When comparing the entire market (in the form of the Wilshire 5000, the broadest market index available) to new orders for capital goods, one can see that the designation “fantasy land” isn’t too far-fetched:
The stock market hasn’t really grokked it yet – its celebratory mood is out of line with developments in the real economy – click to enlarge.
As many others have remarked (inter alia the above mentioned Michael Pollaro, as well as our regular correspondent BC), these days the stock market is the economy. This largely explains the extreme reluctance of the central planners to hike rates even by a measly 12.5 or 25 basis points from freaking zero.
Conclusion
There is no recession in train just yet, but it would be a grave mistake to ignore the growing weakness in the manufacturing sector. This weakness is all the more remarkable considering that money supply and credit growth remains brisk, which normally keeps malinvestments on artificial life support and allows them to expand further. The fact that this is no longer the case is evidence of the enormous structural damage the economy has suffered due to loose monetary policy and the succession of credit booms we have seen unfold in recent decades.
Stock market investors have so far been protected by the “central bank put” and the associated strong money supply growth. However, in the euro zone, where money supply growth is currently the strongest of the main currency areas, stocks have performed dismally of late, proving that even pumping up the money supply by 14% p.a. sometimes won’t do the trick. Moreover, there is no law that states that stocks have to be the main beneficiaries of excess liquidity. They have been in recent years, but that won’t necessarily remain so. If our ruminations about the sorry state of the economy’s pool of real savings are correct, one should actually expect this to change.
Lastly, this isn’t the first time the market has ignored a sharp deterioration in the economy. Sometimes it later turns out that market participants were correct in looking beyond the economic data of the day, but often enough they simply turned out to have woefully underestimated the dangers (as the chart above actually demonstrates). Caveat emptor.
Addendum: Gross Output Reminder
Just as a reminder, we reproduce the gross output chart below (gross output by industry is shown until Q1, new orders for capital goods are updated to August):
Gross output by industry, plus new orders for capital goods ex aircraft. This chart also provides evidence for the correctness of Austrian capital theory: mining and manufacturing are the most volatile sectors, while retail is the least volatile. In other words, the further removed from the consumption stage industries are, the more volatile and boom-bust prone their output becomes. It is worth noting that the output of mining and manufacturing both have already turned negative in Q1 – click to enlarge.
Charts by: St. Louis Federal Reserve Research, StockCharts, Michael Pollaro
