Written by Lance Roberts, Clarity Financial
Here is an issue missed by the majority of mainstream economists.
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Before the “Financial Crisis,” the economy had a linear growth trend of real GDP of 3.2%. Following the 2008 recession, the growth rate dropped to the exponential growth trend of roughly 2.2%. Instead of reducing the debt problems, unproductive debt, and leverage increased.
The “COVID-19″ crisis led to a debt surge to new highs. Such will result in a retardation of economic growth to 1.5% or less. As discussed previously, while the stock market may rise due to massive Fed liquidity, only the top-10% of the population owning 88% of the market will benefit. Going forward, the economic bifurcation will deepen to the point where 5% of the population owns virtually all of it.
“That is not economic prosperity. It is a distortion of economics.”
All Hat, No Cattle
Importantly, these are all extremely optimistic assumptions based on massive interventions by the Federal Government. While the economic plunge was terrible, had it not been for the massive infusions of Government stimulus, it would have been far worse.
The chart below shows the annual percentage change in Federal expenditures and the rate of GDP growth less Fed expenditures. Essentially, there was ZERO economic growth, ex-federal expenditures.
However, that is also why the stock market has done so well.
The problem is the Government’s ability to continue spending at increasing rates to support economic growth and the markets.
As they say in Texas, the current rally has been “all hat and no cattle.”
Such is the most significant risk for the bulls.
