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REALITY CHECK: The Stock Market and Economic Fundamentals on a Collision Course

September 16, 2014

If you tune into TV, the radio or are reading the business section of the newspaper, you would immediately believe that economic recovery is gaining strength and stock market indexes are at all-time highs and will continue to grow. Insert car crash sound effect here.

 

Put the Kool-Aid down, turn the “happy” off, and listen up! Either the economy will have to improve considerably or the stock markets are headed for a precipitous fall.

 

Stock Market Reality Check, a recent article written by James Rickards (author of Death of Money), outlines what the media isn’t telling you and what the harsh reality is.

 

“The first weak link in the ‘happy talk’ chain is the nature of job creation,” states Rickards. “For example, it was reported that 288,000 jobs were created in June. But full-time jobs declined by 523,000, while part time jobs increased by 800,000.” This rise in part time work is driven by Obamacare, which doesn’t require coverage for part-time workers. This is, of course, fueled by employers – as more and more of them don’t want to have to continue paying for insurance.

 

The second weak link is that labor force participation is at its lowest rate since 1978 – only 62.8% participate in the work force today.

 

“Productivity is declining because capital expenditure has slowed down,” Rickard continues. “Businesses are keeping up with demand by employing part-time workers instead of investing in the plans and equipment needed to make full-time workers more productive.”

The mix of lower consumption, lower investment, declining productivity, stagnant wages and under-employment all feed off each other to create a weak economy.  I hate to rain on anyone’s parade, but the people that think the market is going up are truly in for a rude awakening.

 

To leave you on this final comment from Rickard: “The conundrum is complete. Stock indexes march to all-time highs. Economic fundamentals fall apart. The two will be reconciled with a spectacular turnaround in growth or a spectacular collapse in stock prices. The problem is that a turnaround in growth can only come from structural reform, not money printing.”

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