All Of These Items Point To a Collapse in the Markets

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Published : October 31st, 2014
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Category : Crisis Watch

The primary drivers of asset prices are the economy and corporate earnings.

Unfortunately, both are indicating future weakness.

If you want a somewhat accurate measure of GDP growth, you need to ignore the headline GDP numbers an look at nominal GDP.

The reason for this is that all “adjusted” GDP data involves a “deflator” metric that is meant to adjust for inflation. The Feds often use an inflation adjustment that is even lower than their official Consumer Price Index metric (which is already massaged to downplay inflation) in order to make GDP growth look greater.

Consider this simple example. Let’s say that the US GDP grew by 10% last year. Now let’s say that inflation also grew by 10%. In this scenario, real inflation adjusted GDP growth was ZERO. However, announcing ZERO GDP growth is a major problem politically. So what do the Feds do? They claim that inflation was just 8%, and BOOM you’ve got 2% GDP growth announced for a year in which real GDP growth was actually zero.

By using nominal GDP measures, you remove the Feds’ phony deflator metric. With that in mind, consider the year over year change in nominal GDP that has occurred.

As you can see, we’ve broken below four, the reading that has been triggered at every recession in the last 30 years. So the economy is likely at or already in a recession.

The above chart shows that the US is on the brink of a recession. With that in mind, consider that corporate profits are at all time highs.

Not only that, but corporate profits, as a percentage of GDP are at all-time highs. Never before in history have corporations made so much money relative to the US economy. This trend is not likely to continue.

So, we have a weak economy, record profits (mostly from cutting payroll by firing people) and record profits as a percentage of GDP. The simplest interpretation of this is that there will be a reversion to the mean at some point.

What will the mean be?

In terms of valuing stocks as a whole, based simply on CAPE (cyclical adjusted price to earnings) the market is significantly overvalued with a reading of nearly 26 (anything over 15 is overvalued).

Indeed, we’ve only been at this level of valuation during major stock tops (1929, 1966, 2000, and 2007)

So… the economy is weak, corporate profits are unlikely to rise much, if at all, and stocks are sharply overvalued…

ALL of these point towards another collapse in the markets…

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