Comstock Partners, Inc.July 02, 2015
The Fed Continues to Project Weak Growth
Happy Fourth of July
To say the least, the Fed’s own projections of GDP growth continue anemic at best. For 2015 the Fed now projects 1.9% growth in GDP followed by 2.55% in 2016 and 2.3% in 2017. We have stated many times that the recovery since the bursting of the “Housing Bubble” is the most tepid recovery since the great depression and as you can see, the Fed is forecasting more of the same. We have also stated that the primary reason for this is that debt, i.e., government, corporate, household and student loans, are eating us alive. At the same time, the Fed is predicting relatively “full employment” with an unemployment rate of 5% starting in 2016. It turns out that the only way to get to a 5% unemployment rate is to eliminate those people that were not able to find work and have given up from the equation. Our analogy here is to say the Fed is like the golfer that gives himself every putt over 20 feet and then tells everyone he’s “scratch”. It is not reality!
From time to time, however, there are bright spots that seemingly appear. One such spot is automobile and truck sales that were very strong in June. It turns out that those sales were achieved through a record percentage of leases and/or record length car loans. Said another way, debt is the reason that auto sales were good. We therefore do not believe this is a “turn for the better”.
If we are wrong, the Fed will have to raise interest rates sooner and faster than the market expects. If we are right, the economy will continue to grow at somewhere between anemic or even negative rates. Either way, stocks by almost any valuation measure are expensive and when that is the case the forward rate of return suffers; it always has throughout history and we expect it will now. This is why we remain so bearish on U.S. equities!
We would like to wish all of our viewers a happy and safe 4th of July!