My Prediction? Pain
The Economy Is Great
The Fed keeps telling us that the economy is great. Inflation is undercontrol and the employment picture has never been better. It is all milk, honey and sleeping in the clover.
We are in high cotton
The numbers put out by the Goverment say that things have never been better.
But it dosn’t feel like that. I know plenty of people that are complaining about money. These include people who bought a house two years ago in Dallas, car salesmen, truck drivers, students, restaurant managers, realtors, loan officiers, accountants, consultants, and small business owners.
And there are more and more layoffs and closures. 7-11 just announced that they would shut over 400 stores. IKEA announced they were cutting prices due to lackluster sales. Bankruptcies just hit the second highest year to date in 13 years – and most of those were in consumer discretionary.
The Government would have you believe we are in a goldilocks economy with low unemployment and low inflation. But it is all about the trend. Core CPI rose to 3.3% yesterday which was the fourth month of an increase. And 258,000 people filed for unemployment this week. This was well above the expectation of 230,000.
Don’t Belive What is Behind the Curtain
The BLS pumped the September job number which included a huge number of new government workers. This will be revised sharply lower and it will reveal that the Fed is backed into a corner.
You see the Fed has a dual mandate to keep unemployment low and inflation low. But it is about to see a situation where inflation is growing and unemployment is ticking higher.
Rising inflation with rising unemployment is called stagflation and its what happened in the 1970s.
The Fed Has to Lie
The Fed Cheif Jerome Powell has to come out and say things are great right up until his is proven wrong. If he says things are going to get bad the economy is likely to get worse than it would anyway. The Fed must cheerlead the market.
Do you remember two years ago when the Fed was saying that inflation was under control? And then it went to 9%?
And then the Fed said it was temporary but hiked interest rates the fastest and highest it had ever had?
Now they are saying that inflation is under control and the economy is at “maximum employment.” Then why would they cut 50 basis points last month? This dramatic move made no sense. It was a panic move because they know things are going to get worse quickly.
There is something out there that we don’t know about. I feel it has something to do with the banks and we will only know what after the shoe drops. Warren Buffett has been selling all of his Bank of America (BAC) stock.
And on top of that the equities are expensive.
PEG Ratio
Currently the Price to Earnigns Ratio on the S&P 500 is around 22. This means that if you buy it, the companies you own will make enough in earnings to pay you back in 22 years.
However the earnings growth rate of the S&P 500 is only 11% and dropping.
There is another value metric called Price over Earnings Growth (PEG Ratio). This meastures the value of a company over time.
So say your company has a PE of 100 and is growing earnings at 100%. If the share price didn’t move, next year the PE would be 50 and the year after that, 25. This is why growth stocks cost more. You are paying for future earnings. It is also why when the growth slows down the high flying stock crashes hard.
The rule of thumb is that a PEG ratio under 1.0 makes a stock a buy. The S&P 500 has a PEG ratio of 2.0. And as you can see by the chart below, due to the lag effect of the hike in interest rates, earnings growth is trending down at the same time what you pay for the S&P 500 continues to climb.
In otherwords, people are paying more for less.
In a logical market, investors would pull back and wait for growth to slow or valuations to drop. But markets aren’t logical. Nope, investors are all in.
You never know when the foolishness will end. But at some point it will.
And as the esteemed Mr. T once said in critically aclaimed movie, Rocky III; “My Prediction? Pain!”
All the best,
Christian DeHeamer
Here is how growth works:
https://www.outsiderclub.com/a-great-american-company/
Party on Garth:
https://www.outsiderclub.com/the-market-hit-an-all-time-high/
Drop lbs andm make money:
https://www.outsiderclub.com/the-next-weight-loss-giant/
