As turbulent economic clouds loom, the atmosphere grows increasingly heavy with uncertainty. The feeble recovery cycle, running for almost seven years, now seems to be faltering.
On Tuesday, Intel, the renowned chip maker, announced it would cut 12,000 jobs. This decision, fueled by a significant 10% drop in PC sales during the first quarter, illustrates a long-anticipated shift away from personal computers.
Intel aims to reinvent itself by pivoting towards cloud computing and Internet of Things (IoT) technologies. “I am confident that we’ll emerge as a more productive company with broader reach and sharper execution,” stated CEO Brian Krzanich.
This strategic shift may indeed bear fruit over time. Unlike Kodak, which failed to adapt, Intel is well-positioned to thrive as computer chips find their way into a myriad of devices beyond just personal computers. As long as they don’t repeat past mistakes with tablets and mobile tech, their future appears promising.
Interestingly, despite these layoffs, Intel reported profits that surpassed analyst expectations. However, this news is little comfort for the laid-off employees, who must now seek new employment.
Big Bank Quinfecta
In a broader context, Intel’s workforce reductions are not an isolated incident. This trend may indicate a wider economic slowdown rather than just a corporate restructuring.
Total earnings growth for the first quarter may turn negative for a consecutive fourth quarter. The financial sector has been particularly hard-hit, experiencing significant declines in investment banking revenue.
Major banks reported devastating numbers: Morgan Stanley’s investment banking revenue fell 18%, JPMorgan Chase saw a 24% decline, Goldman Sachs recorded a 23% drop, Citigroup dropped 27%, and Bank of America fell by 22%. The overall situation is dire, as illustrated by Goldman Sachs’ report, which indicated a staggering year-over-year net income drop of 60%.
“Goldman Sachs reported net earnings of $1.14 billion for the first quarter ended March 31, 2016, marking a 48% increase from the fourth quarter of 2015 but a sharp decline from $2.84 billion a year prior,” reported DSnews.
Rational Insanity
The economy resembles a week-old tomato, transitioning from overripe to rotten. As of April 19, the Atlanta Fed’s GDPNow model projects real GDP growth at just 0.3% for the first quarter, suggesting an economy barely scraping by.
Such a meager GDP growth rate does not offer the escape velocity needed to address rising debt levels. In fact, achieving this minimal growth has been a strenuous process. As John Mauldin recently highlighted, U.S. non-financial debt grew 3.5 times faster than GDP last year.
Like the Ouroboros, the mythical serpent devouring its own tail, we are rapidly consuming our future. Yet, in a strange contradiction, stock prices continue to rise. DOW 18,200 seems to be the next target, which feels utterly irrational.
But perhaps this inflated asset price bubble is simply the logical outcome of the Fed’s persistently low interest rates. The current yield on a 10-Year Treasury note hovers around 1.87%.
Would you prefer to lend $1,000 to the U.S. government for a decade in exchange for a mere $187 return, or would you opt for investing in a mix of growth and dividend stocks with a chance for greater returns in less time? These are personal choices each investor must make.
As the stock market rebounds from earlier losses this year, it seems to be responding positively to these uncertainties. However, as we approach May, the old adage to ‘sell in May and go away’ may be more relevant than ever. In the current climate, Treasury notes appear an unwise choice.
Sincerely,
MN Gordon
for Economic Prism
