In yesterday’s post, I wrote that higher costs will result in lower growth. We also have other reasons to be concerned that future growth rates won’t match those of the past—with significant impacts on investing.

Here’s the short version: lower future economic growth is very likely to result in lower future stock returns. I’ll get into the details below, but one chart makes the case quite clearly.

This is a follow-up of sorts on yesterday’s post, in which I talked about resource constraints. Today, I want to take another look at that topic—specifically, how resource constraints will negatively affect growth going forward.

I’m writing this from Chicago, at the Commonwealth Retirement Symposium. My talk tomorrow, titled “The New New Normal,” will focus on how growth is expected to be lower in the future than it has been historically. I have written about this before—and am in good company with Grantham and Arnott, among others—but there’s a different way to look at the problem that may add to the discussion.

A point I have been making about the stock market recently is that it makes no sense to bet against it in the short run. The momentum is clearly on the upside, and there are no apparent reasons why that trend can’t continue. We may very well see new records for a while.

I do not, however, expect the trend to go on forever. At some point, the market will top and decline. We are already well into very unusual territory for how long an increase can last without a downturn. At some point, a decline is certain, and the longer it takes, the more certain it becomes.

A point I have been making about the stock market recently is that it makes no sense to bet against it in the short run. The momentum is clearly on the upside, and there are no apparent reasons why that trend can’t continue. We may very well see new records for a while.

I do not, however, expect the trend to go on forever. At some point, the market will top and decline. We are already well into very unusual territory for how long an increase can last without a downturn. At some point, a decline is certain, and the longer it takes, the more certain it becomes.

Two completely non-market-related stories today made me think about trends and changes. The first is about how an aquifer in the American Midwest has started to run dry. Farmers, who for generations had drawn water from it, now have to change crops because the water just isn’t there anymore. This is a trend that has run its course and is not coming back. It will take decades or centuries for the aquifer to recharge, even if left completely alone. Reading the story, the farmers have known what was coming, but they seemingly didn’t make any adjustments until they actually ran out. As a result, some of them are in financial trouble.

The other story is a comparison of the apparent patience of the peripheral European countries with their self-inflicted depressions in the name of preserving the euro. The article compares the situation in Italy and Spain with that in Argentina, where similar economic sacrifices were made to preserve a link between that country’s currency and the U.S. dollar. The commitment was total—right up until Argentina’s economy had shrunk by about 8 percent and subsequently collapsed in short order. It was only then that the country abandoned the dollar link.

The economies of the peripheral eurozone have shrunk about 8 percent right now, suggesting that perhaps the euro is not as certain as it has been assumed to be. The euro has not collapsed, but what happened in Argentina certainly suggests that it is a possibility.

The point here is that trends continue from their own momentum, often beyond what anyone would have thought possible, and then collapse. The housing market is the most recent such example here in the U.S.

Right now, we have many trends moving in the right direction—the deficit and the housing market recovery are two examples. Both are moving the right way for fundamental reasons, and they are not that far along. Moreover, they are still in what can be considered “normal” territory. The gradual recovery of the U.S. economy seems to be just such a trend.

But the primary trend supporting the increase in the stock market is increasing corporate profit margins. This trend has been going on a long time, and it is already at record levels. Even if margins remain at current levels, the idea that they will continue to expand demands that costs, especially employment costs, continue to decline. This is a trend that needs to be watched closely.

There may still be some juice to this. Who knows? But, as the trend gets older and older, and more and more into record territory, the possibility of stabilization or a reversal gets more and more likely. With current market valuations pricing in a great deal of good news, the consequences of that could be bad. Just as with margins, the upward trend of the stock market bears close watching, and plans for a decline need to be made.

As I said above, it makes no sense to bet against the market right now, but it does make sense to think about what to do if and when the market declines. Unless the laws of economics have been repealed, we know that such a decline is coming and that the time to think it through is now.

I have written before about the difference between precision and accuracy, and the challenge of distinguishing signal from noise. With the constant barrage of economic and stock market data, much of which is taken to ridiculous levels of precision—one part in a thousand, for example, for the unemployment rates—the problem is particularly acute. What makes it even more ridiculous, of course, is that the figures will often be revised substantially. Precision is an illusion in this area.

This isn’t anyone’s fault; it’s just the reality of collecting messy data across a massive economy in a massive country. It is remarkable that the statisticians do as well as they do.

I talked yesterday about how the U.S. has been implementing its own austerity plan—by reducing federal and general government spending over the past couple of years—and how that has led to slower growth than would otherwise have been the case. Many would argue that this is nonsense, given the deficits we have been running, but a look at the stats from yesterday demonstrates that the government as a whole has in fact detracted from growth.

What has largely allowed this detraction to occur—while also allowing overall economic growth to continue—has been the Federal Reserve’s support of the financial markets and consumer spending by forcing down interest rates. You can certainly argue about how long the policy should continue or how damaging the exit will be—both questions I have addressed before—but, in my opinion, the idea that lower rates have allowed consumers to de-lever and supported the housing market recovery is beyond question.

I saw an interesting chart the other day, in a piece by the analyst Jim Paulsen, that showed how the U.S. economy had performed net of the government sector—which, to spare you the suspense, was actually quite well. We’re also seeing increasing debate over federal spending cuts: Are they needed in the short term in the U.S., or are they doing more harm than good?

The austerity debate is also well underway in Europe, and it is starting to be resolved in favor of more spending—at least on a political level. That’s a different discussion, though. Here in the U.S., it is both easier and harder to justify less austerity. Easier, in that we can better afford it; harder in that we need it far less.

Yesterday, two of my colleagues and I were discussing the end of the world, a conversation prompted by some of my recent posts, as well as a call from an advisor seeking help with a client who has a nine-figure net worth and fully expects the world to end. In discussing what to do, we realized we hadn’t actually defined the problem: what does the end of the world mean? The last time we seriously had this discussion, in 2008–2009, we thought we knew what the end of the world looked like, but in talking it over, we realized we didn’t. So, in that vein, here’s my attempt to define various “end of the world” scenarios and what to do about them.

Defcon 1 – The U.S. today: economic uncertainty and looming hazards

Yesterday, I was asked to respond to an article on the views of Peter Schiff that appeared on the website Moneymorning.com. I’ve written a couple of these responses, and I think it makes sense to keep addressing questions as they come up, as many of these issues are worth a look on their own merits. The headline of the piece in question reads, “2/3 of America to Lose Everything Because of This Crisis.” If that’s true, it certainly deserves at least one blog post, right?

I’m familiar with Mr. Schiff’s views, as he’s a regular poster on various financial websites that I read. He also shares his opinions on his own website. His views are well known, and he’s not alone in them.

For some time, I’ve been convinced that a sustainable expansion has been going on in the economy, but I do have some concerns. The primary one is employment. While housing continues to recover, business investment is doing relatively well, and consumer spending is growing more strongly than expected, all of this depends on employment growth. For the next several months, the signs are good that it should continue.

What will increasingly matter, however, is whether the job growth continues, as well as the quality of the jobs, and here I have some worries. One of the biggest is how Obamacare will affect both the amount and type of hiring. This isn’t a political argument; the law contains multiple incentives that should—if employers are rational—influence their behavior.