- The strong equity markets
- The housing market recovery
- Low unemployment
- Low interest rates
The problem is apparent in the following chart. The market has had a huge 'unprecedented' rally in terms of its longevity. Even if you were positive about the outlook, you might question the sustainability of this rally, given the expectation of rising rates. Looking at the following chart it seems reasonable to expect a 'good retracement' to at least the 14,000pts level. The reason why we might not expect more than that is simply that, there is every reason to expect a recovery in the real economy because:
- Interest rates remain very low - so there is scope for the market to accept some increase in rates
- Higher rates would actually encourage more spending because the incentive to pay off one's liabilities will be lower. The problem is that the Fed would not raise rates if there was any prospect of sinking equity & property markets.
- There are no signs of inflation
Source: Google Finance
Based on the chart above, there is good reason to expect a 'sell-off' in Sept-2015 on the prospect of rising rates, but also for other reasons:
- The 'dead-cat' bounce in China's equity markets, suggests a lack of confidence there
- Ominous signs of political instability in the USA, with elections looming in 2016
- The prospects of a currency war, that can only undermine confidence in political leaders. This is the surest sign of no demand.
Housing market recoveryJudging by the following chart of new housing starts in the US, you could be forgiven for thinking the strong growth in construction is a 'good sign'. The reality is however is that:
- Current levels of housing construction only offset the 'pent-up demand' for new housing that arose after the global financial crisis.
- There is no 'fundamentals' which would support the persistence of this trend, as I will show next.
Low unemployment myth
- Families spending like there is no tomorrow because they have kids and little savings
- Subsistence lifestylers living frugally - mostly these are skilled people leaving themselves flexible
- Subsistence welfare recipients - mostly these are 'estranged' unskilled people, or skilled people in vocations that society does not value. Sometimes they are just people who don't readily integrate into society, i.e. libertarians, white supremacists, atheists, disabled or convicted felons for drug use.
- Skilled people who have seen a rapid rise in incomes - Even these people are not spending because they are rapidly paying off their homes
- There is a recovery in the 'real economy to justify a rise in interest rates by over 100bp beyond Sept-2015
- Quantitative easing in order to stimulate the US market
It is therefore important to appreciate that 'low unemployment' is a 'dirty white lie' that is in fact a long term decline in the US workforce participation. You could argue that too many people have simply left the workforce, or 2-income families have become one, or full-time workers have become part-time, that more children are staying at home until their 50s, or more people are packing into ever-smaller apartments. Of course there are more Americans on welfare programs. But the greater reality is that they are simply living minimalist lives. This is actually one of the reasons why governments have shifted to taxing consumption, as well as expanding their powers to intrude into foreign bank accounts, as more people 'live abroad'.
Source: US Bureau of Labor Statistics
Why would this rate be falling if unemployment is falling. People have simply stopped looking for work. Not everyone of course. It is also fair to say that a lot of people are 'under-employed'.
Excess business inventoriesThere are however also other 'demand indicators' that are used to justify the premise that the US economy is recovering, such as new vehicle sales, which are at "record levels". There is other evidence however to suggest that not all is well in the US economy, namely:
- US inventory levels - see the ominous signs of recession below
- Vehicles in the US are a 'necessity' unlike Japan. The issue is not 'car ownership' but car cost. Moreover the credit terms for new cars have never been easier, and anyway delaying the purchase has a reason to jump into the market....they have been saving for 7 years.
- Judging by the statistics belong, vehicle sales are at 'break-neck' rates, so I'd expect a fall in coming months.
Source: US Bureau of Economic Analysis & Federal Reserve of St Louis
In conclusion, there are strong reasons to be cautious about the outlook for the next few years. There are also compelling reasons to appreciate that the current crop of conservative and democratic politicians have no intent to reform goverrnment. Only politicians like Rand Paul and Donald Trump are likely to make those tough decisions to cut costs, that will restore the US economy to health. Note the following:
- Stock and bond prices - the tendency for stock indices to fall every 7 years (2001, 2008 and now 2015??)
- Excess inventory levels - a precursor to recession
- Prospect of a modest interest rate increase - not so significant as only 25bp probable
- Election concerns diminishing confidence in the next year
Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
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