US GDP numbers came out this morning and no surprise they were disappointing. Annualized Q1 Real GDP growth was revised downward from 1.1% to 0.8% and Q2 Real GDP growth was estimated to be only 1.2%. It is important to note that Wall Street expected the US economy to grow 2.6% in the second quarter. Since the stock market is a discounting mechanism for future corporate earnings it should concern investors that GDP and corporate earnings growth continue to disappoint yet the ramp up in projected GDP and earnings growth is continually moved forward a quarter or two. It is very disappointing that at the DNC Convention both Clinton and Obama just don't get it and continue to preach that all is well. It is also disappointing that whereas Trump's assessment of where we are economically is much more accurate he's a lunatic. When I vote in November I think that I will choose Option C - None of the above.

Something has definitely changed as the economies of the G7 countries continue to slow. It is also concerning that emerging markets, which are the hoped for source of GDP growth for the developed economies, are also in bad shape in terms of the crash in commodity prices and runaway debt. Economies that have near-zero growth simply cannot support rising debt levels. The chart below graphs US Total Debt (public and private) and US Nominal GDP over the time period 1975 to 2015...

Whereas GDP increased by a factor of 10 over the 40 year period total debt increased by a factor of 24. The annual increase in nominal GDP and total debt over that time period was 6.00% and 8.23%, respectively. Annualized nominal GDP growth in Q1 2016 was 1.3% versus the 6.00% average over the 40 year time period. The whole idea behind the reduction in interest rates was to get corporations and households to borrow and spend. Corporations borrowed to buy back stock rather then invest in the real economy and households just didn't borrow. Does a lower interest rate really incent corporations to invest in the real economy and households to borrow and spend when their expectations of future earnings growth are bleak? At these debt levels we are simply tapped out.

The chart below graphs federal goverment debt as a percent of GDP over the time period 1982 to 2016...

There is growing evidence that a ratio of public debt to GDP in excess of 80% subtracts from future economic growth. Given that US budget deficits are projected to grow to over one trillion dollars in the near future, and the fact that the US is already at a public debt to GDP ratio approaching 110%, the growing level of public debt in relation to GDP subtracts from economic growth and will only get worse as time goes on. Even though Wall Street (for self-interest reasons) and the Republicans and Democrats (for political survival reasons) view low economic growth as transitory this new regime of near-zero growth for developed economies with high levels of debt (i.e. all of them) is most likely permanent.

Things to think about: The primary driver of PE ratios is earnings growth. At near-zero earnings growth the current PE for the S&P 500 of 25 times GAAP LTM earnings is unsustainable. The recessions of 2000 and 2008 saw the stock market decrease by 40% to 50% and then recover primarily as the result of Fed intervention. If the new regime is near-zero growth and the stock market adjusts to this new reality then that adjustment will be permanent (i.e. there will be no rebound). For those of us approaching retirement the decisions that we make in the very near future with regards to portfolio allocation will determine whether we are princes or paupers in the retirement leg of life's journey.