Saturday, April 25, 2015

Moving Forward

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2.18.15 - 2015 Annual Forecast

It’s already February, but for many readers this is the first communication of 2015 so, Happy New Year!  It’s been a great 6 weeks so far and we’re looking forward to many more to come.  Let’s get into it…

In 2014 most of our forecasts were falling into place until late August when the value of the Euro, Japanese Yen, and oil all plunged.  Inflation expectations immediately fell, followed by long-term interest rates.  Although I expected dollar strength, I didn’t anticipate the sea change we experienced.  I find no solace in the fact that almost everyone else seems to have been similarly blindsided.  As it turned out, those surprises validated my core thesis; the extraordinary high level of US corporate profit margins is unsustainable.  A trifecta of earnings-shattering events is presently unfolding:

  • Plunging energy prices are decimating oil company profits as well as companies that supply the energy industry and its employees;
  • The strong dollar is hitting profits of companies that rely on exports and foreign subsidiaries to pump up their bottom line;
  • Bank earnings are being hit by a flatter yield curve as short-term rates creep higher and long-term rates fall.

These realities notwithstanding, US stock prices managed to rally into year-end while miners of precious metals prices made new cyclical lows. 

Frankly, this made no sense at all…then reversed in January.  In the meantime, it temporarily upended our forecasts and strategies at the end of last year.  Years of zero interest rates and quantitative easing induced by the Fed have produced a myriad of economic distortions.  Massive stimulus provided by central bankers primarily benefitted areas of the economy where debt levels are high (by lowering interest expense) and had a minimal effect on the rest of the economy.

Until these recent events, my outlook for the US economy in 2014 and early 2015 was relatively ebullient (despite my concerns about the equity and credit markets).  My economic optimism was driven by the sharp rise in bank lending between mid-2013 and the first 3 quarters 2014.

Expansion of bank-created credit is normally associated with significant expansion in business investment.  That investment is what typically drives productivity, jobs, and growth.  Although there was some investment growth, most of the borrowing in 2014 fueled other things providing only minimal economic lift.  Despite the slowest recovery on record, US growth still outpaced our major global competitors for the last five years.  While the Fed

would like to take credit for this, our outperformance is almost entirely the result of a doubling of US energy production since 2007. 

It may not come as a surprise to anyone watching the energy sector over the last 7 years that roughly 100% of job growth since the beginning of the Great Recession has come from Texas where energy CAPEX has boomed.

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From the Archives...


12.17.14  - The New Paradigm for Global Markets

10.9.14    - Markets Rolling Over

5.30.14    - Bank Lending and Economic Growth

3.21.14    - March Flash Update

2.20.14    - February Flash Update

1.15.14    - 2014 Annual Forecast

12.10.13  - Bursting of the Bond Bubble

11.13.13  - A New Top for Stocks? 

7.23.13    - Bursting of the Bond Bubble

5.9.13      - The TINA Hypothesis

4.15.13    - The Bernanke Illusion

3.15.13    - US Economic Outlook

2.1.13      - 2013 Annual Forecast

12.10.12  Tax Reform: A First Step

9.17.12    QE3

5.1.12      All the Good Ones Are Taken

3.12.12    March Flash Update

2.23.12    February Flash Update

1.11.12    Annual Forecast


1 DOW 18,080.14
+21.45 (0.12%)    
2 S&P 2,117.69
+4.76 (0.23%)    
3 NASDAQ 5,092.08
+36.02 (0.71%)    

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