The Unfortunate Math Behind Our Economic Plight
The Pragmatic Capitalist has a great new post up. Discussed is the Output Gap (Potential GDP vs. Actual GDP) and the fact that every single stimulus program to date is a 'fix' to a misdiagonsed problem. Targeting bank balance sheets helps banks (which are your lobbyists and source of funding, this is called crony capitalism) but does nothing to help the real cause of the problem. I am not saying the stimulus was good or bad (... except I am, It was bad), but rather I am saying that if you wanted to 'stimulate' to help a) solve the problem or b) throw money down a black hole, then government has chosen b) every single time.
THE UNFORTUNATE MATH BEHIND OUR ECONOMIC PLIGHT
9 September 2010 by TPC
The whole post is good with charts illustrating the Output gap and the size of the problem, but this paragraph is a gem....
As I’ve previously mentioned, this current environment is easier to comprehend than most would like to admit. What is basically occurring here is a massive decline in consumer spending power which subsequently weakened corporate revenues. The lack of revenue strength leads to tepid hiring because visibility is poor. Margin expansion has helped companies maintain their balance sheets in recent years, but margin expansion alone can only sustain bottom line growth for so long before the market realizes that there is no organic growth. At some point, the household must heal to the extent that they contribute to corporate revenues and sustain recovery. So what we’re seeing now is this frustrating positive feedback loop where corporations are waiting for revenues to rebound so they can expand their operations and hire, but the problem is that consumers are more focused on paying down debt as opposed to spending and accumulating debt. The problems are now being compounded by the fact that the government is no longer aiding growth.
Do I think that consumers paying down debt is a 'problem'? NO!!. This is *EXACTLY* what needs to happen.
The 'problem' exists from the stanpoint of corporate revenues. The stock market is priced for a full recovery and resumption of GDP growth that we have seen over the last 50 years. I don't believe this is even remotely close to the reality that we see either now or in the next few years.
Stocks will not fall if earnings are still good.
... But earnings are 'good' through a) organic growth or b) cost cutting / margin expansion. We have seen a lot of b and no a recently. And I think b is 'maxed out'. I think we will see evidence of this next quarter and the market will begin to see, once again, that equities are overvalued.