Isaac Gilinski of Brickell Analytics Investigates the Historical Analysis of GDP vs. SPX Growth
Could we be on Route to a Second Great Depression?
Navigating the financial landscape is a complex undertaking, and given the volatility of the markets, even the most seasoned investors have difficulty understanding current market predictions. Just as markets go up, invariably and inevitably, they must also come down. The only real questions are when it will happen, and how much will it hurt.
According to Isaac Gilinski, the owner of Miami-based Brickell Analytics which provides customized macro-based research on global markets, the answers to these two big questions are: when the last wave up reaches 3,150 and very. And it is all because SPX growth relative to GDP growth at the moment is not just unhealthy. To put things bluntly, it is in complete disarray.
Analyzing Periods of Expansion and Recovery (GDP vs. SPX)
Here is why: since 1949 there have been roughly 11 periods of expansion or recovery, with each period followed by a recession and stock market decline. However, Brickell Analytics’ Isaac Gilinski drilled deeper into the relative concurrent growth of the SPX and GDP, and discovered something very interesting: during expansions, a SPX growth multiple of one or even two (i.e. SPX growth of up to 200 percent more than GPD growth over the same period) preceded an economic decline, while a SPX growth multiple of more than two preceded a major crash. Isaac Gilinski takes note of four expansion periods that fall into this latter category and are as follows:
- From 1954 to 1975, the SPX-to-GDP growth multiple was 5.4x, and was followed by a 20 percent crash.
2. From 1991 to 2000, the SPX-to-GDP growth multiple was 5.5x, and was followed by a 50 percent crash.
3. From 2002 to 2007, the SPX-to-GDP growth multiple was 3.6x, and was followed by a crash of 58 percent.
4. In the current expansion that started in 2009, the SPX-to-GDP growth multiple is an unprecedented 7.4x GDP — which suggests that the impending crash is going to be massive.
With this in mind, the 7.4x SPX-to-GDP growth multiple linked to the current expansion is based on the SPX hitting 666 on March 6, 2009 — which some people might believe is too low of a base for the analysis to be valid. However, Brickell Analytics’ Isaac Gilinski is well equipped to neutralize this objection. Here is his sobering and persuasive take on the matter:
Even if we use the 1075 base from October 2011, and at which time the USD-JPY plunged to an all-time low of 75, the SPX-to-GDP growth multiple is still 5x, which makes it the third highest since 1949. What this means is that the best-case scenario is we are headed for another Great Recession.
Expansion of the G3 Central Bank Balance Sheets
During the early 1990s, central banks increased their participation in the marketplace, leading to a distortion in the SPX-to-GDP ratio. Since the early 90s, the SPX has risen by multiple of 6 times, as the Fed has expanded its balance sheet by a multiple of up to 10 times, as per the chart below. In the latest expansionary period since 2009, the combined balance sheet of the world’s three largest central banks, the Fed, the ECB, and the BOJ, has gone from a low of $4 trillion in 2006 to a high of almost $14 trillion right at this time. As the balance sheet of the G3 central banks has expanded, the SPX has rallied by the same proportional amount, as can be appreciated by the second chart below. As the central banks continue to generate excess credit, the credit continues to flow into the markets in the form of leverage, leading to a further inflated or “out-of-whack,” SPX-to-GDP multiple, as very little of this excess credit ends up flowing into the real economy. Which means that when the eventual recession arrives, the market will have to crash by a large amount to align itself back with the economy and the GDP.
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