The Great Illusion - How Long Can It Last?

Everyone just wants to look away, but the facts of the situation are clear.

As the Biden Administration continues to trot out its re-election mantra of the economy is strong, the reality, and therefore appropriate policy responses are far from it.

Yesterday, we had truly shocking economic data out of the US.

House prices continued to decline on a yearly basis and the falls may well accelerate. This was the yearly data. On a monthly basis property, both residential and commercial have been in trouble all year.

Truly alarming, and of such substance it beggars belief that senior members of the Administration and Wall Street simply ignore it, is that manufacturing has been in recession across the nation for a year now. Similarly the housing industry, though it has stabilised of late.

Yesterday, the Richmond Fed 5th District Index for Manufacturing showed contraction yet again. This has been the case in 11 out of the past 12 months. The equivalent Services Sector index also rolling over to the downside badly.

The day before, we had the Fed Chicago National Activity Composite Index confirming the same dire straits of the US economy. As has all the run of data for a very long time now. Yet, again and again we hear the mainstream financial media and commentators talk of how the economy is strong? President Biden says it is an example to the world?

US 5th District Manufacturing Index

US 5th District Services Index

US Core Logic Home Prices

How can there be such a lack of reality in the contemporary narrative and what does it mean for the equity market outlook?

If another country had this continuous run of falling property prices, manufacturing in recession, still extreme core inflation and a central bank still raising rates, without a government with its head in the sand, everyone on Wall Street would exit that market immediately. What the funds management, banking and media industry are doing however is simply propping up the system for as long as they can. It keeps the money of unwitting investors flowing in. It keeps profits on the table for the share buy backs that drive senior executive bonuses ever higher.

There is of course some validity in the bullishness of the magnificent 7 stocks. To a point.

Having long been an advocate of recognising global brands, from LVMH to Apple, who have become so dominant and diversified, benefiting from economic strength wherever it occurs around the globe, and able to absorb any competitor or new technology threat as soon as it appears, empowers them to continued growth to an unheard of degree.

What has been working so well for the funds industry as a whole, is that these few companies have provided the illusion to retail investors that the market, and therefore the economy is moving higher. This year the magnificent 7 stocks are up 58%, while the other 493 companies in the SP500 are up only 4%. Dragging indexes up has generated the illusion that the whole system is stronger than it is. This belief structure supports the money absorption system of Wall Street.

It is also, as I forecast the very day Secretary of State, Janet Yellen, appeared before the Senate Committee on her new banking insurance policy, just a few days after first announcing it, and reneged on it being a blanket policy, but one only for the too big too fail, that this meant the end of the regional banks. They are indeed struggling and failing. Again, Wall Street and the media largely look away as this process is actually great for the Wall Street banks. Hence their ballooning profits.

The big banks now pay next to nothing on deposits, but depositors continue to move to them in any case due to the new depositor insurance scheme.. This allows lending by the banks to occur at Fed heightened rates of interest. Thereby creating a massive sea change in the profitability of these few banks.

We are all in the midst of an historic centralisation of both banking power and corporate dominance. These are reasons to buy these stocks. The damage being done to the real economy of the USA however, is profound. As regional banks lend less, the too big to fail just are not in that market place. Manufacturing and services everywhere are entering a new death cycle, and the outlook for economic performance overall is dire.

From Washington, consumers and business are only going to get higher rates for longer and platitudes of how great the economy is doing?

How can the economic situation do anything other than deteriorate further?

Enjoy the party of the big total control names while it lasts, for eventually they only exist on the backs of hard working Americans. Soon, the Main Street working economy will be unable to support the teetering weight of Wall Street.

That’s when, as in the GFC, everything falls.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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