Expect a Plunge in Corporate Earnings and Another Crack in the Economic Narrative

Peter Schiff has been saying for months that the US economy isn’t nearly as good as Federal Reserve and government officials want you to believe.

Mainstream analysts and pundits seem to be doing their best to toe the line and paint a rosy picture, but we are starting to see a lot of cracks in the narrative. It’s becoming increasingly difficult to ignore the signs of real trouble in the economy.

A recent CNN story warning us to brace for a “rare recession in corporate profits” as fourth quarter earning begin coming in over the next week serves as a case in point:

Fourth-quarter earnings from S&P 500 companies are expected to shrink by 5%, potentially marking the first back-to-back decline since 2009, according to S&P Capital IQ. The timing couldn’t be much worse for the stalled-out U.S. stock market. Wall Street just wrapped up its worst year since 2008 and stocks are trading at expensive valuations compared with historical norms.”

CNN blames the crash in oil prices and the dramatic rise in the US dollar (aka a dollar bubble) for putting the squeeze on earnings. Businesses based on commodities, particularly energy related companies, are expected to be hit particularly hard. But as CNN points out, the earnings trouble is not purely commodity based:

Even if the gloomy energy sector is excluded, S&P 500 earnings would be expected to rise just 0.6%.”

Since before the Fed raised interest rates in December, Peter has insisted the economic data doesn’t support the move. As a result, Peter believes the Fed won’t be able to maintain the increase. In fact, he’s said the Fed will likely drop rates back to zero and initiate another round of quantitative easing. The Fed may even have to take rates below zero.

Of course, virtually nobody in the mainstream is saying this. But there is an interesting observation in the CNN story that hints at exactly what Peter is saying:

The timing [of poor cooperate earnings] couldn’t be much worse for the stalled-out U.S. stock market. Wall Street just wrapped up its worst year since 2008 and stocks are trading at expensive valuations compared with historical norms. At the same time, investors can no longer count on the Federal Reserve to juice risky assets with stimulus. Last month, the Fed raised interest rates for the first time in nearly a decade.”

Notice the terminology the CNN reporter uses – “juice risky assets.” This dovetails with something a former Dallas Federal Reserve Bank president said the other day. The mainstream pretty much ignored Richard Fisher when he essentially admitted that the Fed manufactured the stock market recovery. Peter picked up on it:

He admitted that he and his buddies at the Federal Reserve engineered – and that was his word, ‘engineered’ – a stock market recovery rally. That they front-loaded a bull market. He said this. He said the Federal Reserve did it deliberately to create a wealth effect. Yes, they wanted to create all this phony wealth based on an artificially pumped up stock market. They wanted all this phony wealth to cause us to make stupid, irrational, reckless decisions.”

So, the Fed created a stock market bubble. Now that the central bank is trying to wean the market off the meth it injected, the markets are reacting – and not in a good way. When you add to that the overall negative economic pressures we’re seeing, the Fed is left with two choices: let it all come crashing down or get the addict back on the meth. Despite CNN’s assertion that investors can’t count on the Fed to bring back the juice, it seems highly likely it will.

Of course, CNN tried to put a positive spin on the earnings news, saying analysts expect corporate earnings to rebound in 2016. But it seems far more likely this “recession in corporate profits” is yet another canary in the coal mine.

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