Down goes the Dow

It stalled because QE ended. The Fed is no longer trying to raise the S&P. The hope us that it will raise because of the strengthening economy. Time will tell.

POTO,

I agree and hope the Fed lets it play out.

Igy

"The real economy" requires motivation, energy, and work. It needs people to do things of their own volition, more or less, with the hope that they will receive something that is more significant to them than is the work, time, energy, and thought that they put in.

In order for this to happen, CONDITIONS need to be conducive, and it needs to be done by the private sector. Government cannot, by itself, constitute a real economy, because there is a disconnect between the work done, and the benefit received--that is, the benefit received is coerced from others, rather than resulting from a free exchange. When this is the case, it is increasingly the case IMO that the middle part, being perceived as an unnecessary and very inconvenient impediment to realizing the benefit, is either minimized or eliminated totally. This is when taxpayers pay a lot, and receive either very little, or nothing, for their money. On any such scale there will be a point at which, under rational analysis, a project would not be worthwhile because it costs more than it is worth. Of course on public projects such rational analysis is never undertaken, and if it is undertaken by third parties, it is immediately marginalized and the issue obfuscated using the considerable resources at the disposal of the public authorities and their lock-step media.

Thus what needs to happen to impel "the real economy" is first and foremost that conditions favoring private economic activity need to be cultivated by the government, and then to make it more efficient, government activity needs to be minimized. In practice, the two amount to almost the same thing: either decrease regulation, or change regulation to make it more rational and more efficient, or do a mix of both, where appropriate.

The exact opposite has taken place. Regulation, in all sectors that I can think of, has gone through the roof. Taxes and fees continue to rise. Not only that, but government is undertaking increasingly controlling roles in so-called "infrastructure spending", which is also a negative thing. EVERYTHING that results from human endeavor is economic infrastructure, including that new paint job you put on your private house, or your car, or the pair of shoes that you are wearing. Try to work without a pair of shoes--unless you're a lifeguard, it's not going to happen. It is infrastructure, it permits you to engage in economic activity, which contributes to the public good. So-called "public infrastructure" is just a way of slicing the baloney to permit governments, rather than private entities and consortiums, to control inter-jurisdictional projects. The term has no intrinsic meaning, and is an economically inefficient power grab.

Yes I know there is a school of thought that says that during a recession especially, public spending on infrastructure is what brings the economy back, or keeps it afloat. Hogwash. There is no rational proof, ever, that such projects are worth what they cost, or even that they are the most efficient use of the resources consumed.

Because "the real economy" is the result of what people do, the unemployment number is often seen as significant. Without considering such things as labor-force participation, tax burden, productivity, and costs, it is a meaningless measure, which is why we look at productivity, PPI, etc.

Bottom line for me is that I don't see positive economic conditions, and I haven't for a while, in the USA. Capital is mobile, and move it will. I also don't see a positive economic story told by any intelligent synthesis of the indicators. All that is left, therefore, is asset prices--and when that's the case, you are either in the game, or you're out, which is why the majority of whatever benefit remains is distributed unequally (which disparity of distribution is, to me, a prime indicator of the lack of underlying "real economic" activity).

And asset prices bring me back, finally, to my earlier questions to Igy and others: at what level, P/E or otherwise, will the DJIA/SP500 be "fairly" valued (yes I know that is a loaded actuarial term), or at least sufficiently attractively valued that it would cause you guys to buy long in any significant measure?

Maser, I agree that regulation has to be smart and good and correct.

but maybe you aren't aware that sp500 companies hit all time high profits (and I think margins) last year.

the relatively slow economic recovery from 2008 has a lot to do with lower than usual government spending, not any sort of struggling in the private sector.

I'm agreeing to your general theory, but I'm just not sure it applies to the last 5 years in the uSA.

there is no 'fair value' to the Sp500 - it's a ponzi scheme...shares in a company have no intrinsic value. It's the flow of cash they theoretically send you in the form of dividends and whether someone will in the future pay you more than you paid for them.

so all we can do is look at past levels of valuation and make some crude guess about what it means for future returns.

"the relatively slow economic recovery from 2008 has a lot to do with lower than usual government spending, not any sort of struggling in the private sector.

I'm agreeing to your general theory, but I'm just not sure it applies to the last 5 years in the uSA."

I don't think I agree. "Lower than usual government spending?" How do you get that, from historic deficits and more added to the debt than in the rest of US history?

They've been doing plenty, but the rewards (assuming there are any), are IMO vastly outweighed by the costs. Foreign entities know this, which is why a spam email can shut down a school system. That shutdown and emergency response system is not only insanely expensive and debt-financed, it ultimately isn't economically viable.

Information is now disseminated for political purposes, and the voting public is now so economically illiterate that to the extent that any actual economic analysis is ever applied to issues of policy, it is overwhelmed by analysis based on whatever dimension will garner the most votes in the next election.

Which isn't economics. In recent issue polls, economy is something like 3rd or 4th on people's lists, even when they are asked directly. As long as that's the case, you won't get any necessarily valid economic analysis from public authorities.

Maserati,

On the role of government Rick Santelli had a funny one this morning on Bernie Sanders proposal for free college education: "College may be free at 21 years old, but they will be paying for until they are 65."

In regards to fair value levels of the Dow or S&P 500, that depends on earnings. Let's assume earnings stay level at the current $90 per S&P 500 share, the last time the S&P 500 earned that amount it was trading at 1606 (6/30/2013) and Dow 14,909. For 4th quarter 2015, reported earnings are down 6%, so I believe earnings are continuing to erode. Market overshoot to both the upside and downside. So I think we will break significantly below these numbers.

Igy

Maserati wrote:

"the relatively slow economic recovery from 2008 has a lot to do with lower than usual government spending, not any sort of struggling in the private sector.

I'm agreeing to your general theory, but I'm just not sure it applies to the last 5 years in the uSA."

I don't think I agree. "Lower than usual government spending?" How do you get that, from historic deficits and more added to the debt than in the rest of US history?

.

I suppose I should modify what I said to be more accurate: GROWTH in government spending has been lower than usual. In fact there has been virtually zero growth in total government spending.

all that debt you talk about was in the 2008/9 period, caused by collapse in tax receipts and stimulus. Since then, gov't spending at all levels has flatlined.

Total US Government Spending, federal, state and local, was increasing briskly, year on year, in the mid 2000s from $4.4 trillion in 2005 to $6 trillion in the depths of the Great Recession in 2009. But since the end of the recession total government spending has leveled out at $6 trillion per year.

Thanks for that, Igy, and fair enough, we will see.

Maserati and agip,

Of course I disagree that there is not a valuation metric to investing in stocks. Let's use the S&P 500 as a proxy for all investments in stocks. If the index is at a level of 2,000 and is delivering $200 of actual earnings it is trading at 10 times earnings. On the other hand, if the index is trading at 2,000 and is delivering $100 of actual earnings it is trading at 20 times earnings. It is a simple observation that as S&P earnings have declined so has the index, as well as the opposite climb up in the index from 2012. All investments are directly related to the cash flow they generate. It is the ill-informed investor that discounts these metrics. Those poorly informed investors have been learning this lesson lately.

Igy

"All investments are directly related to the cash flow they generate."

Unless the "investiture" is made for the purpose of capital preservation, which is increasingly the case, and will continue to be so in any NIR environment.

but the point is that stocks aren't 'worth' 10x earnings. You buy the SP500 at 10x earnings you could still lose 100% of your money. there's nothing but the greater fool theory valuing stocks. And a little bit of cash flow in the form of dividends.

but yes buying at low valuations in the past has meant your future returns are likely to be better than if you buy at high valuations.

Maserati,

I said months ago that cash would be superior asset class to stocks. I was widely criticized for that view. And of course capital preservation is an important concept and certainly will be viewed more favorably if my market views prevail.

Igy

Ghost of Igloi wrote:

Maserati and agip,

. All investments are directly related to the cash flow they generate.

Igy

so you have never owned a stock that doesn't pay a dividend?

Or a zero coupon bond?

or cash that earns zero interest?

agip,

There is still a cash flow equation in both cases. Its called PE for stocks and YTM in zero coupon bonds. Even cash would have one, it is just zero or something less than zero. Not sure what you are thinking but it is wrong the way you are questioning.

Igy

Ghost of Igloi wrote:

agip,

There is still a cash flow equation in both cases. Its called PE for stocks and YTM in zero coupon bonds. Even cash would have one, it is just zero or something less than zero. Not sure what you are thinking but it is wrong the way you are questioning.

Igy

If I own a stock with no dividned I get no cash flow. Zilch.

I have an utterly theoretical right to some share of the company's earnings, but that is theoretical and meaningless. No dollars come to me so my cash flow is zero.

My point is that stocks are not mathematical formulae - they are a ponzi scheme. There is real danger in making them bondlike, where you know what the cash flow will be.

So saying 'stocks are 20% overvalued' is utterly meaningless since stocks with a pe of say 18 could fall 100% or rise 1000%, depending SOLELY what people will pay for them in the future.

that's why Facebook stock can rise 15% in a day - it's just theoretical value, not grounded in anything.

FWIW

http://www.bloomberg.com/news/articles/2016-02-01/consumer-spending-cooled-in-december-as-american-padded-savings

The conclusion that they padded savings is, as far as I can tell, only inferential. I don't believe it--I think the remainder, and then some, got eaten up by medical insurance and medical costs (which are incorrectly not included in taxes, notwithstanding the rationale offered by John Roberts in the ACA decision).

Live by the sword, die by the pen?

That is, money used to pay medical insurance costs is not "disposable" at the discretion of the consumer, as such costs are not voluntarily incurred, just the same as with other taxes. The consumer does not control or decide the disposition of the funds.

agip,

I guess all I can add is that is why so many investors will be disappointed at the end of this cycle.

Igy

FWIW, PMI & ISM are dragging.

Maybe, just maybe, some indicators are starting to reflect underlying weakness.

Time to change the calculations, just like the GDP