Today the revised 1st quarter GDP was released showing that it was worse than previously calculated with a decline of 0.7% annualized. Real final sales declined by 1.1% in the 1st quarter. GDP growth year over year declined from 2.5% to 1.8%. It has been 35 years since there has been negative quarterly data during a recovery phase, and there were three separate negative quarters since the bottom of 2009, making the current recovery very weak and dubious. The economy lacks drivers of demand. Previously demand was provided by fake stimulus from the housing bubble of 1997-2007 or from the 1996-2000 tech bubble, some of which was fake. The great Chinese commodity boom was fake because they built
People should realize that Central Bank manipulation is pointless waste of time. The people who matter tin regards to economic activity are business managers and wealthy people. They won’t be influenced by zero rate policy or Quantitative Easing (QE). Attempting to fool them into stimulating the economy is a wimpy waste of everyone’s time. Surely the precedent set where people learned to adjust for and anticipate inflation in the 1970’s means that people (especially those who really matter) will also adjust for artificially low rates and artificial purchases of bonds.
The CPI was published May 22 showing Owner’s Equivalent Rent up by 2.5%. However, the 12 month CPI was down by 0.2%. Bottom line is that inflation can’t happen because wage increases are too weak and there are too many people who are part of the long term hidden unemployed. The problem with Owner’s Equivalent Rent is that the BLS assumes those people who buy homes last month are the same as all the current homeowners sitting on the sidelines and doing nothing. However, many sidelined homeowners can’t participate in upgrading and are afrain to sell and downgrade for a variety of reasons so this data point can be warped by the those who are most affluent and most qualified
Getting real rates up from 0 to 2% seems to be what a lot of people want. However, in a world where debt balances have been and continue to be at unprecedented heights for the past 20 years (roughly double what has a long standing amount of debt) one must ask if that means extra resources need to be allocated to pay down the debt and if one’s budget is already committed to other expense or cash flow items then the only way to make progress on paying extra principal is to use a reduction in interest rates. If rates are normalized by making them increase by 2% then paying down principal becomes more difficult. The point is
The long range forecast for Central Bank monetary manipulation is not good because they are trapped by the zero bound problem which is a political and psychological barrier. To overcome this barrier Central Banks would risks triggering fundamental fears in the common man or common woman that fiat money is unsound and that Central Bank policy is powerless. Once a typical person is exposed to a world where cash not held in a bank account has been made illegal or cash holders have been harassed into accepting a bank account with negative interest then the traditional behavioral tendencies of consumers and investors will change resulting in unknown new risks of misbehavior in terms of behavioral economics. Further to facilitate negative
Cash flow and income are far more important to investment analysis than assets and liabilities. Some people think investing means finding a company whose physical assets or intangibles are undervalued however, my recommendation is to pay far more attention to the P
The great mistake investors have made in the past six years is to assume that low interest rates are a justification for high stock prices. They do this either by using low rates in a discount formula where the lower the rate then a higher value is assigned for a stream of earnings. Or they do it by simply getting mad at low yields and saying they are entitled to decent yields even if it means buying stocks instead of bonds. If investors assumed that the traditional yield on the Barclays (Lehman) Aggregate bond index of 5.85% for BBB mid-term bonds was acceptable and used that rate in a discounting formula then they would decide to exit stocks right away.