As Larry mentioned in a recent tweet, the current rally is antithetical to what Jerome Powell and the Fed are aiming for: tighter financial conditions. We are still in the camp that you should not fight the Fed.
While the stock market returned more than 180% since the 2007 peak, that increase in asset prices was more than 6x the growth in real GDP and 2.3x the growth in corporate revenue.
It sure seems like much of the equity market outperformance has come from multiples expansion…
Bloomberg released a great article today that discussed how “the puzzle pieces aren’t fitting together very well”.
“The manufacturing sector is arguably already in a recession, and the housing market has slumped, yet factory and construction employment remains elevated. Fourth-quarter GDP numbers due on Thursday, Jan. 26, may only complicate the picture further, showing that consumers—the main engine of the economy—remained largely resilient but companies cut back.”
Even though there’s a mixed picture, the market is firmly pricing a recession in the Treasury market.
“One tried-and-true recession indicator is an inverted yield curve. It occurs when yields on shorter-term US Treasuries rise above those on longer-term ones, which is the opposite of the norm. Inversions have preceded every recession since the 1970s, though there’s been at least one false positive, too.
The curve inverted a few times last year. And following the release of the latest jobs report on Jan. 6, which showed slower-than-expected wage growth, the gap between yields on 3-month bills and those on 10-year notes widened by a full percentage point for the first time in decades.”
Chart That Caught Our Eye
Analyst Team Note:
Total factor productivity (TFP) is the ratio of GDP to its inputs. The greater the proportion, the more the economy grows per its usage of resources.
Since 1980, TFP growth has stagnated from 0% to 2% annually. Such change is well below the 4% to 6% range in the thirty years following WWII.
For every 1% decline in productivity growth, real GDP falls by 0.41%.
We want to take a moment to thank Interactive Brokers for being one of our Channel’s trusted Partners and to inform my audience of the special features they have given that our online friends here closely follow Chinese Internet stocks (BABA/Tencent).
Much of Larry’s audience is concerned about the US ADR issue of Chinese Stocks being delisted.
