The Market Bull – July 18, 2019
The major averages finished about even on little real news. There were a number of economic reports today, none particularly significant.
The Philadelphia Fed regional index rebounded sharply in July jumping 21.5 points to 21.8 on strength in new orders and employment. Price data advanced but remains moderate.
The trade war with China was always going to produce some unintended consequences, and we are now starting to see what some of them are. A recent piece by the National Association of Realtors or NAR showed that foreign purchases of real estate plunged 36% in the period April 2018 through March 2019 compared to a year ago. From a numerical perspective this works out to 183,100 properties with a total value of about $77.9 billion, down from 266,800 properties valued at $121 billion a year earlier. Chinese buyers fled the market as their share of purchases fell 56% during the period in question.
The last 20-years has seen three credit booms and two busts. The first being the Dot Com boom and bust from 1997 through 2003. The 2nd being the Great Financial Crisis from 2003 through 2009. The third of course is the current boom from 2013. The 3rd consecutive boom built on record debt, as a substitute for income. With corporate income growth going AWOL, like personal income growth, debt has been used as a substitute. As it has become official central bank policy worldwide to push zero interest rates and encourage all manner of reckless leveraged speculation with real estate, stocks, bonds, commodities, crypto currencies and you name it. With the real economy hollowed out and wealth and income distribution becoming increasingly skewed in favor of record inequality it’s no wonder economic growth has struggled.
What should immediately jump out at you is that the compounded rate of growth of the U.S. economy was fairly stable between 1950 and the mid-1980s. However, since then, there has been a rather marked decline in economic growth. Much of this can be traced back to mal or unproductive investments. In order for deficit spending to be effective, the “payback” from investments being made must yield a higher rate of return than the debt used to fund it. Using debt to speculate in real estate a largely unproductive asset, or the corporate buyback of their own shares to cover up declining profits and or revenues is another classic “unproductive asset” or investment. Investing in research and development, plant and equipment, aka capital expenditures, these are generally productive assets. The government ballooning its balance sheet to bailout the banksters through the purchase of distressed assets is another example of non-productive investing, though it did keep the banks from failing, at taxpayer expense of course. Now MMT or Modern Monetary Theory promulgates that “debts and deficits don’t matter” so long as there is no inflation. However, the premise fails to hold up when one begins to pay attention to the trends in debt and economic growth. And this is why we have seen 2 debt driven busts in the last 20-years and we are about to see a 3rd, because debts do matter, especially when they are non-productive as the declining economic growth trend illustrates.
Standard and Poors 500 Index closed at: 2,995.11 up 10.69
NASDAQ finished the day: 8,207.24 up 22.04
Gold ended trading at: $1,447.40 up $24.10