Guest Haymaker
Courtesy of StoneX's Vincent Deluard
Charts of the Week
A critical factoid I haven’t seen covered from the myriad sources I track is that S&P 500 profits are now running below the federal government’s fiscal deficit. The latter is now trending at around a $2.5 trillion annual rate, though, clearly, the final number could end up above or below that stunning level. As you can see in the preceding chart, the gap can be huge during recessions when government support outlays surge and profits collapse (which is why the recession debate should be of vital concern to investors). Now, though, this is happening when the economy is still expanding. It’s reasonable to ask where S&P 500 profits would be right now if deficits were at a more normal level of around $500 billion versus $2 trillion or more. As noted in prior Haymakers, deficit spending is highly supportive of S&P profits, as it creates demand that doesn’t need to be funded by Corporate America. Unquestionably, the current pace of federal spending is, in a word, unsustainable. In two words, it is totally unsustainable. Stock market bulls beware. (Many thanks to Gavekal’s Kaixian Tan for the above chart.)
The above image may go down in financial market history as one of the most outlandish of all-time, right up there with the price chart of the NASDAQ in early 2000. (Apologies to our clients and Founding Members who saw this during yesterday’s webinar.) For those too young to remember that era, it was when the first tech bubble had inflated to gargantuan proportions. Considering that the U.S. is now facing an array of threats and risks unparalleled since WWII, this is another utterly unsustainable situation. In addition to the above-referenced earnings distortion, the market value of the Magnificent Seven mega-cap growth stocks is now in the vicinity of $12 trillion. This exceeds the capitalization of the Chinese stock market and is about six times the value of publicly traded German shares. It is also nearly three times America’s contribution to global GDP.
“There is also an ongoing need for increased spending due to the green economy, the restructuring of global supply chains, higher military spending and rising healthcare costs. This may lead inflation to be stickier and rates to be higher than markets expect.” -JPMorgan CEO, Jamie Dimon
Mark Twain once said words to the effect that if you find yourself on the side of the majority you should pause and reflect. To a congenital contrarian like me, those are words I should have on a big plaque in my office. Last year was a prime example of that when I wrote I was uneasy that I found persuasive the overwhelming consensus view a recession was looming.
Fortunately, I did say and write multiple times that I was more confident there would be an earnings recession. Wall Street analysts disagreed with that, but a mild one did occur.
Someone who more accurately anticipated the economy’s path last year was my close friend Vincent Deluard. Vincent is the Global Macro Strategist at San Francisco-based investment firm StoneX. Veteran Haymaker readers are familiar with his work due to the fact we’ve run a number of his articles in the past. The good news, for those who have been asking for more Guest Haymakers, is that this week Vincent’s thoughtful work once again graces these pages.