Tuesday, July 6, 2010
There's so much talk about a coming double-dip recession and the parallels between now and the 1930s that I feel compelled to counter the pervasive pessimism with some reasoned optimism.
The first chart here shows PE ratios as calculated by Bloomberg. As of June 30th, they stood at 14.9, which is below the long-term average of 16.7. As Brian Wesbury notes, if you use forward earnings estimates, PE ratios are now under 12.
Lots of pessimism in those figures, as I think you can see from the second chart, which compares profits according to the NIPA calculations (which in turn are based on IRS data), and standard earnings calculations based on what companies report using GAAP and writeoffs. I note that the NIPA measure of profits is much less volatile than the S&P measure, and to my eye the NIPA series tends to lead the S&P series. NIPA profits are just a shade below their all-time high (as of last March), while S&P profits are still almost 25% below their all-time high. If the NIPA series is indeed a leading indicator of reported profits, then there is plenty of good news on the profits front to come.
How reasonable people can look at these strong profits numbers and conclude that we are on the verge of another recession or even a depression is beyond me.
What we should be concerned about is not the absence of profits but the fact that while corporations are generally very profitable these days, they are noticeably very reluctant to invest those profits. Record levels of profits and tepid job creation is a sign of a lack of confidence in the business community, and it's not hard to understand why: consider the almost unprecedented anti-business attitude that emanates from the White House; the out-of-control federal spending that creates deep-seated fears of an eventual surge in tax burdens; the Congressional urge to dump huge new regulatory burdens on private industry; and the Federal Reserve's unprecedented purchase of $1 trillion of MBS, which creates a mountain of uncertainty in regards to future inflation and the value of the dollar. Here is a video of Steve Wynn making his views on the subject quite clear.
Posted by Scott Grannis at 11:08 AM