For several years after 2008, skeptics of printing money to inflate asset values described the policy as "Extend and pretend". However, after the 2016 election it was reinvented as "Greatest 'Conomy ever". It was the exact same con job, under new management featuring higher interest rates and reduced casino liquidity. A bigger circus and no safety net.
Here we see U.S. homebuilders with rest of world (ROW) stocks. I knew I had seen that chart somewhere.
There are several reasons why Larry Kudlow still predicts 3% GDP in 2019, all data to the contrary. First off, because he's a dunce and a con man. Although that's strictly my opinion based upon listening to him for thirty years. Secondly, the government shutdown has obfuscated and further delayed already delayed backwards looking data. Third, economists right now uniformly believe that the impact of laying off 800,000 Federal workers for a month and forcing them to use local food banks, will "rebound" in the second quarter once they pay off their payday loans at 400% annualized. Fourth, they assume that tax refunds absconded from the middle class to the wealthy won't impact 2019 GDP, because they ignore the fact that the marginal propensity to spend is far higher at lower incomes. Fifth, they assume that the critical December holiday sales collapse was a "fluke", as was Friday's payroll collapse. But most importantly, they are all ignoring the collapsing fake wealth effect which is what the past ten year "expansion" was predicated upon. Which I will now discuss next...
The reason why economists can't predict recession is because economic data is lagged. It's impossible to predict the future by looking in the rear view mirror. Markets usually lead the economy, however, in this cycle the relationship between markets and the economy was inverted via the trickle down "fake wealth effect". The operational gimmick during this entire cycle was the well known "quantitative easing" policy of buying up government bonds in order to force investors further out onto the risk curve. Global policy-makers expressly pursued this policy to generate an artificial sense of economic wealth and well-being. The long-term net effect was to drive a chasmic gap between market valuations and long-term earnings potential while wholly desensitizing speculators to risk. On top of that shit pile add in record stock buybacks which are also highly cyclical. Billions in fraudulent Chinese IPOs. A tax cut for the rich paid for with higher interest rates for everyone else. A year long trade war. Cap it off with a reversal in Fed balance sheet liquidity now into the second year.
All of which means that the new "leading indicator" is speculative appetite, best indicated by pot stocks:
All of which means that the new "leading indicator" is speculative appetite, best indicated by pot stocks:
Meanwhile, the fake wealth effect is going in reverse.
Here we see that household (total) wealth as % of GDP (red line) reached a new record high in 2018 and then rolled over in the fourth quarter. The blue line is the median sales price for homes:
If we look at the rate of change of home prices on a longer-term view, we see that there was never a time when a negative decline did not lead to or precede a recession.
Going back sixty years:
Going back to the household net worth graph and this time overlaying the Fed balance sheet, the question on the table for anyone who can fog a mirror, isn't why this is happening, it's why do they assume it's not happening?
What matters is that this time around everyone 100% agrees with my opinion on Larry Kudlow.
