Leading Economic Indicators
Day after day 'positive' anecdotal data points are latched on to by a self-confirming media (and plethora of talking heads and asset-gatherers) unable to see anything but their 'it's all good in the long-term' thesis. The truth is, as Bloomberg's Rich Yamarone notes, there’s no way to assess last week’s economic data as anything other than poor. Chinese GDP continued to deteriorate, U.S. core retail sales and the index of leading economic indicators for June were flat, industrial production was at the same level as in March, and housing, the lone oasis of prosperity, slowed as new starts plunged nearly 10 percent from the previous month. Toss in the city of Detroit filing the largest municipal bankruptcy in U.S. history and the tone of America’s economic outlook took a decisive turn for the worse. Of course, this is all good for stocks is our new (ab)normal reality of single-factor Fed-liquidity-driven mass hypnosis.
"The economy is amazing right now - employment is recovering, innovation is going and housing is reviving. What's not to love?" This was a statement we heard in the media to justify the recent rise in the stock market. However, back in the real world, what is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken. This is well within the context of historical trends and time frames. While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise.
The Chairman of Goldman's Asset Management group, unwise supporter of Man Utd, promoter of 'decoupling' myths, and creator of the BRIC mnemonic has decided, with everything looking so tickety-boo, to retire. Whether his great Buy BRICS fail or his BoE leadership bid fail was the final straw is unclear, but for now, the erstwhile permabull (and mocker of market skeptics) leaves us on a bright note:
- *O'NEILL SAYS CLEAR EVIDENCE OF THINGS DOING BETTER ECONOMICALLY
20 years of 'broken record' survival and the Brit throws in his chips now - just as everything looks be taking off? Leave your farewell message below...
“Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued,” Kaye said. “We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”
While the general consensus from the media, and the majority of analysts, is that the U.S. economy will avoid a recession - there have been numerous indicators that have continued to point to deterioration in the economic fabric. Most recently industrial production in the U.S. dropped sharply, along with capacity utilization rates, due to the growing recession in Europe, and slowdown in China, which has impacted exports from domestic manufacturers. While it is not popular within the media, or blogosphere, to point out economic concerns but rather why markets are going to engage in a continued bull market - the simple reality is that by the time the NBER announces an official recession it will be far to late for investors to minimize the damage. The leading-to-lagging ratio continues to point to an economy that has very little, if any, actual momentum which leaves it very susceptible to exogenous shocks.
Spoiled little investors feeling good today.
The yellow metal soared 4.9% in euros in one week from the 11 week low set November 2nd and has since fallen 1.3%. The rebound from the November dip means prices should recover to reach the all-time euro high set last month, before rising to the point-and-figure target at 1,395 euros, said the bank’s research. Point and figure charts estimate trends in prices without showing time. Gold may then reach a Fibonacci level of about 1,421, the 61.8% extension of the May-to-October rally, projected from the November low, Commerzbank wrote in its report on November 13th which was picked up by Bloomberg. Fibonacci analysis is based on the theory that prices climb or drop by certain percentages after reaching a high or low. “What we are seeing is a correction lower, nothing more,” Axel Rudolph, a technical analyst at Commerzbank in London, said by e-mail Nov. 16, referring to the drop since November 9th. Rudolph remains bullish as long as prices hold above the November low at about 1,303 euros. Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
Playing in the market, with Phil.
Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year. Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?
There has been a large debate as of late about the economy going into 2012. Will it "muddle through" at a sub -2% rate, rebound sharply to more than 3% as currently estimated, or will we decline into a secondary recession? Cases can clearly be made for all three scenarios and only time will tell who is correct. However, this debate entirely misses the essence of what we are most concerned about - our investment portfolios and the risks to those investments from economic pressures. I have clearly made the case in past missives about the potential for a recession in 2012. When real GDP has declined below 2% growth on a year over year basis the economy has normally been, or was about to be, in a recession. With today's downward revision to Q3 GDP we have now had two consecutive quarters of sub-2% GDP growth. There are only two instances in history (Q3-1956 and Q1-2007) where there were two consecutive quarters of sub-2% GDP annual growth and the economy wasn't already in a recession. In 1956 the economy rebounded for one quarter to 2.93% annual growth in Q4, slipped to 1.88% in Q1 of 1957, rebounded once again to 2.99% growth in Q2 1957 as the recession officially started. The other was in Q1 and Q2 of 2007 and we all know how that worked out in next couple of quarters. These are the only instances where the economy "muddled" along for a period of time before way to the recession. The reality is that an economy cannot muddle along - it will either grow or contract. "Muddling" isn't historically an option.
We are all quite aware of the fact that heightened volatility has become a short term norm in the financial markets as of late. Not surprisingly, we’re seeing the same thing in a number of recent economic surveys. The most current poster child example being the Philly Fed survey that has shown us historic month over month whipsaw movement over the last few months. Movement measured in standard deviation parameters has been breathtaking. All part of a “new normal” in volatility? For now, yes. But over the very short term economic surveys and stats have been taking a back seat in driving investor behavior and decision making in deference to the “promise” of ever more money printing. Of course this time the central bank wizardry will happen across the pond, although the US Fed is also now back to carrying out it’s own modest permanent open market operations (money printing) relatively quietly, but consistently, as of late. Although over the short term “money makes the world go ‘round”, we need to remember that historic money printing in the US in recent years only acted to offset asset value contraction in the financial sector and did not lead to macro credit cycle acceleration engendering meaningful aggregate demand and GDP expansion. And we should expect a Euro money printing experience to be different? Seriously?
For the last several months we have been posting our Economic Output Composite Index and warning that it was heading to levels that typically denote that the economy is in a recession or about to be in one. With today's read of the Philadelphia Fed Regional Manufacturing Survey coming in a not just contraction levels but a massive collapse to the downside, as we have been saying was a possibility, the EOCI index is now at levels signaling recessionary warnings..The safe play in the current environment is hedged investments, cash and fixed income for the current time. This has not been, nor will it be any time soon, a "buy and hold" investing market. The management of risk, the conservation of investment capital and the generation of total returns from portfolios is paramount for investors to survive the cycles that we will face in the coming years.
In the past two weeks, one of the curious development the monetary aggregates, in addition to a spike in the Adjusted Monetary Base (discussed previously here), was the $88.7 billion surge in the M2 for the week ended July 4, the third largest jump in the broadest tracked monetary aggregate in history. Some have speculated that this number may be indicative that the money multiplier has once again started working as bank reserves after 2 long years, finally start making their way into the broader market. Unfortunately as Stone McCarthy explains this is not the case at all (sorry Fed: QE is still a failure) but merely has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits inclusive of money market deposit accounts, which have jumped by $110 billion in the past two weeks, coupled with an accelerating shift of dollar deposits back to banks domiciled in the US. In other words: regulation explains the entire move. There is, however, a kicker, and it goes to another indicator of "economic growth" - the leading economic index, which is actually driven by M2. This means that the fake surge in the M2, will result in an all too real jump in the LEI, which in turn will push the market higher as vacuum tubes interpret the data as positive for the economy as opposed to merely driven by a regulatory forced shift of money from Pile A to Pile B. Expect stocks to surge once the next LEI reading is announced as a result.