Bouncing back from a brutal flu this week. Wow! So good to have energy levels back near norm. How we take excellent health for granted. I was thinking about those suffering from Ebola and other illnesses who don’t have first world comforts the past few days….
Also had extra time to do nothing but think in silence. As always, clarity comes from quiet reflection. Media this morning is all about the weakening global economy and soaring asset markets on news of another desperate rate cut in China and hopes for even moar Quantitative Easing–this time promised yet again by the ECB’s Mario Draghi. In reality convincing the Germans to buy bad debts off other insolvent EU members will do nothing to alter the reality of a world economy oppressed by more debt than can ever be repaid.
While record share buy backs by corporations the past 3 years have managed to manufacture earnings growth out of falling sales, no honest analyst with a straight face can acknowledge the glaring gap below between the S&P 500 price level and earnings growth since 2011 and call it rational pricing.
The fact is that financial ‘engineering’ aside, it takes customer spending to drive sales and it takes sales to drive nominal GDP growth. Far from driving sales, as shown below, zero interest rate policies and quantitative easing have perversely suppressed cash flow while driving up asset prices. This makes future investment returns grim and negative from here. (Clearly corporations agree, as they have elected to use more than 80% of their cash to buy back shares and pay dividends rather than invest in business development or expansion the past 4 years).
There is no free lunch ever. Worse, QE has been a waste of funds and an expensive distraction from necessary reforms. A foolish indulgence for which today’s wildly inflated asset markets must eventually pay in spades.