Here's the case for an earnings smash accompanied by a stock market smash.

S&P 500 Earnings forecast from Tweet below.
 

Imaginary Wealth and Hyper-Financialization

Data goes back 70 years. Here's the relationship between US wealth growth and US GDP growth for 35 years, 1951-1986. Gets a little disconnected with the Nixon shocks and the end of Bretton Woods, but still roughly in line. pic.twitter.com/rJO3sQd75r

— Ben Hunt (@EpsilonTheory) July 6, 2022

Ben Hunt: "In the late 1990s, the Fed began to use monetary policy as a political tool to make us richer than our economy could grow, inflating home prices and financial asset prices without (they thought) ever triggering wage/price inflation in the broader economy."

Change "richer" to "feel richer" and the idea is perfect.
 

Earnings Forecast

Wall Street predicts +10% S&P earnings growth. The Belkin Report forecasts -48% S&P earnings slump, like 2009. pic.twitter.com/ZoPJFUw4fc

— Belkin Report (@BelkinReport) June 30, 2022

Which Earnings Estimate Do You Believe?

• Wall Street predicts +10% S&P earnings growth. T
• The Belkin Report forecasts -48% S&P earnings slump, like in 2009.

Actual earnings could be even more extreme or somewhere in the middle, but I expect Belkin to be in the ballpark.
 

Case for an Earnings Crash

1. Recession
2. De-globalization costs 
3. The retirement of 22 million boomers will lower productivity and slow spending
4. De-carbonization is very expensive, do we even have the natural resources?
5. End of a 40-year bull market in interests rates 
6. Potential for a protracted war in Ukraine
7. Central bank concern over reigniting inflation 
8. Renewed union push
9. Wealth impact of stock market decline will itself slow spending 
10. Various bubbles have just begun to pop
     

Feedback Loops

Some of the above points are circular, feeding on themselves. But I do expect a reinforcing feedback loop. There is a wealth impact of a stock market and crypto plunge that feeds on itself. 
 

De-Globalization

De-globalization is huge. We went from just-in-time inventory management to inventory and supply chain chaos. That point alone is sufficient reason to suspect current earnings estimates. 

For discussion, please see De-Globalization: New Supply Chains Are Inefficient and Will Drive Up Inflation
 

Protracted War in Ukraine

Things will improve once the war in Ukraine ends, but when is that? 

Neither side can win outright until at least one side changes its definition of win. Ukraine wants all of its territory back. Forget it. That won't happen. And as long as the US keeps supplying weapons, the war will go on. 

Meanwhile, How Long Before Putin Shuts Off Natural Gas Delivery to Europe?

Assume the war ends early. Things will not return to the previous normal of outsourcing everything to Asia confident that supplies will be readily at hand when needed.
 

Climate Change

A climate change push is everywhere. But where do we get the lithium, platinum, nickel, rare earth minerals? What about fertilizer? 

What about building the infrastructure? The latter will take still more government spending on top of the declared war on fossil fuels driving up costs. 
 

Unionization

There is a renewed push for unionization in many states. Amazon just lost a key battle. 

In California, and AB5 Ruling May Disrupt All West Coast Truck Shipments

California ruled that independent drivers are employees, not contractors. The US Supreme Court refused the case. The ruling creates a huge potential for a massive truck shipping logjam.

Even when the logjam ends, there will be a permanent increase in price. 
 

22 Million Boomers Head for Retirement

Employment levels from the BLS, chart by Mish

Millions of those workers will soon retire. Who is there to replace them but unskilled Zoomers? 

Expect productivity hit.

For more discussion, please see Expect a Long But Shallow Recession With Minimal Job Losses
 

Central Bank Concern Over Reigniting Inflation

We have had 14 years of near-endless QE. We now have Quantitative Tightening scheduled to last for years.

Color me very skeptical of that idea. Regardless, QT will go on for a while. 

Powell looks like a fool on inflation, primarily because he was a fool. He will not want to risk more inflation. This point is clear.

On June 29, 2022, Powell admitted "We understand better how little we understand about inflation”

• Powell: "We understand better how little we understand about inflation.”
• Powell: “There’s a clock running here. The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.”
• Powell: "The process is highly likely to involve some pain, but the worse pain would be in failing to address this high inflation and allowing it to become persistent."
• Powell: “Is there a risk we would go too far? Certainly, there’s a risk. The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.”

That translates to "Damn the recession, we are hiking." 
 

End of a 40-Year Bond Bull Market

Instead of financial pumping, ponder the End of the 40-Year Bull in Debt and a “Global Depression” Threat

Francis Hunt interviews Danielle DiMartino Booth in a must watch video, her most economically comprehensive yet.

Risks Strongly Skewed to the Downside

Point-by-point there is simply no reason to believe fantasyland earnings estimates. My estimate of 2,000+- on the S&P 500 just might be overly optimistic.

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