Stocks Near All Time Highs, Yet U.S. Economy Nowhere Near Sustainable Growth


By Charles Biderman


Stock prices are near record highs despite the fact that the U.S. economy is barely growing. So it is highly unlikely stock prices will keep going up without the tail wind of massive money printing. Which means this stock market bubble will pop when the Fed announces that it will start slowing the new money game.


Yes, despite all the hopes, prayers and rhetoric, the U.S. economy is barely growing. Forget about GDP. GDP is a useless government stat that when first released is a nothing more than a guess. Instead, I look at withheld income and employment taxes reported in the Daily Treasury Statement. Adjusting for the changes in tax rates, what is really going on is that since March, year over year wage and salary growth before inflation has grown between 2.8 percent and 3.7 percent. That growth rate is down about a percentage point this year from 2011 and 2012 primarily because of this year’s boost in employment taxes. In other words, the underlying U.S. economy has been growing very slowly with no real change up or down over the past three years.


What does three to four percent wage and salary mean in the real world? Well, three percent wage and salary growth translates into $200 billion plus or minus in higher incomes each of the past three years. Is that good? Consider that we had wage and salary growth of about five to six percent annually during the mid 2000’s and that was before the hundreds of billions that came out of real estate each year from 2003 to 2007. That is why to everybody other than stock holders the US economy sucks.


Despite such a weak U.S. and even weaker global economy, would you believe that the market value of all global stocks is $54.5 trillion today? That’s not far from the $61 trillion market cap peak record reached in October 2007. From that $61 trillion high the value of global stocks plunged by more than half to $25 trillion by early March 2009.


In other words, despite a slow or no-growth global economy, the value of all stocks are up by $30 trillion over the past three years. Even more interesting is that the market cap peaked at $58 trillion on May 21, the day before Fed Chairman Bernanke first said the Fed will slow its money printing sooner rather than later.


What this means is that stocks globally have still not recovered from the May 22 Taper announcement. Right now, Fed officials are saying that no tapering will happen unless the U.S. economy improves. Maybe, but remember, the Fed controls the game and can change the rules for any reason. Perhaps Mr. Bernanke wants to leave office at the end of this year with an exit strategy in place regardless of whether the economy is rising.


Look, obviously for as long as the Fed keeps creating $4 billion of new money each day, $85 billion a month and $1 trillion a year, stock prices should keep rising. But when the market becomes convinced that the Fed will taper at some specific point in time, and that might be sooner than later, stocks will start to sell off.


Globally, portfolio managers feel very smart because stock prices have more than doubled since 2009. To justify current prices many PMs say U.S. stocks are not overpriced because the trailing 12-month price earnings ratio is only 15 times. What those PMs do not seem to want to know is that a 15 p/e is reasonable when incomes are growing by over 4% adjusted for inflation, such as between 1983 and 2007. During slow growth times the average p/e has been under 10, such as between 1969 and 1983.


If Tapering becomes the name of the game, I would expect US stock prices to trade down about one third to 10 times earnings, or back to around 10,000 on the DJIA and1100 on the S&P 500.




2 Responses to Stocks Near All Time Highs, Yet U.S. Economy Nowhere Near Sustainable Growth

  1. black dog on July 11, 2013 at 1:33 pm

    The Federal Reserve will have to taper – at some point – no matter what due to liquidity issue.

    QE is purchasing on the longer end of yield curve –

    “Under this distribution, the Desk anticipates that the Treasury securities purchased will have an average duration of approximately 9 years”

    Debt distribution –

    if Federal Reserve continues to suck notes/bonds out of the market, the bond market will be more susceptible to ever greater swings in interest rates as LARGE funds dump/load up on Treasuries.

    IMO, one of the best virtues of the US Treasury market has been its liquidity (deepest on planet) … allowing institutional funds to move in/out of Treasuries without “moving the needle”. A year from now with no tapering??

  2. Ed_B on July 30, 2013 at 4:04 am

    My thought is that a 10,000 Dow due to reduced or eliminated Fed levitation-inducing free money is quite generous. My own estimate for this is approximately 7,000 on the Dow. While this is not due to any particularly exhaustive analysis on my part, it is close to the early 2009 market low of about Dow 6,600.

    By paying attention to this market and the actions taken by both the Fed and the US Gov, we can all see that very little has been done to correct the structural problems in the US economy since its near collapse in 2008. The US Gov is still spending more than it has. The Fed is still printing lots of money. The banks are still being treated as if they are something special and not just another business that happens to deal with money instead of something more mundane. Far too many Americans are either unemployed or under-employed. Too Big To Fail, aka TBTF, is still with us in spite of the trillions of dollars that were squandered to “fix” the banking system. But the banking system did not get what it truly needed and that is a giant boot in the butt.

    When any other business is poorly run, its difficulty is resolved by a bankruptcy court judge and a pack of lawyers. That is done so that physical assets can be sold off and creditors paid a share of whatever money can be derived from selling off the company’s assets. Somehow, though, the banks in general and the big NY banks in particular are seen as being too good for this humble process. News Flash! They are not!

    When banks are run poorly, they NEED to go through bankruptcy as surely as any other business and treating them as if they were special in some way only reinforces their own hyper-inflated self-appreciation. Only the depositors of these banks should be “bailed out” in an emergency while the stock and bond holders should lose big-time. Management should be fired because those who create disaster are not of the mindset needed to fix it. If the banks knew beforehand that this would be their fate, they would be a LOT more careful with depositor money and not so haphazard with it. Allowing them to privatize their profits while socializing their losses will guarantee the continuation of severe banking system problems and their attendant problems in the market and the economy because rewarding bad behavior never ever results in good behavior.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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