More Misconceptions to Dispell

The financial press is full of bull these days.

Walking past the news section in the grocery store, I spot the headline for a cover story in Barrons: OUTLOOK MOSTLY SUNNY!!! Bulls have the edge in the big money pool, predicting stocks will rise 10% this year.

I used to read this comic when they were market savvy. Not anymore. Bob Bleiberg must be rolling in his grave.

Conventional financial analysts can be depended on to forecast the future by giddily extrapolating present conditions in a straight line with total certitude at just about the time the trend is due to change. Elliott Wave analysts extrapolate in fractals, observing that the primary influence in business activity is social mood, which ebbs and flows in fractal patterns rather than linearly. Historically, Wave analysts have made the more reliable calls, and they are calling for a trend change (down) now. This is a good time to ignore conventional financial commentary.

But, not entirely. The April 21st. issue of The Economist features an upbeat section titled Manufacturing and Innovation, containing several articles citing major turnarounds in global competitiveness for American industry. Here’s a short excerpt:

“As manufacturing goes digital, a third great change is now gathering pace. It will allow things to be made economically in much smaller numbers, more flexibly and with a much lower input of labour, thanks to new materials, completely new processes such as 3D printing, easy-to-use robots and new collaborative manufacturing services available online. The wheel is almost coming full circle, turning away from mass manufacturing and towards much more individualised production. And that in turn could bring some of the jobs back to rich countries that long ago lost them to the emerging world.”

This is very exciting for the long term, but problematic for the immediate future. A much lower input of labour is Economistspeak for fewer jobs. Already, lots more stuff can be made with lots fewer people. This is classic Schumpterian creative destruction and, of course, deflationary.

Many, if not most industries are replacing jobs with technology. Retailing is undergoing radical downsizing due to internet buying. Big box stores like Best Buy and WalMart are shrinking. I’m told that Office Depot is going from one 30,000 sq. ft. store in an area to several units of 5,000 sq. ft. Hard to see more jobs coming out of this trend.

Fewer jobs means lower tax revenues. Our little town just announced the elimination of one fourth of the positions in our Public Safety Department. Your town is probably doing something similar.

Growth in corporate profits depends on growth of  consumption, which in turn requires a growing workforce. Corporate profitability in this new era comes from technologically-based productivity increases which limit job growth. Until that changes,  stock market valuations have to reflect low or no growth–they must go down. The Dow Jones Industrial Average is presently valued at 15 times earnings. A p/e ratio below 5 for the Dow is very likely before the bear market is over. And if earnings go down–as they must–it is going to be a bloodbath for anyone buying Barron’s expert’s opinions.



The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.



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