Your comprehensive yet concise, one-stop summary of all the bullish and bearish events of the past week.
Two months ago, there were various prominent pundits who were furiously mocked and ridiculed by those whose job in the media it is to mock and ridicule, for suggesting what most know: that economic data is widely nuanced, massaged, adjusted, goalseeked and outright manipulated by various political interests. That someone would feign outrage by this allegation is laughable at best (and sorry, the "too many people were involved to keep it a secret" excuse is now absolute rubbish following the confirmation of Liborgate, yet another conspiracy theory until it became a conspiracy fact), yet all the "serious" outlets of insight did just that. Now that the election is over, for one reason or another "unnuanced" normalcy is about to strike back with a vengeance, as soon as tomorrow with the official release of November jobs data. And if the just released Gallup unemployment data is any indication, the amount of outright goalseeking by the fine folks at the BLS was nothing short of startling. Because after recording an adjusted unemployment rate of 7.4% in October, the November unemployment rate, based on a random sample of 29,308 adults, soared by a whopping 0.9% in one month to 8.3%, the most since the Great financial crisis itself! And furthermore, at 8.3% the unemployment rate is now the highest since May. Is it time yet for all those sellsiders to admit they were wrong weeks after producing beautiful pitchbooks of how 2013 will be "different this time" and the economy will soar? Or should we wait a few weeks first?
Ahead of today's presidential and congressional elections, Goldman provides some brief thoughts on various election-night (and beyond) events. From a viewer's guide to the poll-closing times to a discussion of the apparent 'closeness' of the race and post-election market performance, they note that equity performance post 'tight' races has been better than in elections where the winner is more clear-cut. This election has a twist though in that it will be immediately followed by debate on the fiscal cliff, and thus resolution of the election will reduce, but not eliminate policy uncertainty.
People are going to be pissed off no matter who wins this election and that is a very important social dynamic we believe is vastly under appreciated by the majority of mainstream pundits and analysts out there. This is also very distinct from the environment that prevailed in 2008. Should Romney win, the 28% of Americans that identify as Republican will be thrilled, and the remaining 72% will be largely upset and on edge. Should Obama win, similarly, the 32% registered Democrat with be thrilled and the remaining 68% will be upset and on edge. Hence, the 70% referred to in the title of this article. This is a recipe ripe for social unrest and it will be coming to our shores as we outlined recently in The Global Spring.
What if the fiscal cliff collides with a replay of the Bush vs Gore 2000 election fiasco...
Gallup just announced the results of their latest poll and find Romney has overtaken Obama 49% to 47% among 'Likely Voters'. Obama still holds the lead among 'Registered voters' but this headline was enough to cause a dramatic crash (back under 60%) in Obama's odds on Intrade's market. Critically, the entire post-QEternity bump that Obama-believers had bought, has now been retraced as it seems the old adage "As Goes AAPL, So Goes Obama" is proving true...
Whether it is a fringe-blog pointing out the statistical un-possibility (here and here), or a previously well-respected 'elite' pointing out the suspiciousness (here), most of the general public (or their media-based oracles) prefer not to swallow the red pill of reality with regard Friday's data SNAFU. However, given the political (and economic) consequence of a single-number, Gallup has decided to weigh in on reality as they note "even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers" as they analyse why the household results should be discounted heavily. Critically, they, like us, suggest the 'unemployment rate' needs to be replaced as a measure of joblessness, suggesting a far simpler (and more transparent) measure - Payroll-to-Population - would avoid the 'adjustments' and 'biases' that are inherent in the BLS's bafflement. The Gallup measure suggests, as one would perceive using common-sense, that the real jobs situation was essentially unchanged last month.
SS Ponzi is approaching a cliff.
Gallup's US economic confidence index surged 11 points last week (more than the 10 points when Bin Laden was killed) and has reached levels comparable to the pre-crisis highs from January 2008. As Gallup notes, it appears that the spark for the dramatic rise in Americans' economic confidence last week was the Democratic National Convention. A review of Gallup's nightly tracking results shows that the index was consistently near or below -25 each night in late August and early September, but then sharply improved on Sept. 4, the first night of the convention, to -18. Confidence then held at or near -18 through Sunday, despite the dismal August unemployment report Friday morning showing continued weak jobs growth. More specifically, the convention appears to have given Democrats and, to a lesser degree, independents, fresh optimism about the economy. We can only assume that the cognitive dissonance of the hope-holding believers-in-change will not carry through to real economic growth or all those other 'hopers' - the 'this-time-QE-is-different' crowd - will be sadly disappointed.
One of the deepest mysteries related to the ongoing rally in U.S. equities is the persistent lack of retail investor involvement. QAs we have vociferously noted, U.S. equity mutual fund flows remain solidly negative and interest in single stock trading among individual investors is similarly moribund - while corporate bond volumes remain flat and Treasury volumes higher. As Nick Colas, of ConvergEx group, notes, one missing link to explain this dichotomy must be the fundamental lack of financial literacy among U.S. retail investors, yet this relationship is seldom mentioned as a reason for this group’s ongoing apathy in the face of 4-year highs for domestic stocks. You might argue that “It was always thus…” and that is a fair point. American investors haven’t grown dumber on financial matters in the last decade; they never had the requisite knowledge to begin with. But it does appear that the events of the last few years have caused some kind of “Tipping point” with regard to investors’ ability to process the world around them.
With the polls apparently seeing it all tied up at 46-46 (and heading into the period when McCain and Obama diverged so strongly in 2008), a recent Gallup poll brings up the age-old question of whether the electorate will vote with their hearts or their wallets. Only in a Facebook-world; but 54% 'like' Obama versus 31% 'like' Romney but this huge social-network-factor disappears when asked who will better handle the economy - 52% believe Romney will be better for the economy as opposed to 43% believing in Obama. Of course none of that matters if the market remains up here.
In four months the debate over America's Fiscal cliff will come to a crescendo, and if Goldman is correct (and in this case it likely is), it will probably be resolved in some sort of compromise, but not before the market swoons in a replica of the August 2011 pre- and post-debt ceiling fiasco: after all politicians only act when they (and their more influential, read richer, voters and lobbyists) see one or two 0's in their 401(k)s get chopped off. But while the Fiscal cliff is unlikely to be a key point of contention far past December, another cliff is only starting to be appreciated, let alone priced in: America's Demographic cliff, which in a decade or two will put Japan's ongoing demographic crunch to shame, and with barely 2 US workers for every retired person in 2035, we can see why both presidential candidates are doing their darnedest to skirt around the key issue that is at stake not only now, be every day hence.
Something tells us not even an ARIMA X-12, 13 or even 14 seasonal adjustments will do much to change the opinion of America's population that Congress is now more useless, incompetent and corrupt than ever. From Gallup: "Ten percent of Americans in August approve of the job Congress is doing, tying last February's reading as the lowest in Gallup's 38-year history of this measure. Eighty-three percent disapprove of the way Congress is doing its job." So what happens when the approval rating hits 0%? Does America automatically revert back to Monarchy (for all you Sid Meier fans out there), and what then? Back to Slavery? And in the New Centrally Planned normal is Darwin really right?
It has been a tempestuous week where good is bad, worse is better, but European news is to be sold. Here is your one stop summary of all the notable bullish and bearish events in the past seven days.