Artificial Wealth vs GDP: Why Earnings and the Stock Market Will Get Crushed
by Mish Shedlock, Mish Talk:
Here’s the case for an earnings smash accompanied by a continuation of the stock market crash.
Ben Hunt: “In late 1990s, the Fed began to use monetary policy as a political tool to make us richer than our economy could grow, inflating home prices and financial asset prices without (they thought) ever triggering wage/price inflation in the broader economy.”
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Imaginary Wealth and Hyper-Financialization
Data goes back 70 years. Here’s the relationship between US wealth growth and US GDP growth for 35 years, 1951-1986. Gets a little disconnected with the Nixon shocks and the end of Bretton Woods, but still roughly in line. pic.twitter.com/rJO3sQd75r
— Ben Hunt (@EpsilonTheory) July 6, 2022
Change “richer” to “feel richer” and the idea is perfect.
Earnings Forecast
Wall Street predicts +10% S&P earnings growth. The Belkin Report forecasts -48% S&P earnings slump, like 2009. pic.twitter.com/ZoPJFUw4fc
— Belkin Report (@BelkinReport) June 30, 2022
Which Earnings Estimate Do You Believe?
- Wall Street predicts +10% S&P earnings growth. T
- The Belkin Report forecasts -48% S&P earnings slump, like 2009.
Actual earnings could be even more extreme or somewhere in the middle, but I expect Belkin to be in the ballpark.
Case for an Earnings Crash
- Recession
- De-globalization costs
- Retirement of 22 million boomers will lower productivity and slow spending
- De-carbonization is very expensive, do we even have the natural resources?
- End of a 40-year bull market in interests rates
- Potential for protracted war in Ukraine
- Central bank concern over reigniting inflation
- Renewed union push
- Wealth impact of stock market decline will itself slow spending
- Various bubbles have just begin to pop
Feedback Loops
Some of the above points are circular, feeding on themselves. But I do expect a reinforcing feedback loop. There is a wealth impact of a stock market and crypto plunge that feeds on itself.
