Strong Earnings Growth Unlikely

The depression continues. The broadest measure of unemployment – U6 – now stands at more than 17%.

The bad labor news last week didn’t seem to bother investors. They’re all monetarists, optimists, or delusionists. They figure that the jobs picture will keep the Fed from raising rates…and that the low interest rates will keep stocks moving up.

They are wrong. Well, they are right about the first part and wrong about the second. The Fed will not raise rates anytime soon. But it takes more than low rates to create a durable boom on Wall Street. It takes earnings growth.

Today’s prices imply strong earnings growth in the next 12-24 months. But it’s not likely to happen. Ambrose Evans-Pritchard:

“Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath.

“Judges are finding ways to block evictions. One magistrate in Minnesota halted a case calling the creditor ‘harsh, repugnant, shocking and repulsive’. We are not far from a de facto moratorium in some areas.

“This is how it ended between 1932 and 1934, when half the US states declared moratoria or ‘Farm Holidays’. Such flexibility innoculated America’s democracy against the appeal of Red Unions and Coughlin Fascists. The home siezures are occurring despite frantic efforts by the Obama administration to delay the process.

“…It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of ‘option ARM’ contracts due to reset violently upwards this year and next.

“US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. ‘If the 2008 and 2009 loans go bad, then we’re back where we were before – in a nightmare.’

“David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.”