This past week we
received the final 4th Quarter GDP number which came in at 0.39%. The total
4th Quarter growth was terrible, plain and simple. Based on the performance
in the equity markets that we have seen thus far in the 1st Quarter of 2013
investors would expect strong GDP growth. However, the only thing spurring
stock market growth is the constant humming of Ben Bernanke's printing press.
The real economy and the
stock market are no longer strongly correlated. Essentially, they are
meaningless. How do you evaluate risk when Treasury linked interest rates are
artificially being held down by the Federal Reserve? How do you evaluate
earnings growth estimates when most government based statistics are
manipulated or "smoothed" to perfection?
My final argument to
anyone who is a true believer that the stock market is representative of the
economy is a very simple premise. If the stock market is the economy, how
does the stock market evaluate small business earnings growth when most small
businesses are not publicly traded? It is a simple question, but I have yet
to find a sell side analyst that can work around it with facts.
To back up this
information, here is a chart courtesy of www.zerohedge.com that demonstrates the S&P 500's price action compared to economic
data and overall macro risk.
Larger Image
The chart above clearly
depicts the divergence between the macroeconomic data and the performance of
the S&P 500 Index. Yet the sell side continues to scream that stocks are
cheap, earnings are going to ramp up later this year on insane S&P 500 earnings
growth expectations, and the consumer is going to remain strong even though
payroll taxes have increased and the "wealthy" are paying more in
taxes.
Even amid those concerns,
no one knows for sure what the impact that Obamacare and the various new
taxes associated with it will have on the business community. Again, the only
thing driving growth is directly linked to the Federal Reserve's balance
sheet expansion. The chart below is courtesy of the Federal Reserve's
website.
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On August 8, 2007 the Federal
Reserve's total assets were $869 billion dollars. As can clearly be seen
today, according to the Federal Reserve the central bank's total balance
sheet has grown to over $3.2 trillion dollars. The increase is on the verge
of rising exponentially. With QE, QE2, QE3, Operation Twist, Extended
Operation Twist, and now with QE 4 in Perpetuity this trend is certainly
unlikely to shift.
At this point in time the
Federal Reserve is printing roughly $85 billion dollars each month to
purchase Treasury securities with a focus on the long end of the maturity
curve. As primary dealers of Treasury securities process these flows the
money eventually finds its way into riskier assets that offer higher rates of
returns through balance sheet machinations at large money center banks.
It has proven that the
flow of the Federal Reserve's printed monies are more important than the
total money stock for a variety of reasons and inflation according to the
government's data is under control ex food and energy.
However, how are people
supposed to survive without food and energy in today's world? The last time I
went to fill up my gas tank or to purchase food prices have gone up
significantly. According to the 1990 version of consumer price reporting,
real consumer inflation is running around 6% currently and shadowstats.com
has the following comparison.
Unfortunately the 1980
based inflation numbers are even uglier, which based on Shadowstats' data
chart would place consumer inflation at nearly 10%. The calculations being
used by Shadowstats.com are based on the government's OLD ways of calculating
inflation. The calculations were adjusted over time and today the data is
completely manipulated by not including items that typically experience the
largest levels of inflation.
Normally I talk about
price action, probability based option trading, and technical information.
However, before investors consider buying stocks near the all-time NOMINAL
(non-inflation adjusted) highs, why not simply consider the backdrop of the
total economic situation.
Central banks around the world
are printing money at an alarming rate and their balance sheets are growing
to levels not seen in human history. Interest rates are being manipulated to
levels that are historically at record lows or near record lows based on real
inflation data.
Macroeconomic indicators
are issuing a cautionary tone with significant divergences showing up in many
areas. Earnings expectations for the S&P 500 in the 3rd and 4th Quarter
of 2013 are extreme and borderline ridiculous.
So before jumping
headlong into equities based on some sell side analysts recommendation or
even worse, a financial advisor who is more interested in his/her commission
than they are about producing gains consider the following comparisons.
S&P 500 Index (SPX) Price Chart - 1 Year Price History
Larger Image
Gold Futures Spot Price Chart - 1 Year Price History
Larger Image
Clearly paper gold
represented by gold futures is no substitute for physical ownership, but when
one considers the fundamental backdrop for gold versus the S&P 500 Index,
it should be clear which asset is offering the most value at current price
levels. It does not require any inserted trendlines or oscillators, it should
be clear which asset is expensive and which asset is cheap based on the real
long-term economic fundamentals.
I will give you a hint
regarding which asset is offering the most value. It can't be printed, it has
represented the store of value since the advent of modern civilization, and
it is senior to all paper currencies.
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