Last week, I wrote about the potential for the U.S. to experience a liquidity trap, and I referenced several other recent columns that concern economic indicators that are providing warning signs about the current economic trajectory.
The financial media for the most pay little attention to the kinds of issues I've raised recently. That alone is justification for investors to be even more mindful of them.
When discussing issues that may be construed as negative, there is always the risk of being labeled a pessimist, doomster, bear or perma-bear. Doing so while the equity markets are rising almost unrelentingly since the 2008-09 financial crisis also risks being considered irrelevant.
I would caution, however, that this kind of "conscious obtuseness" allowed for the bubble in real estate and subprime mortgages, which led to the inevitable market crash from which the U.S. economy is still trying to recover; and doing so very poorly.
Another report exhibiting the negative economic patterns I've written about recently was released yesterday by the Federal Reserve Bank of Chicago: the Chicago Fed National Activity Index (CFNAI).
This is the 10th quarter, out of the past 15 having occurred since the "Great Recession" ended in June 2009, that the three-month moving average of the CFNAI diffusion index has been below zero.
In the past 50 years, no other post-recession "expansion" has exhibited such a long period of not actually expanding. And yet, as the equity market's performance attests, this has had no impact on the animal spirits of equity market participants.
Real final sales per capita in the U.S., since the recession ended, has been about 0%. Historically, when the year-over-year rate of growth in real final sales was below 1% and the CFNAI three-month moving average was at or below zero, the U.S. economy was already in recession.
Breaking down the individual components of the CFNAI provides a bit more clarity. The personal consumption and housing categories, although above the lows put in immediately after the demise of Lehman Brothers, are still in recession and have been so throughout the past five years.
The production and income category rebounded strongly after the Great Recession but peaked in mid-2011. It's been declining since and is now back to zero.
The Great Recession has become the Great Stagnation, while equity market participants are either unaware of this fact or don't care. There is no physical law or fiscal rule that requires there to be a positive correlation between economic activity and equity market performance, but historically there has been.
Right now, aggregate economic activity is decelerating while equity-market performance is maintaining the upward trajectory of the past five years. This is not a simple case of diverging trends between the two or a difference in growth rates. This is a dichotomy that can only continue if the historical relationship between the two is no longer applicable.
I don't know if that is the case or not, but it is possible, although I can find no precedence for it.
It is probable that in the future we will discover that this situation was allowed to occur because the largest publicly traded firms can access cheap debt capital to buy back outstanding shares, reducing the float, and causing earnings per share to increase, without revenue growth, resulting in increased share prices.
The prudent course for speculators and investors in the immediate term is to be sensitive to the fact that this dichotomy is occurring.
I've written about how the corrective measure in such a situation is for economic activity to increase to meet the expectations for growth exhibited by the stock market or for the stock market to negatively correct to meet real economic activity.
Of those two options, a negative correction in the stock market is far more probable. The only other option is for the stock market to no longer be correlated to economic activity.
