The algos are going wild on the latest headline that the GOP has offered a standoff-ending deal that includes spending cuts.
Awesome. Spending cuts are needed. Any cuts are a start and some fiscal austerity. Which is supportive of US bonds and the US dollar. Gold seems to agree and is selling off violently on the news. US stocks are levitating in a dream of their own making.
Someone should slip stock bulls a little reality refresher:
GDP = private consumption + gross investment + government spending + (exports − imports).
Private consumption is plunging with year over year growth in US consumer spending at just 2.9% in Q2 down from over 5% in 2011. Business investment is at secular lows, as companies have opted repeatedly to buy back their own shares rather than invest in their business growth or infrastructure. Government spending has been in a downturn since the sequester cuts began in January 2013 and now further cuts are coming. And of course the US trade deficit continues to be negative and therefore detract from GDP (imports greater than exports).
Janet Yellen is no more a magician than Greenspan or Bernanke were before her. Cutting rates increased debt to force growth. But now that rates are at zero, the Federal Reserve’s magic elixir is spent. US GDP growth has averaged just 1.8% since 2000 (less than half the 3.7% long term rate from 1879 to the late 1990’s), even as the Central Banks of the world repeatedly tried everything they could think of (except demand prudence and the necessary restructuring in banks of course).
Economic growth is now going lower still. The longer the stock market pretends otherwise, the more spectacular will be its demise. And the more valuable will be the buying opportunity for those who don’t succumb to popular madness now.