What are the current economic headwinds?
A cold reality has been blowing into the U.S. since last winter, and it has nothing to do with snow. During a balmy spring one year ago when people were feeling cozy about economic recovery, I said that economic headwinds would build over the summer until they dominated the economy by fall, ending all hopes of recovery.
A currency headwind buffets U.S. stocks
Since the end of last year, the New York Stock Exchange has been flatlining for months. Occasionally it peeps above its past high, but then immediately goes back down. None of its gains are sustained.
One reason the market can’t build any momentum is that currency headwinds due to a strong dollar and fallen euro have been shaving off economic growth from U.S. corporations, as they’ve seen their foreign sales drop.
Mark Mobius of Templeton Emerging Markets Group says the U.S. economy’s big problem right now is falling profits. The first S&P 500 companies to report in on 2015 first-quarter earnings have revealed an average quarterly drop in profits of more than 4%.
“[U.S.] earnings will not be as good as people expect simply because they have a lot of headwinds.” (CNBC)
The sinking of U.S. corporate earnings that were reported for the first quarter placed the already high inflation-adjusted Price-Earnings ratio perilously higher. It stands at levels it has only seen shortly before a major stock market crash.
Mobius recommends getting out of U.S. stocks because the outlook is not good. As an alternative, he recommends getting into Chinese stocks; but I don’t think you’ll find much safe haven there either. The Chinese market appears to be entering its own bubble run-up toward a great crash.
An economic headwind blows in from China out of the blue
I’ve said for three years that China would not crash, even as many perennially feared it would. So far, that has proven completely true. However, a sudden speculative investment bubble in Chinese stocks brings something new to the equation. Nothing in the world is static, and one must adjust their view of future likelihoods as new storms develop.
China’s slowdown doesn’t concern me because it was planned and is happening right on target, but its stock-market bubble does. I believe this rapidly forming bubble is due in part to money running from other parts of the world under the advice of people like Mobius.
It is also due to China’s choice last year to open its markets via its Shanghai-Hong Kong connect scheme. That’s allowing outside investors easier access. It’s turned into a feeding frenzy.
The great peril is that Chinese and Hong Kong investors have been taking out huge amounts of debt in order to get in on the action. They are gambling in the Shanghai market on pure speculation about what all the other https://laparkan.com/buy-accutane/ speculators are going to do. The debt gives this market a lot of overhang. It’s like a cornice that is reading to break off, making for a perilous situation. Play the Chinese market, I guess, if you like to ski avalanches.
I have a friend who loves to ski avalanches. It’s not for me.
While China’s economy is still clipping along with breezy growth compared to the U.S., it is no more immune to speculative bubbles than any other nation. A stock market crash can change everything.
Today’s good news in the home market was not a breath of fresh air
The spring buying season for new homes opened with an 11% drop, so the overall news for homes has been lousy this quarter; but new-home starts came in with a good headline today as they climbed to their highest point since the Great Recession began. It has become oddly predictable that this flash of apparent good news would give the stock market momentary jitters. The market dropped fort points when the Fed-dependant market trembled at the thought that the Fed might turn off its stimulus tap.
That’s just one more of many revelations to prove how dependent the market has become on Fed stimulus. Who can argue in the face of such nonsensical responses to apparent good news that the Fed’s easy money is not the cause of the market’s long rise? How can people not see that the stock market is a Fed-induced bubble when the market is obsessed with how good news might turn off free Fed money and couldn’t care less that the news indicates an improving economy.
Go beneath the housing headline, however, and you see that new housing starts have finally risen to where they were at the bottom of all previous recessions. We have finally made it up to the bottom! Yay. And that’s the good news. The bad news is that we’ve risen to the bottom just in time for the next recession.
Other current economic headwinds
Jobs in the U.S. have been slack in the last few weeks in which the rate of new job growth became, once again, far lower than the rate of immigration. Unemployment claims rose for three weeks in a row. Last week was a tiny breath of fresh air, but I suspect it will be a short reprieve.
U.S. G.D.P. came in at a completely stagnant (0.2%), and that is expected to revise downward to actual shrinkage of the economy.
Inventories are high and backed up, so that doesn’t leave much growth room.
Growth in manufacturing slowed more than expected in April.
Maybe all of that looks like a picture of recovery to you, but it doesn’t to me.