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Economic indicators are grim nationally and abroad

A former Wall Street banker reviews the state of the market and urges caution.

  • By
  • | 5:00 a.m. February 6, 2024
  • Longboat Key
  • Opinion
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We have recently been told by the Federal Reserve that because the economy is “relatively strong,” inflation is receding and interest rates are trending down, that things are getting better and that 2024 will be a good year for the economy. 


George Rauch of Longboat Key is a former Wall Street banker.
Courtesy image

Right now, the yield on the Dow Jones Industrial Average is less than 2% and the historical dividend yield is 4.1% (see chart). The current DJIA price-earnings ratio is just over 30 times earnings, way up from an average of 14.7 times the past 50 years. 

What does a yield of less than 2% and a price-earnings ratio of less than 15 tell us about the price of the current market? It tells us that the market is tremendously overpriced, almost double where the market should be priced if it was selling at an average historical yield and price-earnings ratio. Current valuations have only been exceeded in December of 2020 and just before the 1929 crash.

Let’s look at some basic problems and relate them to our economic outlook and then examine the possibility of a favorable stock market over the next several years. 

Wall Street firms are predicting 10% annual returns over the next decade. Assuming that is true, let’s analyze what has to be overcome before we can count on those 10% gains:

  1. The federal debt just passed $34 trillion with $5 billion to be added to the national debt every day for the next 10 years.
  2. Corporate defaults are surging. There were twice as many bankruptcies in 2023 through just September than there were in all of 2021 and 2022 combined.
  3. Average adult net worth in the U.S. is $94,000. Two adults in a family enjoy a combined net worth of $188,000. A family of four’s share of the U.S. debt is $408,000 — $102,000 per citizen. No taxpaying family of four has enjoyed benefits thereof. The money is all given away for welfare purposes. Our generation of politicians will walk away from this mess with fat pensions and leave the debt to our heirs.
  4. The U.S. will borrow $1.75 trillion in just the first half of this fiscal year. That is $20,000 per family of four.
  5. More than 4 million illegal immigrants have entered the U.S. since January 2020. Credible news outlets, and current and retired government employees assert it’s at least 10 million. The Federation for American Immigration Reform estimates the cost to the federal and state governments per refugee is about $80,000 over five years. That cost will come to more than $128 billion annually based upon just 4 million. It will be a drain on our economy, not a plus as past immigration has been. 
  6. Car loans, credit card debt and mortgage debt are at all-time highs, and each one is suffering from increasing delinquency. Consumer spending represents two-thirds of our GDP, so this is an indication that consumer spending, which is down, may continue to decrease as cash becomes scarcer.
  7. There is a huge resettlement of talented individuals leaving states like California, Illinois and New York. Every major city in those states has borrowed money it cannot repay. Like the federal government, the cities are borrowing just to pay interest on debt. There is no plan to reduce debt. Their employment base is receding at a time when finding skilled employees is difficult.
  8. The last time bond yields were this high was in the 1980s when the federal government had debts of 35% of GDP. Now debt is $34 trillion and 2023 GDP is going to be around $27 trillion. That means debt is 126% of our GDP — developing nation-level statistics.
  9. The market's increase in the last several months is due to the performance of the seven richest companies in the world, which didn’t exist 50 years ago: Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms and Tesla. The rest of the market, about 70% of the weight of the index, has delivered average gains this year of only 2%, less than half of the inflation rate. Poor market breadth frequently leads to problems down the road.

Influence of other economies

In addition to our own internal problems, there are serious problems around the world:

  • Russia has increased interest rates to more than 12% to support the tanking ruble; 50% of the Russian economy is from the sale and production of oil. But Russia is using its economy to support war. Russia has about used up its military ordnance, as well as the oil and gas it had hoped to sell to other countries. 
  • The entire European Union is in recession, with problems emanating from debt, a slowing economy, welfare obligations, and out of control immigration.
  • China is currently in dire straits with unemployment among its young people in excess of 20%. China’s high-tech business is in trouble. American and European firms have just about quit expanding in China. They are now building plants in Vietnam, India and other countries like the Philippines, whose laws and political attitudes are conducive to foreigners who want to do business without conflict. For the first time in years, the Chinese economy will not grow. This is worrisome because of what China is currently doing with Taiwan. Leaders will start wars to get citizens' minds off a country’s internal problems and to put unemployed people to work in the military or on jobs that provide goods and services to the military. To top it all off, given the huge losses in real estate, deflation has set in, banks are overloaned and technically bankrupt, and China’s citizens are angry.

Current position of stock markets

While many people think so, the stock market is not the economy. And conversely, the economy is not the stock market. What the stock market tells us is the status of investor sentiment, coupled with current company performances. That’s all. As mentioned above, a handful of huge tech stocks control the flow of the world’s information. 

Think of what could happen to the stock market: Cash gets tighter and there is a sudden loss of interest in the market coupled with the realization that tech stocks, along with the whole market, are overvalued. That could follow disclosure that a significant number of illiquid banks are about to fail, like the three times they have failed since the Nixon era. All of a sudden there is no one to buy $5 billion a day in new government-issued debt. Assume that because we have lost our AAA bond rating that U.S. treasuries are going to come to market at a large premium like they did in the 1980s. Imagine the Dow going through the mean into PE ratios of 10- and 12-times earnings and dividend yields exceeding 5%. Maybe confrontation breaks out all over the Middle East, or problems between Russia and the Baltic states and Poland, or a confrontation over Taiwan. On top of it all, a nasty election year is facing us.

Statistics indicate we are already in a mild recession. Consumer spending is down. This year’s Christmas “buy now, pay later” plans were up 42% from last year. Household disposable income is sliding; and savings continue to fall. 

When the market is over 30 times earnings, think of how many years it takes of great earnings by companies to justify a 30-times multiple. That alone is enough to sit on the sidelines and enjoy the 5%-plus returns on bonds and CDs. Who needs risk like this in volatile economic and political times? It’s wise to wait for signs favoring economic expansion. This is a good time to be in cash, measure one’s risk and be patient.

Caveat emptor.

George Rauch, of Longboat Key, is the CEO of Bradenton-based General Propeller and a former Wall Street investment banker.


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