- Armageddon environment paints a picture of another 20% decline in the stock market.
- What few seem to understand about this whole affair is that the Fed will not gain control of inflation at all.
Providing a far more accurate read on the true state of the US economy was the key Labor data just released.
Perhaps not too different to, though worse than expectations, we need to take a step back and really consider this result.
The Cost of Labor was up 10.8% in Q2. Bringing total cost increases this year to a whopping 23%. This is just the past 6 months.
Wages rose a huge 5.7%.
Contrasting rather ominously, was that Productivity declined an alarming 4.7%.
The United States is an economy in crisis.
The notion that stock markets are a buy here because bond yields may go down or the Fed may pause or valuations have fallen back, all miss the underlying key ingredient of profitability. A happy confident consumer and strong business climate. Neither are the case.
Of course, the future trajectory of the economy is what most believe matters to the stock market. In reality, the stock market rarely accurately discounts the future and tends to get it wrong most of the time. Then play spectacular catch up to Main Street. Perhaps not what Wall Street wants you to hear, but nonetheless the reality.
Which brings us to the forward looking trajectory of the US economy: It gets worse.
Prices on food and energy are falling back, but remain highly elevated. It is not just the war in Ukraine. It is on-going dislocation issues which arose out of Covid remaining un-resolved as workers and companies continue to figure out what it really is they want to be doing going forward. It is a lack, virtually zero globally, of new investment in Oil production in recent years, limiting the ability to respond to any major energy supply interruption for any reason, it is the mass resignation and early retirement of so many. Inflation is at a debilitating level, and will remain so for the next 12-18 months, even if it falls back to 5%.
Interest rates are going a lot higher as at current levels they remain highly stimulatory.
The Federal Reserve must, in its mind, contain inflation. Therefore, it will keep raising rates. What few seem to understand about this whole affair is that the Fed will not gain control of inflation at all. They will over-tighten. They will not cut rates next year. Inflation will still be too high.
How can profitability be maintained in a n environment of skyrocketing Labor costs, collapsing productivity levels, high inflation, and aggressive interest rate hikes?
The market is acting as if, somehow, miraculously, profitability will be maintained anyway? This reminds me of the Dot com mentality of that period.
All this bullish positioning in an economic Armageddon environment paints a picture of another 20% decline in the stock market. And for it to happen as quickly as by year end.
Hold on to your hats. This gets a lot more ugly.
I am an optimist. You can make money in falling markets too.
Investors must become increasingly flexible, to survive.