April 12, 2023

The Barometer

You do the math. 

Did I tell you that story?  I’ll tell it again.

Karen called the Wall Street Journal subscription department.  This was years ago when we were still taking physical delivery at our Denver home.

She said, “You do the math! The price has doubled.”

Silence on the other end.  Some background clicking noises.

Karen said, “Are you still there?”

The customer service rep replied with an Indian accent (apologies but it’s true), “I am doing the math.”

We still chuckle about that.

Sector Demand trends, Apr 12, 2023, data from marketstructureedge.com

But here’s some math. See the image? That’s the composition of the stock market by sector at Apr 10, showing Demand trends (with a nod to EDGE user John C for turning us onto the view).

The stock market is a barometer. For what? Supposedly the economy.

Here’s some data.  I pulled up the Sifma 2022 Factbook. Everybody these days has a fact book. Maybe we should publish one.

Anyway, Sifma is the association for market professionals, a big lobbying organization.  NIRI should follow that lead. I digress.

Down in the bowels of the data is a comparison of US consumer-price index data with real and nominal GDP, the country’s output. 

Of course, most of what’s called “output” is actually consumption.  Quick economic lesson: GDP is comprised of consumption, business investment, government spending, and the import/export balance.

Only one grows relentlessly. Government spending. I don’t know why it’s part of GDP. But whatever.

And consumption is 70% of GDP.

Real GDP – those four components adjusted for inflation – rose 22% 2008-21.  Nominal GDP, raw unadjusted data, was up 43%. It’s distorted by inflation in its various forms including de-sheeting (charging the same for less product, which you find everywhere from bags of coffee to rolls of toilet paper to boxes of cereal) so it’s rarely referenced.

The official CPI data reported by Sifma was up 29%, 2008-21. 

So inflation rose more than real GDP. Are we really growing?

The Dow Jones Industrial Average has roughly doubled since Spring 2008, a return of about 6.5% per annum before taxes and inflation (back those out and returns fall 50%).

That’s better than either inflation or GDP, unless inflation stays near 5%.

Ron Baron, the 80-year-old proprietor of the Baron Funds (AUM about $50 billion, Ron’s net worth, about $5 billion) says he trades depreciating assets called dollars for appreciating assets called stocks.

Good strategy. But I think it’s an even better strategy to collect management fees. Again, I digress.

One thing is clear. The stock market cannot be a barometer for the economy if it’s behaving differently than the economy. 

If inflation is outstripping GDP, what you should see is rising debt (and rising prices, yes).


By nearly every metric, debt of all kinds is at record levels. When output exceeds consumption, debt falls. There’s money left over to pay it down.

Well, that’s not happening. It should be. But it’s not.  And I’ve just described with two key facts what’s wrong with the Federal Reserve’s strategy. 

Anyway, so exactly how is the stock market a barometer?  Well, maybe it only tells us the rate of depreciation of the dollar and the degree to which investors are trying to escape that debilitating effect.

What’s that mean for investors and public companies? For one, don’t expect the stock market to warn you about economic risk.  That’s not its purpose anymore.  Expect it to tell you about the risk to the dollar.

And what risk is that?

Paul (Elliott) Singer offered a shrewd view in the WSJ’s Weekend Interview (subscription required).  Yes, he’s the famous activist investor behind the firm bearing his middle name.

He says capitalism can survive a credit crisis. 

That’s what you get when banks fail and societies revert to cash on the barrelhead.  Reminds me of a sobering line attributed to Arthur Brooks, erstwhile chief of the libertarian think tank the American Enterprise Institute:

There’s nothing wrong with this country that can’t be cured by a long hard recession. 

Nobody wants that but it solves a lot of problems that won’t solve themselves because central banks and politicians keep getting in the way. When we can’t seek self-actualization and instead have to focus on food, clothing and shelter, we stop meddling in each other’s affairs, and stuff resets.

But Singer says capitalism might not survive hyperinflation – the unexpected collapse of the currency.  That the stock market is rising faster than output should be a claxon. Like bitcoin back over $30,000.

Wrapping, have a last look at the image here. The sector with the best uptrend is Healthcare. Yet even in the best, two-thirds of stocks are doing something other than showing rising Demand. Keep that in mind for expectations of what stocks will do next. 

This kind of data should be core to investor-relations at public companies. It’s how money hedging dollar-depreciation behaves. And investors, you need to know it too.

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