The Wall Street Journal reports (and I agree), Even a Goldilocks Economy Could Be a Bear for Stocks.
> On balance, policy makers expect to raise rates four more times by the end of next year. The economy will slow, with gross domestic product up 2.5% on the year in the fourth quarter of 2019. The unemployment rate will drift a bit lower to 3.5% and inflation will come in at 2%.
> What is the outlook for companies under that scenario? If their demand grows about as fast as the economy, adding in inflation, sales would be up about 4.5% in the fourth quarter next year. So the only way for profits to grow at a faster clip would be for profit margins to expand.
> That seems like a bad bet. Even after adjusting for the effects of this year’s tax cut, profit margins for companies in the S&P 500 are historically quite high. Then consider how hard it would be to contain, much less cut, labor costs with an unemployment rate at 3.5%.
Bad Bet
Image from Five plot holes often overlooked in the story of Goldilocks and the Three Bears.
The WSJ article puts things mildly.
It’s not a “bad bet” to think profit margins will expand. It’s a “horrible bet”.
Eight Reasons Financial Crisis is Coming
I note Eight Reasons a Financial Crisis is Coming
Yes, that is looking at things quite pessimistically. Yet, even the alleged Goldilocks scenario is unlikely to keep stocks on track.
Anything worse spells serious trouble. Any of eight things will suffice. I expect all eight.
And if Goldilocks appears?
Most likely, you still lose, for seven straight years.
Click on the above link for further discussion.
Mike “Mish” Shedlock
The reason those jobs sit empty is because they arent legitimate jobs that will produce growth. Companies are a lot more cautious than previous booms because theyve used the corporate bond market more than they care to share. There is a house of cards in the corporate bond market that mirrors the RMBS market harkening back to the 2000s. Shortage of skilled labor is no longer an issue. Our economy is still built on the FIRE economy. We will soon see how heavily we are dependent on low interest rates that financed this boom. The excesses of the last boom never ended.
It is hardly controversial to note that the financial economy and the real economy parted company some years ago. The financial economy performed well, while the real economy stagnated. Interesting! And almost certainly a result of the Federal Reserve’s actions, along with the burden of excessive regulation on real productive activities.
Could there be a scenario in which the reverse happens? The financial economy takes a hit as reversion-to-mean occurs, while the real economy does ok. The guys who hold stocks & bonds lose paper wealth, while the working stiffs who actually produce real goods & services continue to earn their income and live their lives.
In this scenario, financial losses would likely be limited by holding shares in unsexy companies which make boring essentials and pay dividends — toilet paper, electricity, food, etc.
It not only can happen. Eventually it will. It’s why Japan is still a functioning (if dying…) society, despite their banksters best efforts at straight up destroying the Yen on purpose.
Contrary to the bankster propaganda that has been promoted for the past 50 years, “Investors” and “Investment” matter very little at all to the performance of real economies. To a large extent, the less you have of both, the better. As all they, in practice, do, is drive up prices of productive assets, hence increase production cost, hence reduce competitiveness.
Pretty much the only reason they exist at all, is because they as a class are the designated beneficiaries of the loot which money printing steals from productive members of society. Aside from idly serving as recipients of that theft, virtually the entirety of all their actions, is just net-zero (at best) make-work covering up and obfuscating the theft itself.
There can’t be no pain on main street if the FIRE economy burns. Credit lines will get pulled and the spillover effect will be massive. We still have only about 1% GDP of productive growth. The rest shifting deck chairs on the Titanic
The pain can also only be temporary. Being robbed in order to keep zero-value-add FIRE leeches in splendor, doesn’t benefit anyone, after all.
House Niggas suffered a bit, temporarily, by the house they toiled in being burned down as part of the emancipation process as well. Still, no longer being a slave, is always a good thing.
Rising rates will expose how this boom was created – the lowest interest rates we have ever seen financed a corporate finance boom like the boom we saw in low regulations and interest rates in the 2000s. Credit lines will soon be pulled as profit margins shrink. Japan and others also will be spooked by higher rates as per John Mauldin this week.
Thanks to the “exorbitant privilege” I discussed earlier this month, the US has long had many foreigners willing to buy our debt. Now they are losing interest (forgive the pun) because hedging their currency exposure costs more. There are some complex reasons behind this, relating to swaps and the differentials between the US economy and others, but here’s the bottom line: European and Japanese investors can no longer buy US Treasury debt at a positive rate of return unless they want to take currency risk, which most do not. This is a new development.
ROFLMAO…
Investors in JAPAN!! and the EZ!!! don’t want to buy US Treasuries because of currency risk??!!
You cannot make this stuff up!
Regarding the five plot holes in Goldilocks and the Three Bears, I may have some explanations that leave the author’s assertions of fatal flaws in the story in doubt:
Assertion #1: Bears do not have enough income to get a mortgage.
Explanation: At one time banks were lending money for home mortgages to anyone who could fog a mirror. Bears can fog a mirror, so they qualified.
Assertion #2: Nobody goes for a walk while their food cools down.
Explanation: Bears do. They prefer their food to be somewhat cool because they are prone to chomping and gulping.
Assertion #3: Bears do not eat porridge.
Explanation: Bears eat what they can get.
Assertion #4: The bear parents sleeping in separate beds is evidence their marriage was in trouble.
Explanation: Bears have big claws and teeth. They are prone to injuring each other if they sleep too closely.
Assertion #5: The break-in was clearly staged. Goldilocks is a patsy.
Explanation: Like many children her age, Goldilocks was curious and did not spend much time concerning herself with the longer term consequences of her actions. She did not “break-in” per-se. More precisely, she wandered in and started investigating. Being bears, the bear family felt there was little reason to lock the doors and windows before they went for their short walk. If anything wandered in while they were away, they figured they would eat it.
To summarize:
There is no more road to kick the can down….
“Buy gold. A financial crisis, not just a recession, is on the horizon.”
There’s still a bit more road left, before America is quite at the stage Argentina was on the morning of the Corralito. Comparatively speaking, as a whole, American workers are not THAT destitute and universally indentured yet. And given how they seem no less uncritically unquestioning of whatever nonsense their caudillo du jour tells them to cheer for, there is little reason to believe they will wake up any quicker than their equally caudillo worshiping Argentine brethren.