Much of the financial information we get on a daily basis tends to shape our perspectives of how the economy is doing. Unfortunately, much of that data tends to be a first pass WAG (wild-assed guess), which has often proven to be more wrong than right.
Take the the numbers for job creation, which are released monthly by the BLS, for example. They are definitely NOT rooted in reality. But what happens is when the revision for a month comes out, the attention is focused squarely on the new WAG for the most recent month.
Other economic numbers of varying degrees of significance experience similar releases, and are also, more or less WAGs.
I have, over the course of the last 10 years, been working on a different approach, although it lags the headline grabbing urgency of a July number for job creation, for instance. No, instead, my numbers crawl along slowly, three to four months behind. But they are clearly superior. I do not give you false hope with WAGS. I do not sound false alarms with WAGS. I also do not have to provide seasonal adjustments or other economic tricks. I have no reason to inject bias into the numbers. They are what they are.
While many economists also love to focus on top line growth, I have been dissuaded from putting too much importance on that line. Instead, it’s the bottom line growth that drives the US economy forward in the long term. This line is where the dollars come from for new expansion, new pay increases, new product development: the keys to real growth.
And unfortunately, the news I have to share is not positive.
Here is a chart depicting the rate of profit growth year over year for the last four quarters on a per share basis for 1625 companies I track. So, had you owned one share in each of these companies, one year ago and today, you would have seen your earnings grow by 5.27%, down from 8.40% a year ago, and 34.64% four years ago.[read more=”Read more” less=”Read less”]
One must keep in mind that Valueline drops companies that are heading in the wrong direction and add companies that are headed in the right direction. So this data tends to have a natural bias towards the better businesses overall.
What’s going to be the stimulus to returning businesses to higher profit growth?
I simply cannot come up with any ideas that might be able to do it. I can tell you what is working to drag profits even lower.
Higher interest rates.
Higher tax rates.
Increases in minimum wages in various locations.
Continued implementation of Obamacare.
So, we are at a junction where things need to get better but can’t. Where will that send us? What happens next?
Once the lack of growth in the chart above is acknowledged, the joy of owning stocks will become a fond memory. Those stellar returns since the last bottom will disappear faster than the vapor from that E-cig your kids are smoking.
This recession will be unlike the last one. The Federal Reserve cannot cut rates. Too many businesses have taken on too much debt to buy back shares at their peaks (they should have been selling shares at the peak). Companies used to be in the business of issuing shares to expand their businesses. Today? They borrow dollars to buyback shares to make their earnings per share look good.
Meanwhile the total profits of the Dow 30 will fall by 9% in 2015. But fear not. Their per share numbers look better than should.
States with the most issues financially have been able to mask the smell of their stinking liabilities so far. But that gig is nearly up. Puerto Rico is a hint of things to come. Chicago is not far behind.
I suggest you prepare for the downturn which is coming. Many of us were able to grin and bear the last downturn.
This one…well it’s gonna hurt.