Y su bolsa no es tan cara…
It's ironic that the stock market suffered a huge "correction" only days before the second revision to Q2 GDP growth came in surprisingly strong. Sometimes the market gets carried away by emotions, and sometimes the economic statistics get revised significantly after the fact, so it pays to keep an eye on the fundamentals as revealed by key market-based prices (e.g., real yields on TIPS, swap spreads, the dollar, gold).
I've long argued that real yields on 5-yr TIPS were a good indicator of the market's expectation for the trend of real economic growth. As the chart above shows, the two tend to track each other over time. Real yields on 5-yr TIPS have moved quite a bit higher over the past two years, and now we discover that the economy strengthened over that same period. The annualized rate of economic growth over the past two years was 2.7%, a good deal better than the 2.2% annualized growth since the recovery started in mid-2009. .
Despite the pickup in growth, however, the economy is still a lot smaller than it could/should have been. As the chart above shows, the shortfall in growth relative to long-term trends is about $2.8 trillion. Per year. We're talking about a lot of income that's being left on the table, and a lot of people unemployed or underemployed, most likely because of higher tax and regulatory burdens.
Yesterday's GDP revisions also gave us the first look at corporate profits after tax for the second quarter. They reached a new nominal high of $1.82 trillion. As the chart above shows, that puts corporate profits very close to an all-time high relative to GDP. From a long-term historical perspective, corporate profits have been exceptionally strong throughout the current business cycle expansion.
The chart above shows the PE ratio of the S&P 500 using the after-tax corporate profits (with adjustments for inventory valuation and capital consumption allowances and normalized in order to facilitate comparisons to reported PE ratios) as the "E" instead of trailing GAAP earnings. By this measure, the stock market at the end of June was trading very close to its long-term average valuation.
What does all this say? The economy is doing OK, and has even managed to improve somewhat in recent years, despite all the moaning and groaning. Corporate profits have been absolutely fabulous, and certainly supportive of higher equity prices. Stocks aren't in a bubble, and monetary policy hasn't stimulated the economy or caused equity prices to artificially inflate.
So why is the market so worried? Why is the Fed so worried about the economy that they have to keep interest rates at zero? Sure, things could be a lot better, but we're not talking about a fragile economy that needs an extraordinary dose of TLC (aka low interest rates) to survive. If we want things to improve, we need to look to fiscal policy, not the Fed.
Abrazos,
PD1: Consumo y apalancamiento de EEUU:
If anything good came out of the Great Recession, it was the lesson—for consumers, at least—that debt can be a very unpleasant thing to have when the going gets rough. Consumers have taken that message to heart, by managing their credit card debt more carefully.
As the chart above shows, credit card debt outstanding fell from a high of $866 billion in 2008 to $703 billion as of last June. Relative to disposable income, credit card debt fell by fully one third over the same period.
Reduced credit card debt, combined with rising incomes, has dramatically reduced the percentage of credit loans that banks have had to write off.
Consumer loan delinquency rates are at their lowest level over 25 years, and falling.
All of the above is consistent with the Fed's calculation of household leverage:
Bottom line: consumers and households have trimmed their exposure to debt and are managing their debt much more cautiously and conservatively. This is, arguably, one of the under-appreciated facts that contribute to a positive outlook for the future.
PD2: San Pedro Julián Eymard recomendaba descansar en Jesús después de comulgar. Y advertía del peligro de llenar la acción de gracias con muchas palabras dichas de memoria. Decía, que después de recibir el Cuerpo de Cristo, lo mejor era estar un rato en silencio, para reponer fuerzas y dejando que Jesús nos hable en el silencio de nuestro corazón. A veces, mejor que explicarle a Él nuestros proyectos es conveniente que Jesús nos instruya y anime.
Nos podemos quedar cinco minutos después de que la Misa se haya acabado dando gracias al Señor. Deja que la gente se largue corriendo y quédate sentado, como agradecimiento de lo que acaba de pasar, hemos comulgado al Señor, le tenemos dentro. Mejor un ratito de dar gracias que salir fuera a seguir con la cháchara…
