Consumer Confidence

Two weeks ago we showed the notable cyclical collapse in Goldman Sachs' business cycle 'Swirlogram', due to a combination of downward revisions in over-adjusted data and actual economic decline. The latest 'swirlogram' shows that the situation has gone from bad to worse. While hope remains due to strength in AUD and CAD (commodity) currencies, Consumer confidence, global PMIs, and Industrial metals have all worsened significantly pushing the Global Leading Indicator momentum down notably. The next key indicators Goldman are watching are Belgian and Dutch manufacturing, Japanese Industrial Production Inventory/Sales, and Korean exports and they remain cautious of the increasing fiscal drag in the US.

The last decade has seen significant changes in media and communication. In a world where there is an ever louder cacophony of news sources competing for our attention, any one particular story has to be communicated at a particularly high volume if it is to attract notice. UBS' Paul Donovan warns that this perhaps gives a tendency to sensationalism. For financial markets, Donovan notes, there is a risk that these changes in the world of media will impinge on the calm and reflective world of economics. Economists rely on sentiment data as a leading indicator for future economic trends. If individuals are overreacting to events relative to the past, however, sentiment may not be as useful as a barometer of future economic activity. In the US a certain economic hysteria seems to be developing, amongst consumers in particular (especially compared to Europe) and Donovan suggests investors would be wise to treat US sentiment data (particularly consumer sentiment data) with some caution as American investors appear to react more strongly to the underlying economic events.

Last week we laid out the apparent 'blueprint' from the EU Commission for every other country with a banking system in which non-performing loans are soaring. With Mario Draghi's patsy in place at the Cypriot Central Bank, happy to hand over the nation's gold at the beck-and-call of the EU leaders - despite the Cypriot President's disgust at the 'coercion' of the new deal chiding the central bank for "catching the government by surprise," it now seems, as this Cyprus Mail op-ed explains, that the people of this nation are ready for change - real change, , otherwise, "we may wake up one morning and find the country has completely shut down, crushed under the weight of its mounting, unserviceable debts with no banks, businesses or services able to operate."

The stock market is not crashing yet, but there are lots of other market crashes happening in the financial world right now.  Just like we saw back in 2008, it is taking stocks a little bit of extra time to catch up with economic reality.  But almost everywhere else you look, there are signs that a financial avalanche has begun.

Well if this doesn't send the market into all-time record high territory, nothing ever will: seconds ago the UMich Consumer Confidence plummeted from 78.6 to 72.3, on expectations of an unchanged 78.6 print. This was not only a 9 month low in the index, but more importantly the biggest miss to expectations in recorded history! Both conditions (84.8, Exp 89.5, Last 90.7) and expectations (64.2, Exp.70.0, Last 70.8), imploded, with the current conditions number the worst print since July and posting the biggest drop since August 2011. Surely if retail sales was not a sufficient Conviction Buy signal for the Fed, then Consumer Confidence should send Kevin Henry, who is now mainlining a trail mix cocktail of Redbull, Caffeine and Meth, into F5 overdrive. And if that doesn't do it, the final economic miss of the day, Business Inventories which also missed expectations of a 0.4% print, and dropped from 0.9% to 0.1%, the lowest since September 2011 and biggest miss since September 2012, should certainly cement today's 1600+ S&P close.

There was little in terms of overnight newsflow to spook algos, but the tone is decidedly sour this morning following a lack of either the now traditional Japan or Europen-open buying ramps. The primary reason for this may well be the ongoing decline in the USDJPY which failed to breach the 100 barrier yesterday, coming as close as 99.95 before the Mrs. Watanabe onslaught had to be called off despite some more jawboning from Kuroda whose headlines are now summarily ignored, and which appears to have set a line in the sand for Japan, whose market naturally closed lower following this strengthening in its currency. Similarly troubling was the dip in the SHCOMP which closed down -0.58%, this despite the epic M2 and credit injection reported yesterday: if new liquidity can't send the market higher, what can?

The week ahead is light on major market moving data releases. From a policy perspective and in light of the recent moves in treasuries, FOMC minutes are likely to be followed by markets. Retail sales in the US are likely to print below consensus both on the headline and on the core metrics. That said, this needs to be seen against the backdrop of first quarter retail consumer spending data surprising to the upside. Producer prices are also likely to come in on the soft side of market expectations. Finally, do not expect large surprises from the U of Michigan consumer confidence.

Have you ever done something really stupid, just because you were in love? Something you look back on and cringe, thinking “why on earth did I do that?” Of course. Who hasn’t? In the world of economics and finance, they call this ‘sentiment’. Consumer confidence, business confidence, investor confidence… these are basically emotional readings. Screw the numbers. To hell with the truth. It’s all about how people feel. It seems crazy, but it’s true. Right now, for example, ‘sentiment’ is telling us that the euro crisis is over. It’s telling us that the debt ceiling is pretty much resolved. And, after taking five years to reach pre-crash levels, it’s telling us that the stock market is once again safe for the average investor. Yet the numbers tell a completely different story. Something just doesn’t add up. Investors are throwing caution to the wind right now... ignoring the basic fundamentals and focusing exclusively on euphoric sentiment. (Or central bank policy). We can personally attest, and any boxer will tell you, that it’s the punch that you don’t see coming which knocks you out.

What is the meaning of the markets hitting new all-time highs.  The general consensus of the analysts and economists is that the rise in capital markets, given weak current economic data and a resurgence of the Eurozone crisis, is clearly a sign of economic strength; and, combined with rising corporate profitability, makes stocks the only investment worth having. There is, however, a more pragmatic perspective. Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability.  However, these actions are finite in nature and inevitably it will come down to topline revenue growth.  However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth. The reality is that all the stimulus and financial support available from the Fed, and the government, can't put a broken financial transmission system back together again.  Eventually, the current disconnect between the economy and the markets will merge.  Our bet is that such a convergence is not likely to be a pleasant one.

Succinctly summarizing the positive and negative news, data, and market events of the week...

We cautioned readers in 2011 that in a broke world in which the ridiculously named "muddle-through" has miserably failed, a global wealth tax seeking to expropriate some 30% of all financial assets is coming. Few took it seriously, and why should they - after all the market has been blissfully rising before and ever since then, which implies everything was ok, right? Wrong, as those who are lining up right now in the Cyprus late of night not to buy a shiny new iTrinket, but to access a measly €300 of their own money would promptly admit. Naturally, if more of our Cypriot readers had paid attention, they would have far more of their own money at their disposal right now, instead of having to beg Merkel's emissaries for a €300 handout tomorrow. Now, a year and a half later, the realization that the global wealth tax is not only coming but is inevitable in practically every developed country, is finally sinking in, as this interview with Marc Faber confirms: "Until now, the bailouts in Europe and the U.S. were at the expense of the taxpayer. And from now onwards, in my view, the bailouts will also be at the expense of the asset holders, the well-to-do people. So if you have money I am sure the governments will one day take away 20-30% of my wealth."

He is correct, but probably optimstic.

While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory. Then Bersani, who has been tasked to form a government until tomorrow, said that the possibility of a broad coalition government does not exist, adding that no lasting government is possible without him as a premier, and requesting that Grillo's Five Star party not block his path to government, for which we wish him the best of luck as moments later Five Star ruled out all external support for a broad government and would vote no confidence for Bersani. Then we got news that the Italian financial police has searched the Nomura in Milan in connection with the Monte Paschi case, which means even more skeletons in the closet are about to be uncovered. Finally, Italy just held a 3.5% 5 and 4.5% 10 year bond auction in which the country raised less than the maximum targeted €7 billion, and in which the Bid to Cover on the 5 Year dumping to the lowest since 2002, with bidding quite soft and the yield rising to 3.65% versus 3.59% previously. This has resulted in a blow out in Italian yields by 16 bps to 4.73% compared to 4.705% earlier. End result, as noted yesterday, has been an acceleration in the rush out of the EUR, with the EURUSD sliding to under 1.28 for the first time since November 21, a blow out in Greek bonds with yields pushing up 55 bps to 12.68% and a push for real safety (sorry, not the DJIA) in the form of German 2 Year bonds, which have dipped to -0.018%, the lowest since December, on rising fears that despite endless lies out of its bureaucrats, Europe may not be fixed after all.

Houston we may have a problem: with the DJIA trumpetedely hitting new all time highs day after day in March, one would expect that its traditional second derivative - US Consumer Confidence, would be at all time highs as well, or close thereby. One would be wrong, because according to the Conference Board, March consumer confidence plunged to 59.7 from 69.6, and well below expectations of a 67.5 print. Both components of the index dipped, with both the present situation and expectations indices sliding from 61.4 and 72.4, to 57.9 and 60.9, respectively. And just to make sure the S&P ramps to all time highs on ongoing miserable economic, corporate profit and, of course, sovereign insolvency news, we got both New Home Sales, dropping from 431K to 411K, missing expectations of 420K, and the Richmond Fed also missing expectations of a 6 print, dropping from last month's 6 to 3. All in all, if this latest round of ugly and rapidly getting worse economic data doesn't send the S&P to new all time highs, nothing will. Well, perhaps another European country going broke may do the trick...

Calmer markets today, but European officials are finding it hard to put the cat back in the bag.

Another session in which the market continues to be "cautiously optimistic" about Europe, but is confused about Cyprus which keeps sending the wrong signals: in the aftermath of the Diesel-Boom fiasco, the announcement that the preciously announced reopening of banks was also subsequently "retracted" and pushed back to at least Thursday, did little to soothe fears that anyone in Europe has any idea what they are doing. Additional confusion comes from the fact that the Chairman of the Bank of Cyprus moments ago submitted his resignation: recall that this is the bank that is supposed to survive, unlike its unluckier Laiki competitor which was made into a sacrificial lamb. This confusion has so far prevented the arrival of the traditional post-Europe open ramp, as the EURUSD is locked in a range below its 200 DMA and it is unclear what if anything can push it higher, despite the Yen increasingly becoming the funding currency of choice.