Saturday, February 15, 2014

The Stock Market: What Could Possibly Go Wrong?

Click to enlarge.

The line in black shows real net corporate dividends.

The line in blue shows the real trade deficit (same scale).

The red line shows the exponential trend in real dividends from 1947:Q1 to 1987:Q1. Note the exponential trend failure (to the upside).

Will real dividends stay permanently elevated? Will profit margins stay permanently elevated? Can we be assured that the worst is behind us? Can we expect future growth in real dividends to match the growth we've seen since the early 1990s? I wouldn't answer a resounding yes to any of those questions. Call me skeptical, to put it mildly. Instead, I would ask the following question.

Will we someday, using the power of hindsight, discover that our massive trade deficit was not the permanent free lunch that it was advertised to be?

Put another way, it really helped the corporate bottom line to transition from "Made in USA" to "Made in ____." Mission accomplished. Now what? Persistently high oil prices (financial meltdowns notwithstanding)? Persistently stagnant wage growth? Persistently high unemployment? Increased rate of US (and/or global) financial meltdowns? In and out of ZIRP from here on out (if ever out)? Even more giant sucking sounds?

February 13, 2014
China auto market growth slows sharply in January

Lines of cars are pictured during a rush hour traffic jam on Guomao Bridge in Beijing July 11, 2013.

CAAM last month said the auto market would likely grow 8-10 percent in 2014, echoing views from industry experts and analysts that 2014 would be another strong year for China's auto market.

Other than corporate executives wishing to boost the value of their net worth and retire before the @#$% really hit(s) the fan, did anyone in power really think this through?

The Chinese drive more. We drive less out of necessity (as seen in annual vehicle miles traveled per capita that fell apart during the Great Recession and has yet to make any sort of recovery). That's our plan for a more prosperous America? Seriously?

Source Data:
St. Louis Fed: Custom Chart


Troy said...

CPI everything since 1980

blue is healthcare, up 4X
food (red), housing (yellow), energy (black), wages (orange), up 2.4X
clothing, up 1.2X. (thanks China!)

Imports are deflationary, exports are inflationary.
Still only ~30 matches for "exports are inflationary" on google, many of them me.

I am 100% certain the Fed will make good the $2.7T in the SSTF this decade and next.

This will give some headroom for tax cuts to keep the wheel spinning a few more administrations.

Stagflationary Mark said...


Imports are deflationary, exports are inflationary.


Oil is interesting.

On the one hand, a billion Chinese can't seem to bring the price of it down much lately. Go figure.

On the other hand, think how much oil would cost if we stopped importing it tomorrow.

And on that third hand, think how much more oil would cost if we exported what we'd have left!

Anonymous said...

Maybe dividends will stay elevated. Labor share has been decreasing and took a nose dive beginning about 2002. The trend down continues. At the same time businesses are becoming more monopolistic. Maybe this can't go on forever, but it might go on for a long time. The trade deficit seems to not be self-correcting as one would expect. Maybe it's because we export the monetary reserves that each county needs. They send us stuff - we send them the monetary reserves they need for their expanding economies. What a deal! Fred

Stagflationary Mark said...


Perhaps. Keep in mind that when profit margins are very high and expected to remain high, it does eventually attract more global competition though, even between fully automated manufacturing plants. Picture what's happening to Sony. Is there anything they make where there isn't serious competition, much to their dismay?

So while some industries do seem to be heading down the monopoly path, I don't believe it plays the largest part in explaining these extraordinary profit margins.

And as seen in the chart, the trade deficit is self-correcting to some degree. It's been cut nearly in half since the pre-recession peak.

If the trade deficit was our free lunch, then the lunch is only half as tasty now. In theory, no country can run a trade deficit forever. The unwinding can and probably will be painful to all parties concerned. China depends on us for growth and we depend on them to sell us goods in exchange for our dollars. They've got to be very upset over just how little oil and raw foodstuffs those dollars now buy, not that they seem to admit how painful it is to them.

Troy said...

Deng's point was, I guess, to get China's export GDP up such that people would be comfortable paying CNY for their output.

getting' there

Troy said...

^ that chart is why I decided to take Mandarin in 2008, btw. Not that I wanted to live in China, but I thought it would be useful in my future to be trilingual in E/J/C, should I go back to Japan.

Jury's still out on that due to the heightened squabbling between the two nations.

Stagflationary Mark said...


How much can we trust Chinese GDP? On as scale of 0 to 10, with 0 being full blown conspiracy theorist and 10 being scientific proof, put me down for a 6.

Of all countries, I think China would definitely be more willing to dig holes and fill them back in if it added to GDP and kept the population working. Just sayin'.

That said, learning Mandarin seems worthy. Can't hurt!