The Flim-Flam Economy

The absurdity of today’s flim-flam economy can be summarized when the events of the past week are considered together:

  • The U.S. economy grew at an annualized rate of just 0.5% during the first quarter
  • Corporate profits are the lowest they’ve been since 2009
  • The current bull market is now the second longest in history
  • The Federal Reserve Board, to no one’s surprise, elected yet again not to raise interest rates

The conclusion that can be drawn is that, while the U.S. is not yet a socialist country, it is no longer a capitalist country, either.  There is a seeming collusion between political leaders and central bankers with the net result being more and more government control over our lives amid the illusion that all is well, because, after all, the stock market moves in only one direction. Equities

Mainstream media, with few exceptions, reinforce the illusion, cheerleading for the Obama Administration as it continues to break records for its ever-increasing volume of new regulations.  Burdensome new regulations reduce corporate profits, which should result in lower stock prices.  But the Fed has somehow managed to circumvent reality and juice the market ever higher. 

All Is Not Well

That all is not well should be apparent to anyone paying even glancing attention.

Expectations for Q1 growth were an already dim 0.7%, but the limp economy fell short of even that very low bar. It was the third consecutive quarter of declines in the growth of gross domestic product (GDP) and the lowest rate of growth since the first quarter of 2014, when bad weather was blamed for slow growth. Yet this year’s mild winter couldn’t prop up the economy.

Fixed investment, inventories and trade all declined, but fear not—government added 0.2% to GDP growth.

Meanwhile, according to FactSet, Q1 ’16 was the worst quarter for corporate profits since the financial crisis and it marked the fourth consecutive quarter of declining profits–the first time that’s happened since the fourth quarter of 2008 through the third quarter of 2009.

Overall, earnings per share is negative 8% year-over-year–and earnings a year ago didn’t have Wall Street cheering, either.

CNBC recently noted that corporate profits are turning into “a train wreck,” adding, “If the stock market rally is going to continue the next couple of months, it will have to do so against an aggressively worsening profit backdrop. The corporate earnings picture is ugly and getting uglier in a hurry … ”

The Not-So-Grand Illusion

So with earnings depressed, economic growth flatlining and stock prices bloated by years of manipulation by the Fed, the stock market should be taking a tumble.  It hasn’t.

While volatility has increased, the bull market (heavy emphasis on the “bull”) last week became the second longest in history, stretching to 2,607 days.

As Zerohedge noted, “it only took $14 trillion in central bank liquidity, a global, coordinated central bank ‘put,’ central banks purchases of Treasuries, MBS, ETFs and corporate bonds, and nearly 700 rate cuts in the past seven years to achieve it.”

The dot-com bubble of the 1990s, which stretched to 3,452 days, is the only bull market in history to last longer.

The 12-month rolling return is negative for the first time since the bull market began, profits are down, the economy is stagnant, and other economies throughout the world are in even worse shape, but, as Bloomberg noted, “The Federal Reserve and other central banks have shown time and again that they stand ready to inject more cash into the financial system at the first sign of market turbulence.”

QE4 lives!

Summarizing the gap between fantasy and reality, Zerohedge reported that “the signature characteristic of the Obama bull market has been its ability to soar above an economy going nowhere, returning 3.7 percent a quarter on average since March 2009, compared with a 0.9 percent gain in gross domestic product. That gap is the widest ever.”

Maybe the Fed’s market manipulation would be justified if it helped the average American, as today’s lower incomes would be balanced by market gains and more money for retirement.  But the ultimate irony is that, according to data compiled by Fundstrat Global Advisors LLC, Americans have been net sellers of equities since 2007 (see chart), slashing stock holdings by $2 trillion.

We’re guessing that the Warren Buffetts of the world have not been selling, but the average Americans who can’t afford to take risks with their retirement funds have been.  So the Obama Administration, which has focused so keenly on income inequality, has probably done more than any previous administration to add to the inequality.

It’s unlikely that the current bull market will beat the previous record, but you can’t blame the Fed for trying.  The Fed may vote to raise interest rates again this year, but we wouldn’t bet on it.

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