Economics gets interesting as the economy darkens while stocks bubble

Summary: These economic status reports grow more interesting as the data shows slowing while the stock market bubbles. It’s nothing like 2007, except in our blindness to events and disinterest in preparing for obvious risks. When the recession arrives (we can’t know when), I believe it will mark the start of a new economic order. The next generation will listen with astonishment to tales of these days.  {2nd of 2 posts today.}

“In a nutshell: Things are looking better — in fact, they’re looking downright good. The economy is showing solid momentum and there’s good news in virtually every sector. I expect U.S. growth to be about 2½% in real GDP. I see the continued improvements in the economy pushing wages and prices up, and inflation moving back toward its target.  I expect to reach full employment by the end of the year.”

John C. Williams (President of the San Francisco
 Fed), 23 March 2015. Be very afraid when you hear such things while the indicators tumble.



  1. One of the big indicators: new orders durable goods.
  2. GDP on recession watch.
  3. Stocks: bubbling again because we don’t learn.
  4. A bear market will wreck the investment biz.
  5. For More Information.

(1)  One of the big indicators: new orders for durable goods

The February numbers were weak, as they have been so often during this long slow expansion. The big picture is that they have been flat during the past 2 years (easily missed if you read the news by the hyperventilating over the little swings). They’re the same level as September 2006, and 5% below the pre-crash peak of December 2007. Almost unchanged from a year ago, any breakdown from here will warn of an imminent recession.

New Orders for Durable Goods: February 2015

(2)  GDP on recession watch

GDP forecasts are notoriously inaccurate (we have good estimates of GDP in the 3rd release, in the 3rd month after the quarter ends). But they’re too important to ignore, especially the trend of the forecasts. In this cycle forecasts have tended to drop over time; this quarter the drop has been fast and large. Much slowing from the current +0.3% estimate gives us a negative print for Q1, which would be the 3rd red number since the recession ended in 2009.

Atlanta Fed's GDPnow forecast

(3)  Stocks: bubbling again because we don’t learn

Markets long ago decoupled from fundamentals, as investors embraced our centrally planned economy where the central bank manipulates not just interest rates, the money supply and lending, but also risk preferences (the target for quantitative easing) and “animal spirits” (aka public confidence).

Valuations are quite mad for such a slow growing economy, late in the business cycle, with profit margins at historically peak levels (they have always reversed back to average levels). People tend to forget that the price to earnings ratio represents what you pay for future earnings, so comparisons to the past when America grew faster will mislead you. The carnage will be immense when this bubble pops (more about the consequences on another day). This is too obvious to warrant discussion, so I’ll just point to reports giving the details.

More specific indicators are the stratospheric valuations of social media stocks, investor euphoria over Tesla, and — my favorite — investors’ love for profitless biotech stocks. Zero Hedge has an excellent article looking at the NASDAQ biotech index, showing that it’s a “hope and change” index betting on the development of new drugs. Past history says that many or even most of these will fail, as their drugs either do not receive FDA approval or don’t earn marketplace acceptance. For details see “Forget the tech bubble. It’s the biotech bubble you should worry about“.

Here is a graph of the S&P Biotech Index: showing the classic parabolic rise of an investment mania.


For about this see Don’t ask if there’s a biotech bubble. Ask why we have another bubble.

(4)  A bear market will wreck the investment biz

The finance sector is ripe for disruption as the combination of new technology and new business methods will rip its profitability, producing massive overcapacity. The status quo has been supported by the bull markets in stocks and bonds, plus negligent regulation. I suspect that a bear market will reveal that they (including me) have been walking on air for years. The drop will be painful, but produce a financial sector better able to serve America. More on this coming soon.


(5)  For More Information

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economics, monetary policy, and stimulus programs. Of special interest are these about the state of the economy:

  1. Dreams of a boom fade & attention turns to secular stagnation.
  2. Highlights of the jobs report, the good news & the bad.
  3. New economic data only deepens the mystery.
  4. Updating the recession watch; & what might the government do to fight a slowdown?
  5. Economic status report: good news plus chaff from doomsters.

About the bubble:

9 thoughts on “Economics gets interesting as the economy darkens while stocks bubble”

  1. Pingback: Economics gets interesting as the numbers darken while stocks bubble - The Fabius Maximus website (blog) | Latest financial news

  2. Pingback: Economics gets interesting as the economy darkens while stocks bubble - The Fabius Maximus website (blog) | Latest financial news

  3. Also from the same SF Fed link:

    “It’s been posited by some that the risk of overshooting the inflation target is minimal, because inflation is so low and is unlikely to accelerate quickly. I’ll offer a counterpoint to that, from a time in U.S. history when things looked similar to the snapshot today: In 1965, when the Fed was debating whether to tighten policy, core inflation was 1¼ percent, labor costs were growing relatively slowly, and the unemployment rate was about one-half percentage point above the estimate of maximum employment at that time.”

    This is the quote that scares the crap out of me. In 1965 total private sector debt to GDP was what? 0.6? Our trade current account was in surplus. Compared to today the Fed balance sheet was sub microscopic, banks were healthy, corporate pensions were funded, and the baby boom was literally in its prime. The tract home concept had barely been invented along with transistors, computers, and telecom. It was literally the genesis of the current debt super cycle.

    Which is now ending.

    1. Peter,

      “This is the quote that scares the crap out of me.”

      The comparison of our circumstances with 1965 is wildly inappropriate. GDP was skyrocketing then, going from 2.6% in 1961 to 6.6% in 1966. Accordingly the Fed was tightening monetary policy. Fed Funds was 2.0% in July 1963, raised to 5.8% in November 1966.

      We’re in a cycle with GDP appearing to be fixed in a range of 1.5% to 2.5%. There is no evidence whatsoever of the acceleration you fear. You are worried about fire as the boat is sinking.

      I suspect you are paying attention to the crowd that has been consistently wrong about the US economy since the recession ended. That’s odd, but quite common in these mad times.

      1. Peter,

        In re-reading your comment, I don’t understand your point. You disagree with the comparison to 1965. So circumstances are different. 1965 was not Heaven. That it’s not 1965 should not “scare the crap out of you.” Buck up.

      2. Just as you say, it’s the breathtaking cluelessness implied by that paragraph that scares me. Combined with the indication this guy wants to tighten. Hopefully this is just jawboning about blue skies ahead to encourage optimism and he knows what a disaster tightening might produce.

      3. Peter,

        Never assume senior government officials are clueless because of their statements. Esp Fed officials. They know much more than you do.

        Rather assume they are attempting to influence you. In this case he is probably “talking up” the economy. They are desperate to normalize rates before the next recession, for good reason.

  4. “The status quo has been supported by the bull markets in stocks and bonds, plus negligent regulation. ”

    That tells us all we really need to know and should be aware of.
    It is not wise to be carried away by the joy of what is seemingly so.
    Look closer?
    It is probably a good idea.


  5. Pingback: Economics gets interesting as the economy darkens while stocks bubble - Give Back Our Freedom

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top
%d bloggers like this: