Misleading Financial Metrics
In a Barron's interview, economist David Rosenberg states that the correlation between GDP and the S&P 500 has dropped to 7% from a historical range of 30% to 70%, and that consequently the "stock market is telling you nothing about the economy anymore."
As for why the correlation has dropped so significantly:
"We have had $4 trillion of quantitative easing matched perfectly by $4 trillion of corporate share buybacks, to the point where the share count of the S&P 500 is down to its lowest point in two decades. You would normally believe that a powerful bull market in equities would have been reliant on a strong economic backdrop. But that’s far from the case. We have never before seen such a stock-market performance in the face of what has been in the last 11 years the weakest economic expansion of all time. We haven’t even had one year of 3% or better real GDP growth in the U.S. since 2005."
Rosenberg states that the companies that have raised large sums of debt used the proceeds to buy back shares instead of making capital expenditures to invest in future growth. These purchases have little to do with the economy and create an "illusion of prosperity."
Click on the link below for an interesting read.
Source: Lisa Beilfuss | “A Contrarian Economist Is Warning of Recession and Deflation. He’s Been Right Before.” | Barron's | 2/21/2020 | Visit
During the 2017 holiday season Toys "R" Us experienced an uptick in sales in response to widespread news of the chain's chapter 11 filing in September of the same year. Anxious consumers rushed to stores to redeem the value of gift cards that would soon otherwise be worthless. According to the article the company claimed that "Christmas came a bit early" that year, but the reality is that the "best gift cards [from the retailer's perspective] are those that go unspent."
Source: Elizabeth Winkler | “Toy Story, A Cautionary Tale” | The Wall Street Journal | 12/30/2017 | Visit
In response to a reported increase in revenue from operating leases at John Deere, Jim Grant noted that the mechanism for this "improved" performance was the company's willingness to absorb more risk via an increase in the residual values of equipment leased. The challenge, as Grant points out, is that the value is determined when the lease is signed and that this is simply an educated guess.
"The higher the estimated value, the easier it is for the lessor-farmer (a higher residual value means lower monthly payments) and the riskier it becomes for Deere."
Source: Jim Grant | “Dialing for Dollars” | Grant's Interest Rate Observer | 4/8/2016 | Visit