Here are some updated stats on our economic recovery:
  • The US trade deficit is falling to the 3% of GDP range (from over 6%). This is good news. It means our cheaper dollar is helping exports and making imports more expensive. This in turn reduces our need to borrow from foreigners (other things being equal).
  • 20% of national personal income is a gift from the federal government in one form or another. That is appalling. Whatever the government hands out needs to be collected in taxes at some point.
  • Consumer confidence has risen off its lows. That’s good. But the reading/ value from The Conference Board is 52.5. To put that into perspective, the index is normally around 71 in a recession, and 102 in an expansion / recovery. So 52 is very low.  
  • Take the past 130 years of S&P500 index data. Divide the periods into 10 groups based on their average Price/Earnings multiples. The price of the S&P500 index now puts it into the most expensive of the 10 groups. When the S&P500 index is trading at P/E’s where they are now, the next 10 years deliver 1.3 %/yr returns on average.
  • Over the past 130 years, when the S&P500 index has dividends as low as they are now, the next 10 years deliver 0.7%/yr returns on average.
     

Take a look at this graph (with thanks to The Economist):

real estate 

It was not long ago that the proportion of GDP attributable to consumer spending was 63%. It is around 70% now. This graphic is included to remind those of us that can’t remember the 1980s, that we can go back to those days where the consumer spent less and saved more — and as a result the consumer represented a lower proportion of our economy. Back in the 1960s, 1970s, and 1980s we saved around 9% of our income. It’s around 2% now. If US consumers were scared straight, we’d revert back to a savings rate around 9%. It will probably take another stock market and perhaps even housing market correction to do it. That much money being drawn out of the economy would be a drag on economic growth, but unless the savings rate rises considerably, we’ll be faced with a generation or more of Americans with no retirement savings (when social security is going bust).    
 
Now, take a look at this graph:
 export
 
The trend is obvious: the US has been exporting more to developing countries. Given that most of the developed world has similar economic issues to overcome (as the US), we’ll be forced to make our goods and services competitively priced to developing countries. That means:
  • more innovation (good!)
  • more labor productivity pressure (longer hours for free)
  • more stagnant wages (probably for a decade or more)
  • a lower US dollar
 
The good news is the US is a very adaptive economy, and the proportion of our economy that is dependent upon exports is lower than our main competition. See this graph:

exp 2

In order to address all the structural economic issues facing our country and have real sustainable economic growth, we’ll need a decade or more of hard times and hard work. It took the better part of 25 years to build our current mess. It should be reasonable to expect a long time to fix it.
 
Here’s the wrong approach: continued bailouts & spending by the federal government. Japan tried that for 20 years. Their stock market remains approximately 65% below where it was 20 years ago.
Take a look at this graphic:
gov debt
After your chin comes back up from viewing Japan’s data, look at the debt as a % of GDP for the US in 2014: 108%!!!  There’s no chance the bond market will let us continue to print money and sell our bonds at the current interest rates. Why not? Because we’ve been reliant on foreigners buying our bonds. Japan has been able to see these nosebleed levels of debt because has been selling its bonds to its own people, where we have not. Now, if all the sudden Americans stop buying stocks and corporate bonds, and commodities for investments, and instead many Americans begin buying Treasuries, that changes things. But if you’ll make more money in 1 year bonds & CDs than 10, 20, and 30 year Treasuries, what sort of demand will there be for Treasuries?  Side note: look at the numbers for Canada at the bottom of the graphic. They’re downright rosy. That’s why we’re invested there and not here (at least for now).
 
We’re facing a protracted stagnant economy, and a lower standard of living in the US. The bond market is figuring that out (as it usually does). The stock market has not — and it never does. The short reason for this disconnect is the stock market is driven by legions of analysts that pay attention to the trees and not the forest. By that I mean they pay attention to the details of how a particular company is operating and then extrapolate into the future assuming nothing but continued happy times. As a result, the stock market always has and always will fail to see major economic risks and allow for that to impact their view of the future.
 
 There’s no magic bullet.