Sunday , 25 June 2017


Will Stock Market Performance Lead Economic Expectations Lower?

It…feels [to me] like the economy is in a much-better place thanquestion-mark it’s been for the last 9 years, or so, BUT financial markets tend to lead economic expectations [so it begs these questions:]

  1. Will financial markets become concerned with what’s driving small business and consumer spending power?
  2. Will June’s almost-guaranteed Federal Reserve rate hike “help” financial markets lead economic expectations lower?
  3. Will tax cuts and spending initiatives help compensate for the pressure that tighter financial conditions might pose?
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by John Ross Crooks III (moneyandmarkets.com)

…[The data in the chart below] is based on a survey of independent businesses in America. The surge is surely due in large part to the prospects of tax cuts and infrastructure spending in the wake of November’s U.S. presidential election.

[As you can see,] those prospects have darkened a bit but NFIB optimism is holding on at levels well above peak optimism in 2007 so:

  • Is this a sign that good(er) times are ahead?

OR

  • is this a sign that things are getting ahead of themselves?

Financial markets tend to lead economic expectations.

  • Will financial markets become concerned with what’s driving small business and consumer spending power?

The graphs above and below show the nominal growth in loans and leases from commercial banks. Naturally, peaks have corresponded with recessions.

What needs to be determined is whether peak loan growth leads or follows recession … and whether we’re facing a potential peak in loan growth today.

As…[outlined by] Hoisington Investment Management, the economy is saturated with debt:

“Total domestic nonfinancial debt, excluding off balance sheet liabilities such as leases and unfunded pension liabilities, surged to a record 254.8% of GDP in 2016, 5.6% greater than in 2009 when Lehman Brothers failed.

“Total debt, which includes domestic nonfinancial, foreign and bank debt, amounted to 372.5% of GDP in 2016, compared with 251.9% of GDP in 2006, the final year of previous tightening cycle, which, in turn, was greater than in any earlier time from 1870 through 2006.

“The situation in the business sector deserves particular scrutiny. Business debt surged to a record 72.6% of GDP in 2016, for the first time eclipsing the prior peak of 70.2% reached in 2009.

“With the business sector so levered, not much room for miscalculation exists. As such, the risk is clearly present that the Fed’s restraint will chase out one or more heavily leveraged players, just as was the case in all the previous tightening cycles since the 1960s.”

[There are] lots of questions [that need to be answered like:]
  • Will June’s almost-guaranteed Federal Reserve rate hike “help” financial markets lead economic expectations lower?
  • Will tax cuts and spending initiatives help compensate for the pressure that tighter financial conditions might pose?

The only answer is that the direction for stock markets is UP – until it’s not – and, when it’s not, that’s when you want to be protected by having money in gold, Japanese yen and U.S. Treasuries.

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