Where To From Here?

I know this super highway. This bright familiar sun. I guess that I'm the lucky one...

The financial markets were certainly correct in dismissing that rather abysmal first quarter 2014 GDP print, no?  After all, the current 4.2% GDP growth snapback revision in Q2 is proof positive Q1 was just a one-off fluke. Right?

The fact is: for a good five years now, economic pundits have been both hoping for, and then repeatedly disappointed by, the US economy's inability to achieve "escape velocity”.

From the 'misery loves company' department, the "good" news is that the other major global economies have experienced relatively worse economic outcomes than the US. So, in the land of global perceptual relatives, the US economy remains one of the lead sled dogs. 

But, until proven otherwise, we remain in a slow growth macro environment, as has been the exact character of this historically subdued growth cycle since its start coming out of the 2008 crisis.

Is it all bad, though? Of course not. There is some good along with the bad, yet there also exists some outright ugly. It's the balance, rhythm and interplay between The Good, The Bad and The Ugly over time that shape both the headline economic stats as well as theoretically support financial asset prices. Indeed, the manner in which this unprecedented global slow growth cycle has impacted global flows of capital has been much more responsible for raising the prices of financial assets prices than any actual economic realities.

So what lies ahead for the US economy? And for the financial markets? Are things going to get better or worse from here?

"The Good" (The Case For Optimism)

One of the true standout anomalies of the current recovery cycle has been that domestic small businesses have had a very tough time actually recovering (to say nothing of growing) in any meaningful manner. It’s not hard to understand why: their very large global corporate brethren have been able to partake in global stimulus, something not finding its way directly to the small business community.

Also, unlike their large corporate brethren, small businesses do not generally have direct access to the capital markets. In this cycle, large corporations have been treated to once-in-a-lifetime lows in the cost of debt capital. Historically, we've seen the economic and financial fortunes of large and small companies relatively joined at the hip. Not so in the current cycle. The reason this is very important is that at least historically, small businesses have been the key creator of jobs in the US. With the small business sector so left out of the party, it's no wonder we’ve had the slowest job recovery of any cycle of the last half century (at least).

A fingerprint characteristic of the current cycle has been that small business optimism has been living in what has been recessionary territory, historically.  Although it has only been in recent months, after five years of theoretical economic 'recovery', we've just witnessed a (small) breakout to the upside in small business optimism. Although this may not sound bright and cheery, we’re now back to the lows in optimism seen in prior economic cycles.  In all sincerity, this is a big improvement, and a good sign if it can be sustained.

Is small business optimism necessarily a Holy Grail indicator?  Absolutely not. It is anecdotal and, alone, will not drive an economic recovery cycle.  But in terms of where we find ourselves at present, it is welcomed improvement at the margin, even with its late cycle arrival:

The lower chart above importantly tells us sales expectations are and have been a big driver of headline optimism at the small business level (no big surprise). One thing to keep in mind as we move ahead is that like so many things in this special cycle of the moment, “emotions” generated by short term stock price trends have driven real world business actions and responses to optimism surveys such as this. 

The chart below shows us that from 2011 through mid-2012, the stock market followed the short term change in real small business optimism. But from mid-2012 onward, the direction of equity prices instead has driven business sentiment, once again highlighting the perceptual importance of equities in the current cycle. In one sense, the good news for the Fed is they have gotten when they wanted: economic reactions to short term stock price movements. Of course, this is also the bad news; as now stock prices need to hold and move higher, or we'll see potentially suffer adverse real economy reactions:

I have heard many analysts suggest small business has had a tough time as their access to credit has been limited in the current cycle. To be honest, that’s total B.S.

The fact is that there has been plenty of credit available for the small business community. The current cycle has seen the emergence and growth of business development corporations – non-bank entities, free of banking regulations, that make loans to small and mid-size businesses, crowding out the banks at the margin.  So small businesses no longer are totally reliant on banks for capital.

In each monthly small business survey, respondents list their top concerns. Not once has 'credit availability' hit number one over the entire cycle. Not once. The chart below is a look at how small businesses perceive their access to credit, alongside data for headline optimism, hiring plans and capital spending plans.

What's very striking in this trio of charts is that from the inception of the data in 2001 through 2010, all of the individual data points you see above have been joined at the hip with credit. Interestingly enough, over the past two to three years small business owners’ response to credit availability has been pushing toward the highs of the prior cycle. 

The big positive in the chart above can be found in the top clip – hiring plans.  Not only are we at a new high for the current cycle, we’re now back to the mid-range experience of the 2001-2007 expansion cycle. If small business is to have a positive impact on the real economy ahead, this is where it happens in job creation.  In all sincerity, the increase in small business optimism and increase in hiring plans we have seen in recent months is a big plus for the current cycle if it can be sustained and elevated from here.

Less positive are the lower two charts, which show that since 2012, headline optimism and capital spending plans have not followed along with credit availability expectations. Such is the macro of a slow growth economy.

Small business optimism and activity has been a key missing ingredient of the current cycle. So a critical question is: Have small businesses found their home at last in the current cycle?  Stay tuned.  Continued improvement in small business outcomes could easily carry the economy forward with some positive momentum. That is, if that momentum can outweigh the headwinds generated by The Bad and The Ugly.

Conclusion

In Part 2: The Bad & The Ugly, we analyze the increasingly concerning trends undermining the positive data above, most notably the fundamental lack of final demand -- the "elephant in the room" of this current economic cycle. Small business (and large business, for that matter) is not expanding robustly for the simple reason that consumption is not. The economy has not healed enough to support the growth seen in recoveries past. And certainly not to support these all-time high stock market prices.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at https://peakprosperity.com/where-to-from-here/

Man, this Brian guy sure uses a lot of charts.  My hero!
I really appreciate and identify with the goal of linking the various time series together, as well as the thread of the storyline: small business (losers), large business (winners) of the whole 0% interest rate credit game.

I'll add something to Brian's story:  while overall bank credit has struggled mightily to regain 6% annual expansion, C&I (large business) bank credit is actually growing at around 12% right now while real estate credit has just now regained a 2.8% growth rate.  This bifurcation is more evidence of how big companies are using low rates to have a profitable post-crash experience while the rest of the nation (with no access to bond markets and no reason to go into debt) gets left behind.

The credit growth story is all about the debt bubble pop.  And without credit growth, back to normal isn't gonna happen.  Seems like watching small business credit growth is probably a good idea, because that's where the jobs will be created.  The jobs other than the part-time-WalMart-greeter ones, I mean.

It was neat to see evidence of the international capital flows along with the storyline I happen to like best:

... we are in the midst of one of the greatest movements of global capital seen in our lifetimes. The primary beneficiary of that movement up to this point has been the US and dollar-denominated markets. Chinese capital is escaping the crackdown on corruption, Japanese capital is escaping meaningful currency debasement, and finally European capital is escaping banking system confiscation (NIRP), taxes, and a softening Euro currency.
And as long as those flows remain, we can and should expect the US stock and bond markets to continue levitating.  Armstrong says much the same time - just about every time he writes anything.

Of course if something happens to interrupt said flows, it all will move in reverse.

Seems like USD is an important thing to watch, yes?

Davefairtex said,

I'll add something to Brian's story:  while overall bank credit has struggled mightily to regain 6% annual expansion, C&I (large business) bank credit is actually growing at around 12% right now while real estate credit has just now regained a 2.8% growth rate.  This bifurcation is more evidence of how big companies are using low rates to have a profitable post-crash experience while the rest of the nation (with no access to bond markets and no reason to go into debt) gets left behind.
The inquisitive might ask, what is this debt being used for?  If you think that Corporations are investing in their futures via plant & equipment, new hires, etc., you would be wrong.. they are rather investing in short term EPS boost via stock buybacks, otherwise known as financial engineering;
In 2013 alone, corporations authorized $754.8 billion in stock buybacks while simultaneously borrowing $782.5 billion from credit markets. Jeffrey Kleintop, Chief Market Strategist for LPL Financial reports that corporations are now the single largest buying source for all U.S. stocks and the swift pace of buybacks has continued into this year with Standard and Poor’s 500 companies buying back approximately $160 billion in the first quarter.

link:  http://wallstreetonparade.com/2014/07/another-wall-street-inside-job-stock-buybacks-carried-out-in-dark-pools/

CHS wrote a post (totally lacking in hyperbole IMO) yesterday that referenced another estimate of the same;
Stocks’ Biggest Gains Are an Inside Job: Companies spent $598.1 billion on stock buybacks last year, according to Birinyi Associates in Westport, Conn. That was the second highest annual total in history, behind only 2007, Birinyi calculated. The pace picked up in the first quarter of 2014, when companies spent $188 billion, the highest quarterly amount since 2007.

http://www.oftwominds.com/blogsept14/corp-America9-14.html

All that debt with no future productivity tied to it... sad. 

hmmm

 

the consumer spending down…

tons of printed money for big corporations…

the coming war has been in the works for quite some time

i don't think it has anything to do with charts.

 

 

[quote=butterflywoman]hmmm
 
the consumer spending down…
tons of printed money for big corporations…
the coming war has been in the works for quite some time
i don't think it has anything to do with charts.
 
 
[/quote]
Yes

All that debt with no future productivity tied to it... sad.
I think that's true regarding the vast majority of debt in the US.  Most of it is non-self-liquidating.  Home purchase debt, consumer debt, all the stock buyback debt, much of the sovereign debt.  Its all focused on consumption.  Perhaps some chunk of business and proprietor debt is actually related to productivity. Appoint me ruler, and that's what I'd start with: all debt that isn't self-liquidating needs a massive down payment to it.  I'd be ruler for about 10 seconds before someone from Banking shot me. Here's a chart on interest paid per area of the economy.  Data is annual.  Who is the big winner?  You tell me.  Some of the data surprised me.  I figured the nonfinancial corporations would have come out better than they actually did. Source: BEA via FRED: Look up "monetary interest paid NIPA".
I'd be ruler for about 10 seconds before someone from Banking shot me
So last century, Dave. I believe nail guns are in vogue now. And experiments with gravity.

Nice chart.  What is truly amazing Dave is the yellow line… thanks to ever decreasing interest rates, the cost of the ever growing debt has been relatively flat over 20+ years.  CHS, who has in my opinion been on fire recently… says it best;


the core purpose of central banks' monetary policy is to enable vested interests to avoid desperately needed reforms in the real economy. This might have been blindingly obvious to others, but I finally caught on to the dismaying reality: the only purpose of central bank monetary policy is to keep the bloated, corrupt, inefficient and self-liquidating vested interests of the state-cartel crony capitalism from having to suffer the consequences of real reforms.
http://www.oftwominds.com/blogsept14/QE-reform9-14.html

tink, tink, tink, profits counted, margined, debt, greed, tink, silence… screams, no stopping the stomachs churn, fear, rage, as diaper stocks are bid. Why oh why would any half wit stay? It's "UGLY!". Accidents, diapers are bid.

https://archive.org/details/New_Order_of_Barbarians_remaster_tapes_1to3
( http://www.nytimes.com/1989/06/16/obituaries/dr-richard-day-84-ex-pediatrics-professor.html )

The recollections of Dr Lawrence Dunegan of a lecture attended on March 20, 1969 at a meeting of the Pittsburgh Pediatric Society given by Dr Richard Day.
 

I remember him saying that automobiles would be imported from Japan on an equal footing with our own domestically produced automobiles, but the Japanese product would be better. Things would be made so they would break and fall apart -that is, in the United States- so that people would tend to prefer the imported variety and this would give a bit of a boost to foreign competitors. One example was Japanese. In 1969, Japanese automobiles -if they were sold here at all, I don't remember- but they certainly weren't very popular. But the idea was, you could get a little bit disgusted with your Ford, GM, or Chrysler product -or whatever- because little things like window handles would fall off more, and plastic parts would break which, had they been made of metal, would hold up. Your patriotism about buying American would soon give way to practicality that if you bought Japanese, German, or imported that it would last longer and you would be better off. Patriotism would go down the drain then.
 

A few more points:

 

  • People will have to get used to change . . .
  • Suppressing cancer cures as a means of population control.
  • Accelerate puberty to push evolution in the way they want.
  • Encouragement of drug abuse to create a jungle atmosphere.
  • Entertainment: violence, sex and more sex desensitization — preparing the people for "human casualties".
  • Food control (if you persist in illegal activities like growing your own food, then you're a criminal.)
  • Falsified scientific research.
  • Money and banking (There was discussion of money and banking. One statement was, "Inflation is infinite. You can put an infinite number of zeros after any number and put the decimals points wherever you want", as an indication that inflation is a TOOL of the controllers. Money would become predominately credit. It was already... money is primarily a credit thing, but exchange of money would be not cash or palpable things but electronic credit signal. People would carry money only in very small amounts for things like chewing gum and candy bars. Just pocket sorts of things. Any purchase of any significant amount would be done electronically. Earnings would be electronically entered into your account. It would be a single banking system. [It] may have the appearance of being more than one but ultimately and basically it would be one single banking system, so that when you got paid your pay would be entered for you into your account balance and then when you purchased anything at the point of purchase it would be deducted from your account balance and you would actually carry nothing with you. Also computer records can be kept on whatever it was you purchased so that if you were purchasing too much of any particular item and some official wanted to know what you were doing with your money they could go back and review your purchases and determine what you were buying. There was a statement that any purchase of significant size like an automobile, bicycle, a refrigerator, a radio or television or whatever might have some sort of identification on it so it could be traced, so that very quickly anything which was either given away or stolen – whatever – authorities would be able to establish who purchased it and when. Computers would allow this to happen. The ability to save would be greatly curtailed. People would just not be able to save any considerable degree of wealth. There was some statement of recognition that wealth represents power, and wealth in the hands of a lot of people is not good for the people in charge, so if you save too much you might be taxed. The more you save the higher rate of tax on your savings so your savings really could never get very far. And also if you began to show a pattern of saving too much, you might have your pay cut. We would say, "Well, you're saving instead of spending. You really don't need all that money." That basically the idea being to prevent people from accumulating any wealth which might have long range disruptive influence on the system. People would be encouraged to use credit to borrow, and then also be encouraged to renege on their debt, so they would destroy their own credit. The idea here is that, again, if you're too stupid to handle credit wisely, this gives the authorities the opportunity to come down hard on you once you've shot your credit)
 

.“There’s a plot in this country to enslave every man, woman and child. Before I leave this high and noble office, I intend to expose this plot.”

John F. Kennedy

 

 

Why easy-straight up.
This is where you live. No expenses spared for your pleasure and gratification. Enjoy.

https://www.youtube.com/watch?v=rENyyRwxpHo

[quote=Arthur Robey]Why easy-straight up.
This is where you live. No expenses spared for your pleasure and gratification. Enjoy.
[/quote]
Where to?  How about to the point where we realize the entire universe, everything that we can study from top to bottom is fractal and repeats across dimensions and scales that are impossible for my advanced (slightly) monkey brain to even partially grasp.
But I can grasp things enough to become curious and excited.
From your video we find this image of how the intricate network of galaxies are arranged.
Hmmm…that's interesting.  I used to stare at that exact image every day, but I wasn't an astronomer studying things  thousands of light years across.
No, I was growing neurons in culture and studying things best measured in microns (millionths of a meter).  
Here's a typical, florescently tagged culture of neurons for your amusement:
Notice any similarities?
I'm not sure what to make of it, but at the very least we might note that there's some principal(s) of organization that apply from bottom to top…or we might go further and note that the neurons are arranged as they are to facilitate communication and learning and then ponder the arrangement of galaxies in that context.
:slight_smile:

Peak Prosperity and beyond!

I think you are onto something (the principles of organization that apply from top to bottom).  The evidence seems to suggest an order and a complexity that is remarkable.  What gets me is the thought that it all happened completely by chance and without any design.  It's amazing to me that two such systems evolve into increasing complex arrangements over time, rather than following the laws of entropy and breaking down into simpler forms.  Go figure. . .evolution and randomness are so remarkable.  Worthy of praise for sure.Rector

[quote=Rector]What gets me is the thought that it all happened completely by chance and without any design.  It's amazing to me that two such systems evolve into increasing complex arrangements over time, rather than following the laws of entropy and breaking down into simpler forms.  Go figure. . .evolution and randomness are so remarkable.  Worthy of praise for sure.
[/quote]
Preface: I consider myself to be a creature of, and driven by, logic. I am not a religious person, frankly I think religion (at the macro scale) has been, and continues to be, used as a tool by TPTB to divide and control the masses. 
That being said, my intuition is telling me something else is going on here, deep in the background.  For lack of a better description, something spiritual.  I am starting to believe that there is much more going on than we know.

https://www.flickr.com/photos/expd/11641131465/

So nice and useful case study and information. Thanks for sharing this brilliant infographic. It is so much helpful for me. Thanks for!
[Admin:  Link removed.  Sorry, no unsolicited advertising allowed.  Try the front door next time.]

[quote=Rector]I think you are onto something (the principles of organization that apply from top to bottom).  The evidence seems to suggest an order and a complexity that is remarkable.  What gets me is the thought that it all happened completely by chance and without any design.  It's amazing to me that two such systems evolve into increasing complex arrangements over time, rather than following the laws of entropy and breaking down into simpler forms.  Go figure. . .evolution and randomness are so remarkable.  Worthy of praise for sure.
Rector
[/quote]
You know, a lot of complexity and fractal order can come from a startlingly few set of rules.  In the field of complexity theory this goes by the name 'emergent behaviors' and it's a fun area to explore.
In nature we might notice that combining hydrogen and oxygen in a 2:1 ratio we get this stuff called water.  Because of a few rules governing the angles of the bonds and weakly interacting Van Der Walls forces, we get this miraculous stuff called water which is a highly complex liquid that forms an infinite number of solid shapes when it freezes.  
Who could have predicted all the forms of snowflakes if they were given the initial starting 'rules?'  Nobody, because emergent behaviors arise from the initial conditions.  
If you want to have some fun there's a very, very simple 'experiment' you can run called The Game of Life which simply visualizes the sorts of patterns you get in a grid of individual squares after setting some very simple initial rules.  In this case, a square is either on or off depending on the state of its neighbors in the prior moment.  
You can toggle the buttons to try different initial seeds, and switch between rule sets and watch what happens.  
What you'll see is order and complexity far beyond what you might have predicted based on the simple rules running things.
In the natural world we've got a relatively wide variety of forces and rules to live by and I don't think we know them all yet (certainly not on the quantum level).  There's gravity and strong and weak nuclear forces, ionic and electromagnetic interactions, various levels of orbital shells, and so on and so forth.
In short, there are plenty of 'rules' to create a magnificently complex game that would appear to require a master planner of some sort, but it's the rules of the system that create both the order and the complexity.
 

From Steely Dan to Musica Universalis. Thank you all.

Don't forget to point out that this is not an image of the universe, but an image of a virtual universe created in a computer model.  
Our model of the universe tells us we only see 5% of the mater and energy that must exist for our understanding to be right.  We call the unknown 95% dark matter and energy.  We haven't found it yet, but not for lack of trying. 
Perhaps our models are spot on.  Perhaps not.  It could be that a portion or all of the 95% dark plug factor is telling us to take a break from thinking and eat a banana.  
Who remembers a flat Earth and epi-circles?
Bringing it back to the solar system, here's an image of Comet Jacques I captured a couple of nights ago while doing video astronomy.