Wednesday, September 19, 2018
GWB
Search

Investment Wisdom

 Investment Wisdom News Blog


Diana Ion
/ Categories: Investment Wisdom

Is the reported US 4.1% Economic Growth real? – Not so fast!

1.1% of the gain was due to a surge in exports to beat China’s 28% retaliatory tariffs that became effective on July 8th. Buying in front of the tariffs put the “4” in front of the report, which otherwise would have been 3%. Another 2.7% of the gain came from a surge in Personal Consumption, which far exceeds the growth rate of wages, as Consumers took on more debt. The reported gains will obviously reverse out over the next few quarters. This second quarter number will likely prove to be the high point for the year.

The market response was very subdued as the number was baked in the cake. Another item being discounted by the market is the expectation of very positive corporate earnings reports during the next few days. Typically, the forecasts prove to be on the high side. We shall see.

Disappointment over Facebook’s recent financial report and forecast of slower growth pushed the stock price down by 20%.This news is raising questions about the growth rate of the company as well as Google. They are advertising based companies and ad spending has only been growing at about 1.00% per annum since 2007. The rapid growth of these companies could indicate a one-time shift from traditional advertising on TV, Radio and Newspapers etc.

Facebook accounts for about 7% and Google about 18% of the advertising spend, so the two companies have about 25% of the market, but the growth rate of the advertising spend does not support a high earnings multiple.

Interest Rate Pressures:

The cost of money drives the value of all assets. The massive expansion of the money supply since 2008, has greatly increased the value of all assets over the period. The Central Banks are now reversing course and promising higher rates and shrinkage of the money supply. We are moving from “Quantitative Easing” to “Quantitative Tightening.” Obviously, we should expect shrinkage of asset values.

The authorities promise a slow and careful adjustment period, because they hope to execute the policy without doing too much damage to the markets. This promise has been calming for the markets but complacency may prove very costly. It is instructive that even members of the Board of the US Fed have observed surprise that investors are not addressing the impact of higher rates on market values.

The US tax cuts and increased spending are producing massive deficits, expected to exceed $1.2 Trillion, which must be financed in the bond market. The Fed is also selling $600 Billion from the inventory of bonds purchase during QE. These are large sums for the bond market to absorb. In addition, there is the demand for funds by Corporations, States and Municipalities.

The demand for funds is extreme during a period when the Federal Reserve is attempting to shift to a higher interest rate policy. I think interest rate risk is increasing at an alarming rate and common sense dictates a cautious posture.

The rate of inflation has escalated above 2% so real rates are still simulative. Consequently, the consensus outlook for rates may be too moderate.

The Bank of Japan is currently discovering that market forces are very powerful and they are engaged in a battle to keep their low interest rate policy intact while investors seem determined to sell assets. The bank of Japan has bought a large amount of the stocks listed on the Japanese stock market.

The zero interest rate policy of the global central banks has forced investors into higher risk assets. Consequently, the value of all assets is very high compared to past experience. Corporate earnings have grown and are growing at a very slow rate. However, the price being paid for those earnings has expanded by about 60% as measured by the price to earnings ratio. Normalization back to the average multiple of earnings would result in a similar contraction of valuations. Such a contraction would likely lead to a period of panic selling.

It makes sense to be prepared to take advantage of this opportunity to invest at price levels offering much higher dividend yields and interest rates for years to come

Previous Article How the Economic Machine Works
Print
44 Rate this article:
No rating

x

Search

News Calendar

«September 2018»
SunMonTueWedThuFriSat
2627282930311
2345678
9101112131415
16171819202122
23242526272829
30123456

Footer Nav

    Lets have a talk about your investment goals and expectations  Contact Us


Investment Wisdom

Tax Saving Strategies

Tax Saving Strategies

Tax planning today can help you save money when it’s time to file. So be proactive and take advantage of tax-saving opportunities and strategies.

Wealth Notes News

Join our Newsletter

Join our Wealth Notes Newsletter for the latest Investment updates. It's FREE

Contact Us

Global Wealth Builders Ltd.
Suite 105, Mayfield Business Centre
10525 - 170 Street N.W.
Edmonton, AB T5P 4W2

Canada
 Toll Free: 877-488-2858
 Phone: 780-488-2858
 Fax: 780-488-2837

 service@Gwealth.ca

Footer Logo

Global Wealth Builders

 

Terms Of Use | Privacy Statement | Copyright 2018 © Global Wealth Builders Ltd.
Login | Register | Website by WebmontonMedia