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Friday, May 2, 2014

The economy

There sure is a lot of talk about the economy getting stronger.  Lets look at the last five years of real GDP growth.

2009 -2.8%
2010 2.5%
2011 1.8%
2012 2.8%
2013 1.9%

It is easy to understand the low growth in 2011.  Everybody was worried about Europe blowing up and SPX crashed down in late July and early Aug. almost 20% from the high.  That scared nearly everybody.  But what about last year.  The market was up 30%, the FED was doing QE the entire year, there was $50 billion of Sandy damage repaired, and the credit score to buy a car was lowered to practically nothing.  With all of that the economy grew 1.9% for the year.  Really.  I actually found that shocking.  Despite everything going right last year growth was the second weakest in this recovery.   Economists started the year proclaiming this will be the year we reach 3% growth and all will be well.  A recent survey of economists said that not even one of them thought there was any possibility of a recession this year.  Not even one.  I find that amazing.  Did you know that 2011 was the only time in history we grew less then 2% for a year that was not associated with a recession.  The only time!  I believe that was most likely caused by the warmest winter in decades that gave people extra spending money.  This time we have a completely different situation.  We are coming off a year of very low growth and had the coldest winter in decades.  The first quarter GDP of .1% was worse then expected.  It may be revised higher later we don't know.  However, it certainly raises the probability that we don't get 3% growth this year now doesn't it.

There is another thing that may be a problem that I have seen very little discussion of.  The accelerated depreciation tax rule expired at 2013 year end.  Here is an article on it Expired ‘Bonus Depreciation’ Tax Break Could Be Cash Flow Drag. This law has helped the economy and pumped up revenue (cap ex business to business spending) and earnings (extra deductions).  It may even explain why profit margins have been at record highs the last few years.  Is that all about to change?  The first look at Q1 GDP came in much lower then expected.  Here is a chart showing capital expenditures of the last few years.


This was the first quarter spending decreased since Q1 2010.  Did the tax change cause that?  I would guess it was not cold weather.  What if that continues to happen?  Look at what is happening to tech companies that have reported earnings courtesy of Bespoke.

Tech is clearly not doing well.  I would expect that to be the biggest sector hit if cap ex is materially reduced this year.  Is this why the COMPX is showing a lot of relative weakness to SPX the last couple of months?

I have talked a few times about the pundit's claim that corporate balance sheets are in the best shape ever.  That is true only if you look just at cash.  Here is the best look at the balance sheet situation I have seen.

Looking at cash relative to debt the balance sheets are actually in the worse condition they have been in since the beginning of the chart in 1999.  Another Wall Street lie exposed.  The balance sheets are not that great and the tax incentives for cap ex have been removed.  This one rule change is likely to have a negative impact on the economy along with corporate revenues and profits.  The question is how negative.  Something to watch out for in the months ahead.


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