The more historically realistic US GDPNow model forecast for Q3 2015 real GDP growth (seasonally adjusted annual rate) was 1.0 percent on August 6 (green dot below) compared with the still much higher 2.6 to 3.6% range of consensus forecasts (blue band below). The consensus range, shared by Central Bankers and investment sales firms everywhere, continues to be senselessly, relentlessly optimistic only to be revised much lower in retrospect. (And let’s not forget that the meager August 6 GDPNow estimate was days before this week’s ‘surprise’ currency devaluation from China, which will now make US (and European) goods and services that much less affordable for Chinese buyers). You can see more on how GDPNow estimates are calculated here.
This huge gap between realism and consensus matters because the majority of financial types are justifying today’s lofty asset valuations in large degree, on the misguided consensus growth assumptions--a significant amount of which was penciled in as coming from China. Nominal GDP growth is roughly correlated with corporate revenue growth; and so faulty assumptions on top line growth and inflation, become precarious foundations on which to construct valuation beliefs.
It is only when asset markets crash enough to scare consensus-following-sheep off bullish marks, that truly valuable investment opportunities present for the few sober realists ready to capitalize on them. That time of role reversal–where today’s careful bears become tomorrow’s only bulls–is coming sure as winter, somewhere in the months ahead.
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