The Great Disconnect: Markets Vs. Economy

Authored by Lance Roberts via,

The general consensus is the rise in capital markets, despite global weakness, geopolitical risks and sluggish employment and wage growth, is clearly a sign of economic strength as witnessed by rising corporate profitability.

Therefore, stocks are the only investment worth having.

My arguments are much more pragmatic.

First, it is worth noting that while the markets have risen to “all-time highs,” there was a massive amount of “time” lost in growing capital to meet retirement goals.

This is crucially important to understand as was something I addressed in “Stocks – The Great Wealth Equalizer:”

“By the time that most individuals achieve a point in life where incomes and savings rates are great enough to invest excess cash flows, they generally do not have 30 years left to reach their goal. This is why losing 5-7 years of time getting back to “even” is not a viable investment strategy.


The chart below is the inflation-return of $1000 invested in 1995 with $100 added monthly. The blue line represents the impact of the investment using simple dollar-cost averaging. The red line represents a “lump sum” approach. The lump-sum approach utilizes a simple weekly moving average crossover as a signal to either dollar cost average into a portfolio OR moves to cash. The impact of NOT DESTROYING investment capital by buying into a declining market is significant.”

“Importantly, I am not advocating “market timing” by any means. What I am suggesting is that if you are going to invest into the financial markets, arguably the single most complicated game on the planet, then you need to have some measure to protect your investment capital from significant losses.


While the detrimental effect of a bear market can be eventually be recovered, the time lost during that process can not. This is a point that is consistently missed by the ever bullish media parade chastising individuals for not having their money invested in the financial markets.”

However, setting aside that point for the moment, how valid is the argument the rise of asset prices is related to economic strength. Since companies ultimately derive their revenue from consumers buying their goods, products, and services, it is logical that throughout history stock price appreciation, over the long-term, has roughly equated to economic growth. However, unlike economic growth, asset prices are psychologically driven which leads to “boom and busts” over time. Looking at the current economic backdrop as compared to asset prices we find a very large disconnect.

Since Jan 1st of 2009, through the end of June, the stock market has risen by an astounding 130.51%. However, if we measure from the March 9, 2009 lows, the percentage gain explodes to more than 200%. With such a large gain in the financial markets we should see a commensurate indication of economic growth – right?

The reality is that after 3-massive Federal Reserve driven “Quantitative Easing” programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc., all of which total more than $33 Trillion, the economy grew by just $2.64 Trillion, or a whopping 16.7% since the beginning of 2009. The ROI equates to $12.50 of interventions for every $1 of economic growth.

Not a very good bargain.

Furthermore, the Fed’s monetary programs have inflated the excess reserves of the major banks by roughly 332% during the same period of time.  The increases in excess reserves, which the banks can borrow for effectively zero, have been funneled directly into risky assets in order to create returns.

With the Fed threatening to withdraw the reinvestment from their massive balance sheet, one has to ask just how much risk to asset prices there currently is?

Unfortunately, while Wall Street has benefited greatly from the Fed’s interventions, Main Street has not. Over the past few years, as asset prices surged higher, there has been very little translation into actual economic prosperity for a large majority of Americans. This is reflective of weak wage, economic and inflationary growth which has led to a surge in consumer debt to record levels.

Of course, weak economic growth has led to employment growth that is primarily a function of population growth. As I addressed just recently:

“The first is that the number of ‘real’ employees, while growing, is in lower income producing and temporary jobs, and the rate of job growth is substantially lower than the growth of the population.”

While reported unemployment is hitting historically low levels, there is a swelling mass of uncounted individuals that have either given up looking for work or are working multiple part time jobs. This can be clearly seen in the chart below which is the working age population of those between the ages of 16 and 54 as a percentage of that same age group. (This analysis strips out the argument of retiring baby boomers, who ironically, aren’t retiring, not because they don’t want to, but because they can’t afford to.)

These higher levels of under and unemployment have kept pressures on wages even as work hours have lengthened. The declines in real income are evident as the burgeoning “real” labor pool, and demand for higher wage work, is actually suppressing wages as companies opt for increasing productivity, continued outsourcing, and streamlining employment to protect corporate profit margins. However, as the cost of living is affected by the rising food, energy and health care prices without a compensatory increase in incomes – more families are forced to turn to assistance in order to survive.

Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components.  While unemployment insurance has tapered off after its sharp rise post the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise.

Importantly, for the average person, these social benefits are critical to their survival as they make up more than 22% of real disposable personal incomes. With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.

It is extremely hard to create stronger, organic, economic growth when the dependency on recycled tax-dollars to meet living requirements remains so high.

But, Earnings Have Beaten Estimates?

Corporate profits have surged since the end of the last recession which has been touted as a definitive reason for higher stock prices. While I cannot argue the logic behind this case, as earnings per share are an important driver of markets over time, it is important to understand that the increase in profitability has not come strong increases in revenue at the top of the income statement.

The chart below shows the deviation between the widely touted OPERATING EARNINGS (earnings before all the “bad” stuff) versus REPORTED EARNINGS which is what all historical valuations are based on. I have also included revenue growth as well.

This is a not a new anomaly, but has been a consistent “meme” since the end of the financial crisis. As the chart below shows while earnings per share have risen by over 260% since the beginning of 2009 – revenue growth has barely eclipsed 30%.

As expected, since the economy is 70% driven by personal consumption, GDP growth and revenues have grown at roughly equivalent rates.

While suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability, these actions have little effect on revenue growth. The bigger problem for investors is all of the gimmicks to win the “beat the estimate game” are finite in nature. Eventually, real rates of revenue growth will matter. However, since consumer incomes have been cannibalized by suppressed wages and interest rates – there is nowhere left to generate further sales gains from in excess of population growth.

So, while the markets have surged to “all-time highs,” for the majority of Americans who have little, or no, vested interest in the financial markets their view is markedly different. While the Fed keeps promising with each passing year the economy will come roaring back to life, the reality has been that all the stimulus and financial support can’t put the broken financial transmission system back together again.

Eventually, the current disconnect between the economy and the markets will merge.

My bet is that such a convergence is not likely to be a pleasant one.


PT Thu, 08/17/2017 - 08:31 Permalink

It's working.  They tell the lies, they live to tell more lies another day.  They can still direct dissent to where they want it to go.

Hkan Thu, 08/17/2017 - 08:36 Permalink

Correction of population rate.Understanding we are animals with animal instinct it all becoms logical.Overpopulated spieces correction is law of nature. Logical and natural.

sudzee Thu, 08/17/2017 - 08:39 Permalink

Greshams law picking up speed. PM's manipulated and bitcoin buys 1000 barrels oil or 4oz gold. Do cental banks continue to let their reserves of last resort go worthless. Change is on its way.

bowie28 LawsofPhysics Thu, 08/17/2017 - 08:55 Permalink

Every time I hear some "expert" or "financial advisor" talk about dollar cost averaging I want to punch them. It's nothing more than blind faith that you keep dumping your hard-earned money into the market and it will all work out in the end.They do not address the fact that the entire market is corrupt and your money WILL be looted in the next manufactured crisis.It simply provides them a bs excuse every time you get looted because they did not warn you to get out in time. "Sorry you lost half your 401k, we all did.  Nobody can time the market cycles, but look on the bright side, now your monthly contributions are buying even MORE shares.  WINNING!!!" 

In reply to by LawsofPhysics

gregga777 Thu, 08/17/2017 - 08:47 Permalink

Keep your assets outside of the international banking gangster syndicate. Hold some cash, gold and silver coins, copper-jacketed lead ammunition and long-term non-perishable foods. You're going to need all of it when the government and the banking gangsters vaporize all of the "assets" in the banks and on CON Street.

gregga777 Thu, 08/17/2017 - 08:49 Permalink

If a banking gangster or political parasite was on fire I'd piss on them if I could piss gasoline. Otherwise, I'd just enjoy watching them burn.

CheapBastard Thu, 08/17/2017 - 08:49 Permalink

The next recession will force them to print trillions more and that should push bitcoin, gold, etc much higher . RE is already seriously overpriced so imo RE will drop.

J J Pettigrew Thu, 08/17/2017 - 09:05 Permalink

Normacly is short rates ABOVE the inflation rate.  It is the financial history of this country.THIS FEDERAL RESERVE, still hiding behind the "emergency", has kept rates BELOW inflation for ten years...(in which prices have risen 14%) and still, without authority or mandate, PROMOTE MORE INFLATION!Put rates above inflation, where they were for most of the 20th Century, and return to Normalcy...instead of market pumping

Pollygotacracker Thu, 08/17/2017 - 10:04 Permalink

Thank you Lance Roberts. $12.50 of printed money for $1.00 of growth in GDP. GDP growth was obviously NOT the purpose of QE and all the ZIRP, infinitum ad nauseum. The banking elites are smart, you have to give them that. Never let a crisis go to waste. The very same bad actors that were responsible for the banking collapse were BAILED OUT for years. They are now tens of trillions of dollars richer now than they were before. Not one of them was led out of the Hamptons in handcuffs. Job well done FED. Gag me with a spoon.

PreferredSpecialist Thu, 08/17/2017 - 12:28 Permalink

I have a young client struggling to get ahead with too much credit card debt.Any thougths on having them max them out with cash advances, andfile for bankruptcy? Invest all that, and the amount that would befor monthly payments to an IRA.In seven years...take it out for a first time home purchase ?These are different times for the millenials. 

much obliged Thu, 08/17/2017 - 12:57 Permalink

Fractional Reserve Banking requirement for growth remains at odds with the environment and is not going to go away without turning the planet into the same cesspit that has happened in south Asia. Quite simply, Fractional Reserve Banking is obsolete, conceived in an era with a fraction of the current world's population. Heard recently that volunteerism is the alternative to statist aggression that clings onto Fractional Reserve Banking.