Friday, March 13, 2015

Artificial or Else - Questionable US Recovery

They claim the recovery is solid. Just look at the stock market, they say.
picture of CNBC's Senior Economics Reporter Steve Liesman
CNBC's Steve Liesman
Economists like CNBC's Steve Liesman and investment peddlers everywhere insist that the seemingly unstoppable stock market climb is a sign that all is rosy within the US economy. After all, they say, isn't the stock market a price-discovery mechanism intended to value all information about the economy instantaneously?
Well, yes and no. The stock market, like any other market, acts as a pricing tool. Where things go bad is that it is now being distorted by the massive gravitational presence of the Federal Reserve's balance sheet. Never before in history did a single entity monetization so much. Never before did markets have to deal with such a large distortion. Let's take a close look at a sector that I feel disproves their allegations.
image of chart from Saint Louis, MO Federal Reserve showing a decline in Retail Sales at Department Stores compared to an increasing US population
Department Store Sales collapse.
Meanwhile, the buying population increases.
Visiting the Federal Reserve's own website, one can easily see that retail sales at department stores across the nation have collapsed. Things are so bad that I will suggest you take pictures of all the anchor stores next time you visit the mall. In no time, your images of formerly well known dinosaurs will appreciate in value.
But not all is bad of course. Noise is never so simple to clean. The fact remains that a continuously growing US population has made the size of the buying market larger; thus helping grow total US retail sales. Yet, all benefits from such market growth seem to have completely missed department stores across the nation. Just look at the Fed's chart above; department store revenue has fallen to scary levels. As a result, there's even talk about how these players are failing to entice new buyers as they continue to lose old ones.
But don't say I didn't warn you. While my forecast for the beginning of 2015 was a little lower than where things are now, I had told you in my article back in July, 2013 that Department Store sales would continue to plummet. Well, they did.
stock price chart comparison of Dillard's, Macy's and Nordstrom.
Stock valuations of Dillard's, Macy's and Nordstrom
continue to push higher despite horrible retail performance
Surprisingly, though, none of these terrible facts is reflected in their stock valuations. As things have turned worse, stock prices of companies like Macy's, Dillard's and Nordstrom continue to increase; just as if revenue performance was stellar.
So, how is this possible? Isn't bad sales data supposed to push stock prices lower?
While we all know that the stock market can behave irrationally in the short term, we still trust that long term price performance correlates with fundamental health. But as it should now be clear, we are witnessing an anomaly.The expected poor stock price is conspicuously missing. Current valuations rather reflect boom times.
Thanks to the disruptive effect of the Federal Reserve's Balance Sheet, department stores are being rewarded for carrying a poor business model that sports an upcoming expiration date.
The Fed's massive money printing has created the ideal environment for capital misallocation. So the story repeats: excess money is put in the wrong hands and... boom, a bubble pops. Let's hope that shrapnel doesn't hurt innocent people this time around.
If you still believe that the market is really serving as proof of a healthy US economy, don't worry; I have a couple of other posts that will destroy your thesis. Until then, enjoy the volatility.

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