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- Fed policy of monetary expansion has not resulted in the transfer of the monetary base to the money supply because banks have not been lending.
- Five key sources of bank profits since the financial crisis have become more restrictive or disappeared now forcing banks back to their prime business of lending.
- Bank lending will fuel growth in the economy as corporations make badly needed capital investments and increase hiring, forcing wages up.
- Lending will have an inflationary effect through wage growth while high cost of corporate investment and rising wages will hinder profits. Rising inflation will contribute to higher gold prices toward year end.
- US economic growth and wage growth will be good for Emerging Market exports currently suffering under a slowing China.
- Rising US inflation will both boost the price of gold and simultaneously force interest rates to rise, creating an ongoing drag on corporate profits.
Nearly everyone agrees that the harsh winter and late spring in the eastern US depressed economic activity. Q1 GDP growth was the worst since 2011. The one percent decline in GDP pales when compared to the 9.8% drop in pre-tax and 13.7% drop in after-tax corporate profits. Although the profit decline was amplified by special factors, it stands in stark contrast to forecasts of ongoing profit growth. Economic growth factors are already showing big improvement and overall growth is likely to approach a 4% annual rate over the next few quarters. In the absence of special factors, the severe profit declines will abate, but multinational corporations are unlikely to achieve significant profit growth this year as expansion proves to be very expensive. That reality poses a serious challenge for an up and down stock market, that despite achieving token new highs, has oscillated around zero all year.
Despite the large swings in price that have led the S&P 500 to occasionally outperform our Diversified Sector Program strategy, downward swings put our strategy way ahead. Only when profit shortfall is widely acknowledged will investors abandon the complacent bullish attitude that is still supporting stock prices. The horrible first quarter results are being explained away with bad weather. When disappointing second quarter results get released this summer, someone is likely to notice the Emperor’s wardrobe is a bit threadbare. In the meantime, unlike the market, our approach in 2014 has been consistently profitable.
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