E In This Market Wisdom Wins Out

The Great Transcendentalist Ralph Waldo Emerson once said, “before we acquire great power we must acquire wisdom to use it well”. Those words have never rang louder and more true these last two decades regarding our fearless leadership and omnipotent Global Central Bankers. The breadth and enormity of these powers have never been on greater display by both.  When both were faced with cataclysmic events they responded with overwhelming force. George W. unleashed our military might with his “shock and awe” plan. Harry Paulson broke out the “bazooka”. Chairman Bernanke birthed “quantitative easing”. I’m sure all actions will be the debates for the century. In short, just because you can, doesn’t mean you should.    

America continues to repair from the bruising of the great recession and corresponding responses which still leaves us at war in three countries and an economy stumbling along at a 2% + or – rate of growth. Or is it? Let’s do our own fact check. Only this fact check is truly unbiased. The figures please:

Gross Domestic Product-GDP.  Second quarter GDP bounced back to +1.2% as reported in the initial reading. This figure is subject to two additional revisions. This GDP reading was a bit lumpy. The US consumer spending grew at a fairly healthy +4.2% clip adding +2.83% to the headline figure.  That relative strength was swamped by the drop in residential investment which dropped -6.1% and government spending which dipped -.9%. There was also a big draw down in inventories. This drawdown was a drag on this 2nd quarter figure but, sets up the current quarter for a restocking period and positive backdrop for third quarter growth. 

ISM Purchasing Managers Manufacturing Index-PMMI. July’s PMMI tallied +52.6% which is healthy but down slightly from June’s  +53.2%. This was the fifth consecutive expansionary reading. The New Orders Index remained solid at +56.9% as did the Production Index +55.4%. One negative was the Employment Index which dipped below the 50% neutral line to 49.4%. 

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Moon Kil Woong 3 years ago Contributor's comment

Earnings are horrible YoY but only positive in terms of nerfed expectations. The market has been rising on Federal Reserve weak policy for a long time now and is behaving exactly like Japan. Asset prices will stay astronomically high even if the yield is low as the economy sputters to a death.

That said the US will fare a bit differently than Japan. Japan survived this long on decades of surpluses and massive savers. The US has massive debts and massive spenders already. However, the US has an extraordinarily robust economy built by years of a free market. Thus we still get growth even though the Federal Reserve's actions deter capital investment and encourages stock buybacks, dividends, and debt.

We will see how this ends, but it doesn't look good long term.