Juggling Dynamite

The Atlanta Fed GDPNow model forecast for US real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 came in at 0.6% on March 28, down from 1.4% on March 24.  The next update is due tomorrow on April 1.  Here is the chart which shows the trend in green since the end of January, along with the perennially optimistic range of consensus forecasters (in blue) still gunning for 2%+.  They always do.

Bullish dreams aside though, the facts are that global data has weakened since February as risk markets have rallied.  Spent of meaningful demand prods, this month the US Fed blinked on its promise of rate hikes and crude and stocks bounced on the dipping dollar.  But this has only made downside risks larger.

The thing about growth, is that beyond short-term accounting gimmicks like ‘ex-item’ earnings and share buybacks, in aggregate corporate profits can’t grow faster than GDP over a full business cycle and animal spirits can’t expand price to earnings multiples beyond reason forever.  Eventually things like wage and sales growth are needed to pay the bills.  And with the S&P 500 trading at a breathtaking 23 x GAAP earnings today, tolerance for disappointment is about nil.

Crestmont Research sheds some useful perspective on present valuations in its report “Game Changer: market beware slower economic growth. When GDP is growing at 3% the historical price to earnings multiple has averaged 15.5 (so 32% below the current average).  But when GDP is averaging 2%, the average historical PE has been 11.5 (50% below current levels).

As for GDP growth of less than 2%…well in that case the present over-valuation in stocks is nearly too obscene to comprehend.

As institutions, hedge funds and even retail flows have been selling equities all year, central bank interventions and the largest corporations borrowing to buy back their own shares have managed to prop a low volume bid under wobbling broad markets. Still, the Canadian TSX Composite is today clinging to the same level it was at in April 2007 and January 2011. The NYSE is unchanged since October 2013 and the S&P 500 (below) was here last in November 2014. Tons of capital risk and volatility for zero progress with breathtaking downside from here. Road to riches or ruin?

On March 31, Tesla will unveil the Model 3, the most affordable electric vehicle yet. Tom Randall takes us through what we know so far. Here is a direct video link.

Also see India is aiming for all cars to be electric by 2030 for a smart financing approach that has buyers paying monthly with the cash flow they are saving in not buying gas (not to mention the repair and maintenance savings which are huge compared with ICE vehicles):

The program would let people buy electric vehicles with zero down payment financed by the state and drivers can then pay for the vehicle at the rate they are saving on gas.
Piyush Goyal recently said at an event via India Times:

“India can become the first country of its size which will run 100 per cent of electric vehicles. We are trying to make this programme self financing. We don’t need one rupee support from the government. We don’t need one rupee investment from the people of India.”

The minister added:  “We are working (on the scheme). Can we actually give electric car for free (zero down payment) and people can pay for that out of the savings on the petroleum products. Innovation is possible, it just needs an open mind. You need to think of scale and be honest.