GDP, Keynesian v. The Austrian School and the Rocks Beneath this Market Wave

Below we look at the recent GDP figures, Keynesian School v Austrian School economics and a seminal observation from Ludwig von Mises.

Von who?

Good News from the MSFM

The economic news just came in, and it looks good. The “recovery” and “synchronized global growth” memes are spinning off the screens of the Main Stream Financial Media and its daily cast of interviewed “economists” chiming in from the big banks and funds who rely upon (and therefore peddle) good news.

To wit, we’ve seen back to back quarterly numbers of 3% real GDP growth. That’s good. Looks strong, right?

In addition, Wall Street just announced that household net worth for Q3 2017 posted an all-time high of $97T, up $7T Year-To-Date. In short, since the 2008-2009 “Great Recession,” household net worth has grown by just over $40T.

And then of course there’s the securities market. Here in the US, algo traders, momentum jockeys, and high frequency trend followers are buying, riding (and creating) a massive market wave with no apparent concern (or VIX fear) for the jagged rocks beneath it. (Hint: China? Italy? Global Debt etc…)

Rocks?

Our role here at SignalsMatter.com is to trade around these waves and make money, long, short and even sideways. And we’re doing it. But it’s also our job to point out the rocks beneath this wave to our readers and provide actionable, real-time signals to our subscribers.

It’s not always popular, but candor helps more than just bearish grumbling.

And we get it. On the surface, things sure look like a “recovery,” even to old grumps like us.

After all, we’re in the 3^rd largest business expansion in US history and some are forecasting years more of it.

And here’s the question, one we’ve traded successfully around for years:

Is This Sustainable?

I suppose anything is sustainable if you have a big enough credit card and an active enough printing press in the basements (i.e. currency computers) of the world’s central banks.

You know the drill folks: this is real growth, but then again, it’s not real growth…

And more importantly, it can’t end well.

We live in a Keynesian School bubble of “accommodation”—which in laymen’s terms means “artificial support.”

I’ve written about this “support” in just about every blog on the central banks. $15T of post-08 global money printing buys a lot of something, that’s for sure. And just as there are plenty of Keynesians at the Fed, the ECB et al, there’s plenty of good times in the market bubble they bought.

But full disclosure: we are not Keynesians.

The Austrian School

Maybe it’s ancestral bias, but I feel the “Austrian School” of economists (who hate debt) have a long track record of ultimately proving the Keynesian School (who love debt) wrong.

And if there’s one economist, and one quote that sums up the difference between the two schools, I can’t think of a better one than the following:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

—Ludwig von Mises

 

Written almost a century ago, but no less true today.

It’s a hard but unpopular truth to just admit that this “boom” we are experiencing is all about the aforementioned (and toxic) credit expansion, so much credit that even junk bonds are basically low yield bonds.

And I’ve written about these dangers elsewhere. Here in the US, the low-rate policy which Greenspan throttled in 87 –and which his cabal at the Eccles building has followed ever since—is the ultimate example of the very credit expansion von Mises warned against.

The fact that US debt alone (private, corporate and governmental) is at almost $70T is the proof in this historically unmatched credit pudding.

The fact that we are almost a decade into a zero-bound rate policy that has not been “voluntarily abandoned” at the ECB, the BofJ or even at the QT-leaning FED is also evidence that we are heading for a rude awakening–“sooner” or “later.”

The fact that Bitcoin is trending faster than Superman through a phone booth is also indicative that faith in central banks, debt-ridden sovereigns, currencies and “accommodation” is thin and getting thinner.

The fact that bond markets—here and abroad– are undeniable and historical bubbles is also proof of this dangerous “credit expansion.”

The fact that the yield on European junk bonds is less than the yield on the US 10-Year is further evidence of a distorted credit expansion…

In fact, the list of facts screaming “credit bubble!” goes on and on, as does Wall Street’s attempts to ignore them.

More Spin, Less and Less Facts

And von Mises, we contend, is right. During the “boom” phase, it can feel really good. And one click, channel push, or radio visit to the MSFM’s latest “report” will add to this warm and fuzzy rush.

We see it every day. Salesmen from Goldman to Fund “X “to Advisor “Y” posing as fiduciaries or “Bank economists” (oxymoron or just conflict of interest?) selling spin as if it were cotton candy at a carnival as the anchormen and women (who studied marketing not markets) gush in awe.

Indeed, the more we listen to the financial media, the more it seems that forced good news (and lip service to outlier news) is the only tool left to keep our minds out of reality, deeper into this bubble, and further from the dreaded “sell” order or that “total catastrophe” of which von Mises so bluntly warned.

Again, catastrophes –even, “total catastrophes” –are hard to notice in the bubble vision of bubble markets.

But Things Are Looking Up, No?

After all, we’ve got those back-to-back 3% GDP numbers and that soaring net household income! Surely, that’s more than just a sign of dangerous “credit expansion”? The Keynesians (and talking heads) will shout that’s productivity emerging from the ashes of the last Great Recession, no? It’s confirmation of “accommodation” at its best, no?

Well, let’s look a little bit closer…

First, 3%+ GDP is not itself a sign of “all clear.” In 2014, we saw a Q2 GDP of 4.6% and a Q3 GDP of 5.2%. It didn’t last…

Nor has there been any kind of underlying GDP trend since the 2009 bottom upon which to base much optimism. We saw 3% numbers in 2010 and 2013 as well. The annualized numbers are much weaker.

And if you look at “core GDP”—i.e. GDP that includes consumer spending, government output and fixed investment, this latest quarter showed the weakest rate in over a year, limping in at 2%.

A better number to be looking at when measuring just how robust the economy really is lies in real final sales—not just inventory numbers which bounce around like a fish on the dock. In fact, when looking at real final sales, both near-term and long-term, the annual expansion rate hovers at the low end of 2%.

In short: yawn.

And as for household income, there’s no doubt that a $7T annual bump is a big bump. But who’s benefiting?

Well, it’s not the real (i.e. “median’’) households…

Sure, the Fed is tracking flow-of-funds, which is growing like gangbusters because the Fed-stimulated markets are growing (inflating/bubbling) like gangbusters, but actual household median income is growing at 1/10^th of that speed.

Stated more bluntly, the much-reported asset inflation we are experiencing in this Keynesian monster bubble (from Amazon to Real Estate valuations) is going to the top 10%, not the remaining 90%–i.e. the real world…

If you’re in that top 1% to 10% category, that may not bother you much. But even if you are, it’s still important to know that you are surfing over numerous rocks on this market wave…If you’re not in that top 10%, well, you’re being hosed, which is what Wall Street does to Main Street…

When Will the Wave Crash?

Market bubbles are fed by faith, not fundamentals. The wave will last as long as faith (and trusted media spin) lasts, and thus the biggest enemy of a bubble is time and faith…

Here at signals matter, we are tracking time and faith as it plays out each day in these trend-heavy and fundamentals-be-damned markets, currently trading at 24X multiples to earnings (using GAAP, not X-items lies/accounting) and all in the backdrop of the greatest levels of simultaneous national and global debt ever recorded.

Remember folks: debt matters, and the debt numbers currently going largely un-noticed are staggering.

We’ll need more than 3% GDP to face that reality…

At Signals Matter, we are watching rates, price action, yield curves, trend patterns, central bank moves and hundreds of other technical and fundamental indicators so that you can rely on more than just blogs to make your entry and exits. Today, more than ever, investors need data rather than didactic observations.

Still, it feels good to look at the big picture too, and the big picture we are seeing would make von Mises wince…