Investing In A Pretend Economy

Monty Pelerin / Economic Noise

We live in a pretend economy. It is important to recognize this condition, especially if you are an investor.

Current market behavior is concerning.  Bonds and stocks remain volatile and near record levels. Markets ignore the continuing stagnation in the pretend economy, buoyed apparently by government liquidity injections.

To justify investing today in these markets, one must anticipate one or both of the following:

1. Economic growth is about to surge.
2. Market values can continue to rise from here, potentially further widening the already large gap between valuations and fundamental economics.

No reading of the economic tea leaves suggests a surge in economic growth is coming. Indeed, a critical analysis of the data makes one question whether there has been a recovery at all. Certainly any recovery has to be labeled as abnormal.

If economic conditions look like they will continue to be sub-par, then an investor has to believe that it is realistic to expect market valuations to continue to ignore economic conditions. That assumption worked last year when markets rose about 30%. Is it reasonable to expect the divergence to continue for another year?

No divergence can continue forever but that doesn’t mean it can’t persist for a while.

Recession, Not Recovery

The recession ended (according to the National Bureau of Economic Research) in June 2009. Rapid economic expansion normally occurs during the first three or four quarters after a recession ends. The typical recovery period is characterized by three to four quarters of unsustainably high growth rates. That take-off growth never occurred when this recession was declared over. Nevertheless, government went into full propaganda mode and the pretend economy began.

At no time in my recollection has the word “recovering” been used to describe an economy five years after a recession was declared over. Perhaps the term was borrowed from “recovering” alcoholic which I understand is a forever state. Either the government is lying about a recovery or something has radically changed in terms of the economy. Both are likely.

The current “recovery” does not conform to other recoveries. After five years, history suggests we may be close to the next recession, not still “recovering” from the previous one. However, history is not economics. It may repeat or rhyme, but it doesn’t rule.

Causal behavioral relationships determine economic decisions and outcomes — ALWAYS! These relationships, to the extent they remain stable, may appear to produce repetitive time cycles, but that is a secondary effect rather than a causal one.

Behavioral relationships are dependent on perceived incentives and disincentives. If the underlying incentives/disincentives are altered, decisions and outcomes will change. That will alter any macro measurements like those captured in growth rates, employment statistics, etc.

Incentives at the micro-economic level have been altered dramatically. Labor participation rates reflect the disincentives associated with ObamaCare and other regulatory nonsense. Anticipated tax increases to pay interest and government debt dampen people’s expectations regarding the future. Capital expenditures are slowed or canceled in order to get a clearer picture of what is coming and when. When aggregated, the macro-stats appear different.

GDP can be manipulated in terms of definitions and data. Government spending is counted as economic activity. Some of it may be, but most of it is not. Increasing government spending is a way to mask a declining standard of living, which has corrosively been occurring for arguably decades.

There has been no real economic recovery. What has occurred is a pretend recovery. The pretend is not limited to this recent cycle. It has been going on for many years. In a sense, what we now have and have had for the last decade or more is a pretend economy. Government interventions have been the driving force in this pretend economy.

Government Intervention

continue reading at Economic Noise:

http://www.economicnoise.com/2014/04/07/pretend-recovery/