Archives For Economy

 

sunriseCertain things, like the sun rising, or the tides shifting, can be counted on. It’s also true that when government shrinks as a share of GDP, things start to pick up.

 

For the past three years, gridlock in Washington has held total spending by the federal government basically flat. This means federal spending has fallen from more than 25% of GDP to 22%, creating more room for the private sector.

 

Contrary to popular Keynesian thinking, this means entrepreneurship will have a more pronounced, and positive, economic impact on the economy. In other words, the “end of the world” trade, which hasn’t really worked in the past four years is becoming more dangerous. We expect gold to fall, while bond yields, the dollar, and stock prices rise.

 

We don’t disagree with the angst of many over deficits and debt, but things are rapidly getting better. Tax revenues are up sharply and we are forecasting a budget deficit of about $725 billion, or 4.5% of GDP, this year. In 2014 and 2015, we expect deficits of near 3% and below 2%, respectively. This is not magic. It’s what happens when spending is contained.

 

It’s not that deficits matter all that much; but it’s a sign of how wrong the pessimists can be. And the same thing is happening in markets. The “smart guys” at hedge funds have been short the dollar and stocks, while long gold and bonds. But, in the past year, this trade has not worked.

 

And the fundamentals suggest this trade will continue to be a loser. We think stocks and growth are still underappreciated.

 

Gold is well above fair value. Comparing its value to oil, corn, copper, M2, nominal economic growth or even the monetary base suggests that it is worth somewhere between $800 and $1,100 an ounce today. We’re forecasting further declines in gold over the next 12 months. It probably won’t be a bloodbath, but it’s not the asset to be long.

 

The same goes for bonds. At the start of the year, we were forecasting a 10-year Treasury yield of 2.85% at year end. Historically, this would have been an outsized jump in yields, especially if the Fed does not move to tighten. A more sanguine forecast of 2.4% still means capital losses.

 

Even if you think the Fed won’t raise rates until 2015, yields are too low. If the Fed held short-term rates near zero for two years and then hiked them to 4% over the next two years and held them there, the average funds rate for the next decade would be 2.8%. Slap a premium of 0.5% on this for the 10-year Treasury and a yield of 3.3% is the result.

 

Meanwhile, despite a sharp increase in equity prices recently, the S&P 500 still has a generous earnings yield of 6%. Stocks are still cheap and we expect further increases. In other words, not letting the conventional wisdom get you down has been, and will continue to be, the profitable trade. – Brian Wesbury of FT Portfolios

 


This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

Back in March 2009, we started writing and talking about a “V” shaped recovery.  Our thinking was pretty simple.  We believed the US economy experienced a “panic” for the first time since 1907.

 

We thought the Panic of 2008/09 was caused by government policy mistakes, not a breakdown of the capitalist system.  Specifically, we don’t believe the bubble in housing would have happened if the Greenspan Fed had not pushed interest rates down to 1% in 2003/04.  And, yes, Fannie, Freddie and the Community Reinvestment Act played a role, too.

 

But the biggest problem was overly strict mark-to-market accounting rules (M2M) which acted like an accelerant for the crisis.  They turned what was probably a $400 – $500 billion bad loan fire into a multi trillion dollar inferno.  And then instead of fixing the bad accounting rule, the government tried to fill the gaping hole itself – with TARP and Quantitative Easing (QE).  In other words, while many saw “market failure” and a “government fix,” we saw “government failure” compounded by “policy mistakes.”

 

As a result, we thought once the accounting rule was fixed the economy would bounce back rather nicely.  It was not a surprise that the market fell nearly 40% after TARP and QE were put in place, but finally bottomed when investors realized in March 2009 that M2M rules would be fixed.

 

The conventional wisdom does not see the world this way.  Many are convinced the Great Recession really never ended and any good data or market rebound is the result of a “sugar high” – created by easy Fed policy and government stimulus. 

 

We don’t believe this.  Excess government spending harms economic growth and QE has ballooned the Fed’s balance sheet, but not the M2 money supply.

 

In other words, what government has done to boost growth is less effective than many believe.  More importantly, because the entrepreneurial spirit is still alive and well in America – a wave of new technology – the Cloud, Smartphone, Tablet, Fracking, and 3-D printing – is boosting growth and creating record levels of profits.

 

It’s what we call The Plow Horse Economy.  New technology is boosting growth while government policy mistakes create headwinds. 

 

The entrepreneur is winning.  And, last week, the S&P 500 reached an all-time record high close – in other words, the right hand side of the V has been finished off.

 

Some call it a new normal, others a sugar high, while still others are convinced that it’s all just a new bubble.  We think the growth is “real” and the entrepreneur is the hero.

 


This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy. This article is contributed by Brian Wesbury, Chief Economist for First Trust Portfolios.

 

Are you looking for solid market commentary? Commentary from someone who will state what they believe and not simply follow the crowd? Allow me to introduce you to Brian Wesbury, Chief Economist for First Trust Portfolios. Brian is a frequent guest on CNBC and someone that many advisors follow. Take a look at this recent interview where Brian Wesbury talks about the economy and the impact of Cypress.

 

 

 You may continue to follow Brian Wesbury on twitter and Wesbury 101 at these links to learn more.