from Birch Gold Group:
After the crazy year we’ve just had, one good question to ponder for a moment is: What does the U.S. economy look like as we head into next year?
To answer that, this article will examine three sectors by looking at economic activity (including Wall Street), the inflation situation, and of course physical gold.
So brace yourself, because if this plays out the way we fear it might, the economic storm on the horizon is less than one week away.
Here we go…
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Economists still can’t come to grips with an astronomically overvalued market
It’s amazing how long a virus can be blamed for “Economic Woes.” But that’s exactly how economists summed up 2021:
U.S. economic activity resurged in 2021 after a year marked by lockdowns and stay-in-place orders, with the rebound fueled by a combination of monetary and fiscal stimulus, as well as firm consumer spending.
However, against this backdrop, the second half of this year especially has seen an economy grappling with supply-side constraints and rising price pressures. Lingering virus concerns have compounded with still-elevated demand to push up inflation.
When the government hands out free stimulus money, and also places a moratorium on mortgage payments, it would be natural to expect increased consumer demand for products and services as a result. (Along with a little market mania for good measure.)
But thinking that these pressures and demand would ease early next year, as those same economists surmised, ended up complicated by Omicron jitters.
From the same article:
Goldman Sachs: The emergence of the Omicron variant increases the risks and uncertainty for the economy anticipates GDP will grow 3.8% on a full-year basis in 2022, or down from the 4.2% clip it saw previously.
Bank of America Economist Michelle Meyer: We think 2022 will be one of rebalancing, albeit only gradually… This should take some of the heat off of inflation but not quickly enough.
Wells Fargo: Supply constraints will gradually ease over the course of the next two years.
They’re understandably focused on supply issues, the virus (still or maybe again), and an imminent slowdown in 2022.
A new report from S&P Global calls the supply chain issues “the largest stumbling block for the U.S. economy.” That same report summarizes its economic outlook for 2022 as “cruising at lower altitudes.”
Some of the notable findings include:
- GDP growth looks to be slow at best through
- Inflation won’t subside to the Fed’s target rate (2%, in case you’ve forgotten) until late 2023 at best.
- The potential for a total of six interest rate hikes by 2024.
But perhaps the most interesting thing about all of these forecasts is they appear to ignore the signals from Wall Street. Namely, that the stock market is still grossly overvalued.
Reversion to the mean, the irresistible “financial law of gravity” threatens to bring the market crashing back down to Earth much like it did when the 1999-2001 dot-com bubble burst. That would be a drop of somewhere between 40-60%. Not a “correction,” not a “bear market” – we’re talking “people jumping out of buildings” bad.
Take a look at this chart showing stock valuations now almost as distorted as they were on the eve of the last real crash…
Of course, two other signals are also pointing at an overvalued market like a neon arrow.
The Buffet indicator continues to increase, with its ratio of market value to GDP sitting at 213% (Buffet thinks over 120% is dangerous).
The S&P 500 P/E ratio model is also way outside its healthy range. It currently sits at only 90% above its historical average, dangerously close to dot-com crash territory.
So to summarize, according to the information so far, the U.S. economy can look forward to slow growth, virus anxiety, and an overvalued market (among other things).
Not a good start, and it doesn’t look like inflation worries will be easing in 2022 either…
Sticky inflation grips the nation
“The U.S. may be stuck with higher inflation in 2022, and potentially beyond” is the headline of a forecast at the London School of Economics.
In fact, if either of the LSE’s “less comforting” models for PCE (which doesn’t even count those inconvenient food and energy prices) pan out, there won’t be much improvement through all of 2022 (and possibly beyond):
We examine two other scenarios which are even less comforting. We assume that the size of monthly price increases falls but does not reduce as quickly or as far, so that it reaches twice the pre-pandemic period average next June. In this case, annual PCE inflation would average 3.2 percent in the final quarter of next year.
Finally, if monthly PCE inflation holds at the latest monthly increase (of 0.3 percent) through next year, annual inflation in the fourth quarter of next year would be 3.9 percent.
To put this in perspective, as of October 2021, the PCE is 5.0%. An improvement of only 1.1% throughout an entire year won’t amount to much financial relief for already-wary consumers suffering from record inflation now.