Sorry QEasy Momentum Chasers: The Economy Still Matters (A Lot)

Tyler Durden's picture

Watching as the market responds to every piece of bad economic news as if a brand new golden age had just been announced, can sure leave one dazed and confused with nauseating amazement at the success of central planning. Unfortunately for the central planners, and as demonstrated in the previous "Godfather" post, central planning can only do so much (as confirmed holistically by the empirical example of the USSR: no, Benny and the Inkjets are not the first to come up with the brilliant idea of having 13 people run $15 trillion out of a small room). As the following example from John Lohman vividly demonstrates, GDP does and always will impact stocks. Granted it may take them a little longer to respond, especially when prodded by the central printer, but ultimately what has to happen happens. And paritcularly when reaching key inflection points. Such as now. As Lohman notes, "As shown, the growth rate in S&P 500 earnings estimates, and hence expected earnings, has always peaked when the spread between estimates and GDP is more than 1 standard deviation from the mean.  In the most recent cycle the spread between profit expectations and economic reality has gone to all-time highs, but has now reversed.  As further empirical evidence of this phenomenon, the right side of the table at the bottom highlights the change to expectations in subsequent quarters.  Note that they are negative in every instance." Unfortunately, Bernanke can push stocks by promising the moon and the stars, but unless he succeeds in actually pushing GDP up, all his efforts to create a wealth effect will be very soon undone. And with fiscal stimulus still a kneeslapping joke (we won't dwell on the topic of the latest fiasco between Obama and Boehner, suffice to say that if the two can't come up with a decision on how to meet, how on earth will they agree on trillions in fiscal stimulus, especially at a time when America is under "austerity"), we remind readers that according to economists, when using monetary policy to boost GDP, every trillion in LSAPs is equivalent to 0.50% in GDP. Which means a whole lots of LSAPs are coming our way sooner or later.

S&P Earnings Estimates vs GDP, from John Lohman

As is well known, the profits of the 500 largest corporations rise at the same rate as gross domestic product over time.  In fact, the 80 year average of S&P 500 reported earnings growth and that of nominal GDP is a nearly identical 7.0%.  The only real difference between the two is volatility, as S&P earnings growth tends to outpace the economy during expansions and lag during downturns.  As such, the spread between the two offers insight into cyclical turning points.  This is particularly true near peaks, given the inherent incentive of analysts to be optimistic.
The chart below plots earnings estimates (a more forward looking measure than reported earnings, but in reality just a proxy) against GDP growth.  The bottom panel plots the spread between the two.  As shown, the growth rate in S&P 500 earnings estimates, and hence expected earnings, has always peaked when the spread between estimates and GDP is more than 1 standard deviation from the mean.  In the most recent cycle the spread between profit expectations and economic reality has gone to all-time highs, but has now reversed.  As further empirical evidence of this phenomenon, the right side of the table at the bottom highlights the change to expectations in subsequent quarters.  Note that they are negative in every instance.

The typical response to the chart above is that “the market is forward looking” and that it “sees through earnings estimates and future GDP growth”.  The chart below, which plots the same S&P earnings estimates only this time against S&P 500 returns, would beg to differ.

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Caviar Emptor's picture

The stock market has become a discounting mechanism for what? 

For bulge bracket C-suite bonus pools. It's a Hamptons real estate stability index fund. 

Not even top Hedgies are being included anymore (Paulson, Ackman). 

As with many things, the original intent and purpose has been lost progressively over time, until it's become merely a symbol, a talisman against perceived evil and superstition. 

DaddyO's picture


Clearly an opinion held by many here on ZH but widely poopoo'd in the Hamptons.

I am inclined to agree though, since things turned ugly back in '07-'08 I have not been able to afford my favorite sturgeon eggs...


Spirit Of Truth's picture

The "central printer"....classic!

RobotTrader's picture



Attn: Bears

Tom O'Brien is totally convinced that:

- The market topped out today.

- The gold market topped out today.

- The USDX is about to embark on a huge rally.

Spirit Of Truth's picture

Spot on IMHO.  Elliott Wave Int'l in agreement.

rocker's picture

What should scare you is they have agreed for three years and been wrong the same.

Strike one, two, three, they are out.  Unless they got extra innings they are hopeless.

On Bloomberg, Prechter said he was wrong on Gold. Oh, Gee, Golly, Gosh dam it,  ..... Really.

He was wrong on Silver too.  Just a fact. So don't use him to validate your prognosis.

rocker's picture

Do I hear a sucking sound from Robo or a moment of reality?

Long-John-Silver's picture

The markets are broken. You can post all the  charts you like but they really mean nothing. It's like charting a Russian resupply rocket that's not going into orbit. It goes up, it comes down, in the end it crashes. This market is going to crash, we just don't know how high it's going before it does so. Is it really important to log the data?

rocker's picture

Hey, somebody using their mind instead of someone else's.  Good Job Long John Silver.

monopoly's picture

Agree, am prepared for this to end badly....again. Just not interested in this market outside of miners and physical. And poor Robot, listens to every idiot on the block. Guy needs some help.

Good night guys.

flaunt's picture

The markets aren't broken.  Markets don't break.  They function perfectly as they should given all the inputs.  The largest inputs now just happen to be the central planners hell bent on continuing the illusion that the economy is growing.  When you have one large player that dwarfs all the others then the markets are going to go where that one player wants them to go.  The problem is central planning, not the markets.

scatterbrains's picture

Anyone have good cut/paste/cropping skills able to overlay a chart of of S&P500 over this time frame to see if this all leads or lags downturns ?


disabledvet's picture

I simply don't believe the Fed had anything to do DIRECTLY with the rally in equities over the past two years. I have seen nothing empirically either to show otherwise...nor will i be because it simply doesn't exist. Obviously an expectation of recovery of the economy is the basis of any rally in stocks. I am not arguing that there isn't right now a synchronous slow down in economies bascially across the globe. Demand can be "created" however. We've never had the inventory build that usually coincides with the bottoming out of every other recession--which is rather odd. This is the USA--"just in time" what again? We solve our problems over here by slashing prices thus creating a wealth effect "the old fashioned way." The irony that Government Motors still doesn't get it (they should be flooding the markets with cars and pick-ups and otherwise engaging in price wars galore) i think goes a long way towards explaining this strange "condition" of "government parsimony" and "profit motivation." Too much overthink--from the folks that are suppose to be stupid anyways--also called "the government." Begs the question "why aren't you stupid here as well?" because "that would good government stupidity."

Caviar Emptor's picture

No traditional metrics apply anymore. Only 10% of daily volume is even held longer than intraday. 75% is program trading aka bots playing ping pong. In ultra low volume markers with hidden huge spreads and false bids and offers, price discovery is based on nothing much so that there is little actual price support. Hence flash crashes. Prices of billions of shares hang on a few bots and day traders exchanging a tiny fraction. The traditional 'investor' class is becoming extinct. And that was the whole thesis for equity investing in the first place: public ownership based on future expectations. The "future" has disappeared in a day-trading world. 

Cursive's picture

In the most recent cycle the spread between profit expectations and economic reality has gone to all-time highs

So, at least there is objective data that my eyes are not deceiving me.  We are living in a Salvidor Dali painting.  ZH on fire tonight and more great work from John Lohman.

buzzsaw99's picture

GDP is expensive to artificially maintain these days.

rocker's picture

Bernanke's thought, who cares if it is expensive.  If it deflates the dollar, it's cheaper.   Hmmmm

Can we say, Bernanke is a prick or just a dick head who would shove his mother under the bus.

Bicycle Repairman's picture

"Sorry QEasy Momentum Chasers: The Economy Still Matters (A Lot)"

Uh, no.  As in plain "NO".  The economy has been in the dumper for a couple years anyway.  Where is the stock market?  As far as the market goes, the FED controls the horizontal and the vertical.  End of Story.

Sambo's picture

Twenty-five of the 100 highest paid U.S. CEOs earned more last year than their companies paid in federal income tax, a study by a Washington think tank said. (Reuters)

They are all in bed with each other.

zorba THE GREEK's picture

"they are all in bed with each other"



wisefool's picture

And the real problem with this is: If G.E.'s CEO hires 1000 people to prepare the taxes, such that they pay no tax. Where does the government get the money to pay 100 people to review the filing to make sure G.E. is not cheating?

Everybody hates taxes. some people want it more progressive, less progressive, etc. Uncle warren , Jerry Springer, and even the President himself have been tearing it up lately saying they pay too little.

But that is not the problem.  The code itself is the problem. legally it falls into the area of unconscionable. Practically -- just like ben is pushing on a string with the printing press -- .gov is pushing on a string with "tax incentive this, tax incentive that, will create jobs."

No, it wont. not even jobs for accountants and attornies. People and small business will conciously or sub consciously go galt.

Wipe it out. tax consumption. if the foriegn holders of USD want to ship inflation right back to us, GREAT! you can pay 10% consumption tax while surveying up Idaho cropland in a rented gulfstream. If the US corps want to repatriate dollars, great! spend it here and they will be taxed here, just like the non-"legal fiction" persons. And this way you don't have to boo-hoo about not getting that gold star you deserve for your firm's l33t tax skills. You can still afford to keep your K street friends in Gucci.

Then both the Fed and .gov would have effective tools to help people again. or atleast let them have thier free will back.

Gray market you say? Even Bill O'Reilly knows how this works. Drug dealers do not pay income tax, but they do spend. Huge huge revenue and makes "the life" less attractive when the Benzo costs 10% more ... If you earn your money legitmately, you'll still be able to get it for less than you effectively do now.

snark: Beam me up Ralph (Nader) this planet is inhospitable for dignified life.

TruthInSunshine's picture

We're back at the 1920's level of income disparity, the 1930s level of unemployment and underemployment (17% and 22%, respectively), unemployment is rising again, wages are falling again, real inflation is exceeding 10% as of August, the imbecile known as Bernanke is crushing savers (aka responsible people) with his asinine ZIRP forever policy, the government is picking winners and losers by throwing trillions the way of Wall Street & the banks (taken from Main Street and in the form of debt put upon future generations), government spending now equals $1.43 for every $1 the government takes in, the true national debt is a minimum of 60 trillion and as much as 200 trillion (depending on whether one fully accounts for future entitlement guarantees), the government is spending 1 trillion a year on defense a minimum of 50% of that money going for idiotic weapon systems and maintenance for idiotic weapon systems, new home sales are now running at less than 300k on an annualized basis - the lowest in recorded history (since 1963, when the U.S. population was 128 million versus the 310 million today), 20% of every dollar circulated in the economy is the result of government transfer payments, there are 34 million Americans who work for government, 1 in 7 Americans is on food stamps and 1 in 4 Americans receives some sort of government assistance, U.S. public education is in a state of absolute crisis (30% of high schoolers drop out before graduation - 60% in inner cities-, and 50% of the one who do graduate can't read or write at an 8th grade level), we have the largest % of our population in prison in the entire world (at a massive cost, with no rehabilitative effect, and with 60% of those imprisoned for non-violent crimes), we have a deeply captured and bought and paid for judiciary, congress, POTUS, and federal and state regulators, and we have a central bank that is among the worst that history has ever known.

And some question whether we're in the beginning phases of another economic depression?

Obama, the members of CONgress and Bernanke are all imbeciles on a level so epic that it is hard to articulate sufficiently.

It's going to be a long, cold winter.

holdbuysell's picture

"Unfortunately, Bernanke can push stocks by promising the moon and the stars, but unless he succeeds in actually pushing GDP up, all his efforts to create a wealth effect will be very soon undone. "

Tyler, I recall the a very recent Goldman piece's views on QE and the Fed where one of the options possible was for the Fed to target NOMINAL GDP by its printing.

In such a case and with the underreported inflation numbers in the CPI, they might be on to something: juice nominal GDP and underreport inflation.


espirit's picture

FWIW - TPTB lie about all the other numbers, so why not for GDP?

Their aim is to keep this ponzi going for as long as it takes to squeeze the last blood from the sheeple. 

how to trade armageddon's picture

Corporate profits don't only follow GDP. They also follow deficit spending.

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Grand Supercycle's picture

S&P500 big picture remains bearish and this will ALWAYS exert the most influence. The only thing GUARANTEED is that the bearish medium/long term cycle will have the upper hand.

FX medium to long term outlook continues: Euro bearish and USD bullish.

As mentioned many times - bring on the OVERDUE USD rally.


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