US Expansion Has Years to Run?

Hugh Son of CNBC reports, Jamie Dimon says the US economic expansion ‘could go on for years’:

“If you look at the American economy, the consumer is in good shape, balance sheets are in good shape, people are going back to the workforce, companies have plenty of capital,” Dimon told analysts during a conference call.

“It could go on for years,” he added. “There’s no law that says it has to stop. We do make lists, and look at all the other things: geopolitical issues, lower liquidity. There may be a confluence of events that somehow causes a recession, but it may not be in 2019, 2020, 2021.”

When the CEO of the biggest and most powerful bank in the United States says the "expansion could go on for years," it's definitely worth noting.

After crushing expectations, posting record first-quarter profit and revenue, Dimon has every right to feel very good about the prospects of the US economy going forward.

In fact, should the US economy continue to grow until July, it will be the longest expansion in US history, besting the period from 1991 to 2001.

But not everyone shares Jamie Dimon's enthusiasm for the US economy. Former Fed Chair Alan Greenspan appeared on CNBC earlier today stating the US economy will start to fade ‘very dramatically’ because of the entitlement burden:

“I think the real problem is over the long run, we’ve got this significant continued drain coming from entitlements, which are basically draining capital investment dollar for dollar,” he told CNBC’s Sara Eisen during a “Squawk on the Street ” interview.

“Without any major change in entitlements, entitlements are going to rise. Why? Because the population is aging. There’s no way to reverse that, and the politics of it are awful, as you well know,” Greenspan added.

While he said the economy looks “reasonably good” in the short run, he expects that over the longer term, growth “fades very dramatically.”

Greenspan isn't the only economist worried about entitlements. In a Wall Street Journal op-ed last month, Martin Feldstein warned of the coming debt crisis, stating most dangerous domestic problem facing America’s federal government is the rapid growth of its budget deficit and national debt.

In their quarterly economic review, Van Hoisington and Lacy Hunt begin by describing the downturn unfolding right now:

The slowdown in U.S. economic activity that started in 2018 has continued into 2019, as confirmed by deteriorating indicators in cyclical bellwether sectors like autos, housing and capital spending, as well as other broad economic aggregates. This has now been acknowledged by the FOMC and recognized in the market, as revealed by declining yields in high grade money and bond markets. These developments reflect the unfolding of the following two major economic theorems:

1. Federal debt accelerations ultimately lead to lower, not higher, interest rates. Debt-funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high. Thus, additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions. With slower economic growth and inflation, long-term rates inevitably fall. 
2.  Monetary decelerations eventually lead to lower, not higher, interest rates as originally theorized by economist Milton Friedman.

When debt levels are inordinately high, more debt only provides a short-term boost to the economy but it fades quickly and followed by weaker economic activity. Stated another way, when debt levels are already very high, more debt is deflationary, not expansionary over the long run.

They then go through an incredible historical analysis to conclude:

The parallels to the past are remarkable, but there appears to be one fatal similarity – the Fed appears to have a high sensitivity to coincident or contemporaneous indicators of economic activity, however the economic variables (i.e. money and interest rates) over which they have influence are slow-moving and have enormous lags.

In the most recent episode, in the last half of 2018, the Federal Reserve raised rates two times, by a total of 50 basis points, in reaction to the strong mid-year GDP numbers. These actions were done despite the fact that the results of their previous rate hikes and monetary deceleration were beginning to show their impact of actually slowing economic growth. The M2 (money) growth rate was half of what it was two years earlier, signs of diminished liquidity were appearing and there had been a multi-quarter deterioration in the interest rate sensitive sectors of autos, housing and capital spending.

Presently, the Treasury market, by establishing its rate inversion, is suggesting that the Fed’s present interest rate policy is nearly 50 basis points too high and getting wider by the day. A quick reversal could reverse the slide in economic growth, but the lags are long. It appears that history is being repeated – too tight for too long, slower growth, lower rates.

In other words, the damage is already done, the US economy is experiencing the lagged effects of the rate hikes and even if the Fed cuts rates by 50 basis points, which looks highly unlikely in the near term, the economy will continue to slide.

But if the US economy is slowing, you wouldn't know it by looking at the stock market, the S&P 500 is up 16% YTD and the major sectors are all up so far this year (click on image, courtesy of barchart):


Another thing worth noting, however, is while all the major sectors are up so far this year, Technology (XLK) is on fire, making a new 52-week high, while the three lagging sectors are Consumer Staples (XLP), Utilities (XLU), and Healthcare (XLV).

If the US economy is slowing, why are these stable/ defensive sectors lagging cyclical sectors like Financials (XLF), Industrials (XLI) and Energy (XLE)?

We are at an interesting point right now, is the S&P 500 ETF (SPY) about to break out to make new highs or will it roll over the the coming weeks? (click on image):


That remains to be seen but US long bond yields are rising and long bond prices (TLT) are rolling over of late. Still, this looks like a correction, not a major selloff (click on image):


But the chart that impresses me the most is the unbelievable rally in the US high-yield bonds (HYG) which have been on a tear lately (click on image):


Another positive note, emerging markets stocks (EEM) keep grinding higher after a sharp selloff last year (click on image):


What this tells me is despite growth worries, things may not be that bad after all. In fact, the global Purchasing Managers' Index (PMI) for the manufacturing sector inched up in March, coming in at 51.7, lifted by robust manufacturing activities in China and the United States.

However, the PMI reading for Europe suffered a four-month losing streak and fell below the 50-point boom-bust line to 49.9, extending intensified downward pressure.

So will Europe drag the US lower or is the US slowdown going to intensify in the coming months? Will US stocks make new highs and sustain their unbelievable momentum? Is Jamie Dimon right about the US economic expansion?

I don't know, I'm just giving you some food for thought in my weekly market comment. All I can tell you is I remain cautious for now and would use the weakness in some stable sectors to buy them here and would start taking profits on the sectors which have been on fire lately.

Below, Nobel-prize winning economist Paul Krugman discusses the next recession, unions and wages. And Alan Greenspan discusses why growth won’t last as the US labors under the burden of growing entitlement programs and weakness around the world.

Lastly, with stocks near all-time highs, is everything awesome again? With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Steve Grasso, Karen Finerman and Guy Adami.