We’re now five years into the worst recovery in the post-WWII period.
Based simply on historical business cycles, we should already be out of recovery and into a “growth” stage for the US economy. (Read more…) This should have happened even with barely any stimulus from the Fed.
Instead, the Fed has spent TRILLIONS of Dollars and failed to deliver anything resembling economic growth. The number of people who are of working age who are actually working has barely budged since the 2009 low.
In plain terms, this chart shows us point blank that all the talk of “unemployment falling” is total BS. The Feds simply alter their methodology to make the employment picture look better, but that doesn’t change the fact that jobs have not and are not coming back in any meaningful way.
During this period, we had QE 1, QE 2, Operation Twist 2, QE 3 and QE 4. Where in the above chart do you see any real improvement in jobs as a result of these efforts? What data is the Fed looking at when it talks about “recovery” (other than the stock market and housing market which are once again bubbles)?
It’s not as though stocks rallying so high is a great thing either. The S&P 500’s CAPE predicts at best a 4% annual return for stock investors over the next 20 years.
If you’re unfamiliar with CAPE it is the cyclically adjusted price-to-earnings ratio.
In simple terms CAPE measures the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation.
The reason you use the average earnings over 10 years is due to the business cycle. Typically the US experiences a boom and bust once every ten years or so.
By using the average earnings over a ten-year period, you smooth out your earnings data to account for both booms and busts. As a result you get a much clearer measure of a business’s profits, which is the best means of valuing that business’s worth.
CAPE is better at predicting stock market returns than P/E, Government Debt/ GDP, Dividend yield, Fed Model, and many other metrics commonly used by analysts (most of which really predict much of anything).
This is not to say that stocks can’t go even higher than they are today. Bubbles, such as the one we’re experiencing today, can often last longer than anyone expects.
However, based on over 100 years’ worth of data, anyone who is looking to invest for the long term by buying the market today can expect, at best, a 4% real return per year over the next 20 years (this includes both dividends and capital appreciation after inflation).
Today the S&P 500 has a CAPE of over 22. This means the market as a whole is trading at 22 times its average earnings of the last ten years. It’s also definitively in bubble territory.
Folks, QE does nothing but create stock bubbles. Nothing at all. The US economy isn’t in “recovery” which is extraordinary because historically even if the Fed had done NOTHING we’d already be in recovery. The fact that the Fed has spent TRILLIONS of dollars and is still talking about a weak recovery only shows that the Fed doesn’t actually have the tools (or know how) the improve the economy… or jobs.
We all know how bubbles end, with a bang. This one will be no different from the last three.
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