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February 6, 2019

How Fed's QE Distorted Our Economy

When showing people my Spending Wave chart, I now must do so in two phases: the first with the market correlation to the 46-year lag for peak spending before the idiotic, insidious, irresponsible QE phenomenon took flight, and the second one after.

This is the second phase with the markets highlighted in yellow after QE (aka “Quickest Egress from reality)…

Look what those damned central bankers did to my beautiful chart!!

And worse, what they’ve done to our economy and free-market system!

The Spending Wave was my first breakthrough indicator in 1988 and, until March 2009, it was the best tool for projecting the economy and stock markets.

It is that fundamental.

It’s based on people driving our economy, not B.S. politicians who are rewarded for giving free lunches today and kicking the can down the road.

The markets are now just over double what they should be by my most fundamental indicator.

And this final bubble has occurred in the worst recovery in history on all counts: real GDP, wage growth, productivity and capital spending.

What central banks figured out is how to leverage earnings and stock prices (and all financial assets): Set short-term interest rates to zero and then create trillions ($12 trillion since 2009 thus far) to buy your own bonds and push even long-term, risk-free borrowing rates down to zero adjusted for inflation…


Something for nothing on steroids!

And then, the Donald adds major corporate tax cuts when major businesses are enjoying the highest profits in history as a percent of GDP… and when they have more capacity than they need.

That’s how they created this unprecedented stock bubble out of a financial crisis and a weak recovery…

The biggest single driver of stock prices is growth of earnings per share, and these central bank schmucks figured how to goose that.

So, here’s the summary:

  • GDP (not adjusted for inflation) grew a measly 44% since 2009.
  • Profits grew an astounding 175% (thanks to ultra-low borrowing and interest costs).
  • Earnings per share (EPS) grew an even more staggering astounding 384% (119% more than profits because companies used cheap money and free tax cut cash flow to buy back their own stock and restrict the shares to lever up).
  • Stocks grew a little less than EPS, at a mind-blowing 338%.

If this bubble continues another year, which looks likely with my Dark Window scenario, stocks will likely catch up with earnings and we could see the Dow go as high as 33,000.

This is B.S.

It’s like magic: now you see it, now you don’t. We see the miraculous effects of QE now. In the blink of an eye, it’ll all be gone.

Before signing off for today, I just want to share some of the feedback you sent to my tax cuts question on Monday…

Tax Cuts: Good, Bad, Ugly?

John B. told me that my view of the tax cuts is just plain wrong. He said: “Small and medium-sized businesses, where 35% tax is a headwind to investment and growth, needed those tax cuts. The FAANGS didn’t need them, but the little guys were stimulated to invest in growth of assets, marketing, and people.”

And another John B. (seriously, not the same person), also commented about the impact of tax cuts on small business: “For many small businesses like mine, the impact of the tax cuts isn’t felt until our taxes get done in April. I think capital spending decisions come later for many of us small businesses. However, I made the largest purchase of equipment in the last 10 years in 2018 because of the tax cuts and a general optimism under a pro-business administration.”

Thanks for that point of view, guys. However, I still believe Trump’s tax cuts were a free lunch for business that mostly didn’t need them, and it has only goosed the stock market bubble even further beyond reality. Even though some businesses like yours did do the right thing and invest in growth, the macro statistics clearly show that most didn’t.

Courtesy of Harry Dent, Economy & Markets (article archive here)   
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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