur services with a clean conscience and hope they have done all they can to mitigate God’s judgment.

The teaching that only a victim can forgive someone implies that God cannot forgive offenses between people until the relevant people have forgiven each other. It also means that some offenses, such as the Holocaust, can never be forgiven, because those martyred are dead and unable to forgive.

Many people dressed in black and white stand in a courtyard between ancient walls.
Thousands of Jewish pilgrims attend penitential prayers at the Western Wall in Jerusalem ahead of the Jewish High Holiday of Rosh Hashana. Menahem Kahana/AFP via Getty Images

To forgive or not to forgive?

In psychological research, I have found that most Jewish and Christian participants endorse the views of forgiveness espoused by their religions.

As in Judaism, most Christian teachings encourage people to ask and give forgiveness for harms done to one another. But they tend to teach that more sins should be forgiven – and can be, by God, because Jesus’ death atoned vicariously for people’s sins.

Even in Christianity, not all offenses are forgivable. The New Testament describes blaspheming against the Holy Spirit as an unforgivable sin. And Catholicism teaches that there is a category called “mortal sins,” which cut off sinners from God’s grace unless they repent.

One of my research papers, consisting of three studies, shows that a majority of Jewish participants believe that some offenses are too severe to forgive; that it doesn’t make sense to ask someone other than the victim about forgiveness; and that forgiveness is not offered unconditionally, but after the offender has tried to make things right.

Take this specific example: In one of my research studies I asked Jewish and Christian participants if they thought a Jew should forgive a dying Nazi soldier who requested forgiveness for killing Jews. This scenario is described in “The Sunflower” by Simon Wiesenthal, a writer and Holocaust survivor famous for his efforts to prosecute German war criminals.

A color photograph of an older, balding man in a blue shirt and striped tie.
Simon Wiesenthal at the White House during the Reagan administration. Diana Walker/The Chronicle Collection via Getty Images

Jewish participants often didn’t think the question made sense: How could someone else – someone living – forgive the murder of another person? The Christian participants, on the other hand, who were all Protestants, usually said to forgive. They agreed more often with statements like “Mr. Wiesenthal should have forgiven the SS soldier” and “Mr. Wiesenthal would have done the virtuous thing if he forgave the soldier.”

It’s not just about the Holocaust. We also asked about a more everyday scenario – imagining that a student plagiarized a paper that participants’ friends had written, and then asked the participants for forgiveness – and saw similar results.

Jewish people have a wide variety of opinions on these topics, though, as they do in all things. “Two Jews, three opinions!” as the old saying goes. In other studies with my co-researchers, we showed that Holocaust survivors, as well as Jewish American college students born well after the Holocaust, vary widely in how tolerant they are of German people and products. Some are perfectly fine with traveling to Germany and having German friends, and others are unwilling to even listen to Beethoven.

In these studies, the key variable that seems to distinguish Jewish people who are OK with Germans and Germany from those who are not is to what extent they associate all Germans with Nazism. Among the Holocaust survivors, for example, survivors who had been born in Germany – and would have known German people before the war – were more tolerant than those whose first, perhaps only, exposure to Germans had been in the camps.

Forgiveness is good for you – or is it?

American society – where about 7 in 10 people identify as Christian – generally views forgiveness as a positive virtue. What’s more, research has found there are emotional and physical benefits to letting go of grudges.

But does this mean forgiveness is always the answer? To me, it’s an open question.

For example, future research could explore whether forgiveness is always psychologically beneficial, or only when it aligns with the would-be forgiver’s religious views.

If you are observing Yom Kippur, remember that – as with every topic – Judaism has a wide and, well, forgiving view of what is acceptable when it comes to forgiveness.

Adam B. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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EasyJet share price has collapsed by 53% in 2022. Is it a buy?

The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest…



The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest level since November 2011. It has plummeted by more than 82% from its all-time high, giving it a market cap of more than 2.5 billion pounds.

Is EasyJet a good buy?

EasyJet is a leading regional airline that operates mostly in Europe. It has hundreds of aircraft and thousands of employees. In 2021, the firm’s revenue jumped to more than 1.49 billion pounds, which was a strong recovery from what it made in the previous year.

EasyJet’s business is doing well as demand for flights rises. In the most recent results, the firm said that forward bookings for Q3 were 76% sold and 36% sold for Q4. For some destinations, bookings have been much higher than before the pandemic.

EasyJet’s business made more than 1.75 billion in revenue in the first half of the year. This happened as passenger revenue rose to 1.15 billion while ancillary revenue jumped to 603 million pounds. The firm managed to make a loss before tax of more than 114 million pounds. It attributed that loss to higher costs and forex conversions.

As I wrote on this article on IAG, EasyJet share price has collapsed as investors worry about the soaring cost of doing business. Besides, jet fuel and wages have jumped sharply in the past few months. Also, analysts and investors are concerned about flight cancellations in its key markets.

Still, there is are two key catalysts for EasyJet. For one, as the stock collapses, it could become a viable acquisition target. In 2021, the management rejected a relatively attractive bid from Wizz Air. Another bid could happen if the stock continues tumbling.

Further, the company could do well as the aviation industry stabilizes in the coming months. A key challenge is that confidence in Europe and the UK.

EasyJet share price forecast

EasyJet share price

The daily chart shows that the EasyJet stock price has been in a strong bearish trend in the past few months. During this time, the stock has tumbled below all moving averages. It has also formed what looks like a falling wedge pattern, which is usually a bullish sign.

The Relative Strength Index (RSI) has dropped below the oversold level while the Awesome Oscillator has moved below the neutral point.

Therefore, in the near term, the stock will likely continue falling as sellers target the support at 270p. In the long-term, however, the shares will likely rebound as the falling wedge reaches its confluence level.

The post EasyJet share price has collapsed by 53% in 2022. Is it a buy? appeared first on Invezz.

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August data shows UK automotive sector heading for a “cliff-edge” in 2023

With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly…



With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly towards the tail end of the yield curve (details of which were reported on Invezz here).

Car manufacturing is a key industry in the UK. Recently, it registered a turnover of roughly £67 billion, provided direct employment to 182,000 people, and a total of nearly 800,000 jobs across the entire automotive supply chain, while contributing to 10% of exports.

Just after midnight GMT, data on fresh car production for the month of August was released by the Society of Motor Manufacturers and Traders Limited (SMMT).

Strong annual growth but monthly decline

Car production in the UK surged 34% year-over-year settling at just under 50,000 units. This marked the fourth consecutive month of positive growth on an annual basis.

However, twelve months ago, production was heavily dampened by a plethora of supply chain bottlenecks, work stoppages on account of the pandemic, and a worldwide shortage of microchips. The August 2021 output of 37,246 units was the lowest recorded August volume since way back in 1956.

Although the improvement in output is a good sign, equally it is on the back of a heavily depressed performance.

Source: SMMT

To place the latest data in its proper context, production is still 45.9% below August 2019 levels of 92,158 units, showing just how far adrift the industry is from the pre-pandemic period.

Since July, production in the sector fell 14%.

The fact that the UK is facing a deep economic malaise becomes even more evident when we look at full-year numbers for 2020 and 2021.

In 2020, total output came in at 920,928 units, while 2021 was even lower at 859,575. The last time that the UK automotive sector produced less than one million cars in a calendar year was 1986.  

Unfortunately, 2022 has seen only 511,106 units produced thus far, a 13.3% decline compared to January to August 2021.

In contrast, the 5-year pre-pandemic average for January to August output from 2014 – 2019 stands well above this mark at 1,030,527 units.

With car manufacturers tending to pass price rises on to consumers, demand was dampened by surging costs of semiconductors, logistics and raw materials.

The SMMT noted,

The sector is now on course to produce fewer than a million cars for the third consecutive year.

Ian Henry, managing director of AutoAnalysis concurred with the SMMT’s analysis,

It is expected that by the end of this year car production will reach 825,000, compared to 850,000 a year ago, but that’s 35% down on 2019 and a whopping 50% on the high figure of 2017.

Sector challenges

Other than the obvious fact that the UK’s economic atmosphere is in hot water, the automotive industry (including component manufacturers) has been struggling to stave off the high energy costs of doing business.

In a survey, 69% of respondents flagged energy costs as a key concern. Estimates suggest that the sector’s collective energy expenditure has gone up by 33% in the last 12 months reaching over £300 million, forcing several operations to become unviable.

Although the government enacted measures to cap the price of energy and ease obstacles to additional production, Mike Hawes, the CEO of SMMT, said,

This is a short-term fix, however, and to avoid a cliff-edge in six months’ time, it must be backed by a full package of measures that will sustain the sector.

Due to the meteoric rise in costs across the automotive supply chain, 13% of respondents were cutting shifts, 9% chose to downsize their workforce and 41% postponed further investments.

Bleak outlook

Uncertainties around Brexit and the EU trade deal are yet to be resolved.

Moreover, the energy crisis is poised to get even more acute unless Russia withdraws from the conflict, or international leaders ease restrictions on Moscow. Last week, I discussed the evolving energy crisis here

With global central banks expected to tighten till at least the end of the year, demand is likely to be squeezed further pressurizing British car manufacturers.

Electric vehicles made up 71% of car exports from the UK in August, but robust growth in the sector looks challenging in the near term, in the absence of widespread charging infrastructure, high electricity prices and globally low consumer confidence.

Although energy subsidies could provide some relief in the immediate future, the industry will remain in dire straits while investments stay low and the shortage in human capital persists, particularly amid the push for EVs.

Given the prevailing macroeconomic environment, and severe market backlash to Truss’s mini-budget (which I discussed in an earlier article), the sector is unlikely to turn the corner any time soon.

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