The Miraculous Decoupling Of Reality, For Now

Wolf Richter's picture

Wolf Richter

A veritable chorus of large US corporations has chopped their forecasts down a few sizes, citing the China slowdown, wobbly demand from emerging markets, the ongoing fiasco in Europe, or weakness in the US. Among the usual bellwether suspects:

Caterpillar raised eyebrows on Monday when it lamented “fairly anemic” global growth and a slowdown in China, not just for the quarter or the year, but through 2015. FedEx cut its outlook on September 18 due to lower shipping volumes and a shaky global economy. On September 7, Intel slashed its third-quarter revenue outlook, ominously on weakness in the enterprise segment and in emerging markets. On August 30, the International Air Transport Association announced that July air-freight was down 3.2% worldwide from last year. And in July, UPS lowered its guidance.

But you wouldn’t know it from the stock markets, which are supposed to predict future turns in the economy better than any other measure, based on the collective wisdom of innumerable astute market participants—or rather computers, algos, and fat fingers. The S&P 500, for example, is up 22% over the last 12 months. A phenomenal run.

And so today, the Business Roundtable (BRT), an association of CEOs from the largest US corporations, made an ugly trend much uglier: CEOs believe the next six months are going to be tough; and they’re reacting to it by slashing capital expenditures and jobs.

The BRT CEO Economic Outlook Index plunged to 66 in the third quarter, from 89.1 in the second quarter. That was not only “the lowest reading since the third quarter of 2009,” when the US economy was still in the trough of the Great Recession, but also “the third largest single quarter drop in the survey’s history.”

And the largest drop? From 78.8 in Q3 2008 to 16.5 in Q4 2008. Off a cliff. These CEOs were caught off guard by the financial crisis, ensconced in their own hunky-dory world. Incredibly, the index had edged up from 74.5 in the prior quarter even though the financial crisis had been making headlines for a year, the housing bubble had blown up, financial institutions were cracking for all to see, and Bear Stearns had already collapsed. These CEOs have zero predictive capabilities.

From its recent peak in Q1 2011 of 113, it has been a steep and bumpy slide to today’s 66. Above 50 in this diffusion index means growth, so 66 is still in positive territory, if barely so. The three sub-indices—sales, capital expenditures, and employment—didn’t help.

In the sales index, 58% of the CEOs expected sales to increase over the next six months, down from 75% in the prior quarter. A low number: six months after the Bear Stearns collapse, and just before the collapse of Lehman and AIG, 78.8% of our prescient CEOs had expected sales to grow—only to see them nosedive weeks later.

The index for capital expenditures was worse: only 30% of the CEOs said they would increase capital expenditures, down from an already low 43% in the second quarter. The lowest score since Q3 2009—when the world was scrambling to get out of the trough of the Great Recession.

The employment index took the biggest hit: only 29% expected to create jobs, down from 36% in Q2; but 34% expected to cut jobs, a jump from 20% in Q2. Hence, more CEOs are planning job cuts than job increases. For a worse figure, you have to go back to Q4 2009—when the unemployment rate hit 10%!

These trends “reflect global demand flattening out, particularly in Europe and China,” said BRT Chairman and Boeing CEO Jim McNerney during the news conference. On top of that are “domestic policy issues” that could have “negative impact on the economy and business climate,” he added, including the fiscal-cliff of tax increases, spending cuts, and a failure to raise the debt ceiling. That uncertainty throws “cold water on long-term planning.”

That the CEO Economic Outlook Index evokes the dark days of double-digit unemployment is not a particularly good sign. It crowns a pile of slashed forecasts from bellwether companies. The old-fashioned among us would expect stock markets to have anticipated that corporate downdraft. But that hasn’t happened.

If QE, QE2, QE3, the bubbly expectations of QE4, and of course QEx have accomplished anything [read... “Forceful and Timely Action” to Nowhere], it is the miraculous decoupling of the stock markets from reality. Gravity can be turned off, apparently, in this new QE world of ours where no one has gone before. But then, gravity has the nasty habit of reasserting itself at the worst possible moment.

John Mauldin of Mauldin Economics is a bit jittery too. Republicans and Democrats will have to hold hands and walk off the cliff together, he says; and Europe is only left with choices that range from bad to disastrous. And yet, there are possibilities. Read the excellent interview.... John Mauldin’s Prescription for Avoiding Economic Catastrophe.

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A little girl was out with her Grandmother when they came across a couple of dogs mating on the sidewalk. "What are they doing, Grandma?" asked the little girl. The grandmother was embarrassed, so she said, "The dog on top has hurt his paw, and the one underneath is carrying him to the doctor." They're just like big business and government, aren't they Grandma?" said the little one. "How do you mean?" asked the Grandma. "Offer someone a helping hand," said the little girl, "and they fuck you every time!"


franzpick's picture

PMs on a tear here with au at 1780, up $23, can't find any new news, Make popcorn and watch here:

Peter Pan's picture

The time has come to see the stock market for what it is......a propaganda machine designed to give the feeling that things are on track.

falak pema's picture

As the november 6 deadline approaches, corporate america gets ready for the inevitable reset that 2013 harbingers.

They know that they cannot sell a perpetually rising P/E to their shareholders, their bonuses depend on signalling to these delusioned  Oligarchs; big, small and indifferent; that their money lines are now seriously diluted, even compromised. 

Whatever Ben and MArio might pretend by printing away...

Not everybody is Jack, sitting on the Apple beanstalk! The only crap map and magic touchscreen game in tinsel WS town. 

ebworthen's picture

Yes, I imagine that if every November or so I could get a doubling of my credit limit at 0.5% I might do some shopping, if I were the FED or CONgress or a Banker (but then my soul would be the Devil's).

q99x2's picture

Right at the end of 2011 begining of 2012 the computers took over the market and so the FED has that problem solved. FED can't do much with unemployment except spin the numbers or rather have the Federal Government spin them. With housing it is a little different because they can take money from savers and help prevent prices from declining by over encumbering the taxpayers with future debt. Also, foreign capital flight money, as the world financial system collapses, floods into the still relatively cheap housing market. And the TBTF they just keep printing an unlimited supply of how ever much they claim to need. So they can print and convert the stock market into software that draws graphs of frauduently valued stock prices. Three of four bases are covered But unemployment is still a problem. That's because no matter how much you try to convince 200 million people, through the use of fraud, that they have enough food and shelter if they don't have it they are going to come looking for you. Hence the reason behind the DHSs recent purchases of 1.4 billion rounds of hollow point ammo plus 200,000 sniper rounds and an additional 173,000 for the social security administration not to mention a public police force for the Federal Reserve corporation, drones, surveillance and on and on. Doesn't mean they are going to try and kill everyone. Just means they are ready if they have to once society breaks down and the supply chains to the major cities electircal, medical, food and water no longer function and everyone comes looking for them. What's left to wonder about? On an elevator to hell; going down.

a1abhishek's picture

I have read this and some other post also but i found it to be very useful for me as well as other users.





TulsaTime's picture

So I guess these fine examples of executive prowess would be a concurrent indicator, or just fucking clueless.  And of course the 'market' has lost any sense of being predictive with the advent of HFT, QE, and all the other manipulative schemes that have not made the news yet.  The fix is in and the markets are anything but free.  It's a far cry from the managed reality of the recent past, as this managed reality now needs to follow the political script of the Overlards.  There is a recovery going on, don't you know?  Play along with the script or GTFO, at least while there is some facade of control over events.

Shit about to get real bitches.

Ned Zeppelin's picture

I'm trying to picture the Overlards with their extra folds of fatty skin padding.

hannah's picture

in 'the old days' if a player fucked up they were taken to the woodshed and beaten and the market fell. now with every player fucked, they are all helping each other in a perverse way by turning the other cheek and inflating and pretending...but it cant go on forever.

Go Tribe's picture

"These CEOs have zero predictive capabilities."

So what's the point of the article? Is the CEO index a contrary indicator?

adr's picture

You mean like Marrisa "Hyena" Mayer claiming she will make Yahoo! a destination portal for the web?

I thought that is what they have been trying to do for the past 15 years.

SAT 800's picture

The S&P500 is falling out of bed on the chart; you can short it right now. I'm turning in a market order right now./ filled at 1432.50 three contracts short.

franzpick's picture

My equity index screens are all pointing down 3%, suggesting SPX 1st stop at 1400, and 2nd stop at 1360. Mr. Market looks to me to be conjurring up a responce to Bennie's last gasp.

20-20 Hindsight's picture

I'm getting really sick and tired of being a prophet of doom among friends and family, who sometimes seem to look at me as if I were from another galaxy.

And yet,all the indices are there, pointing to a catastrophic economic collapse. Still... nothing.  All I've been reading and hearing for the past few years are: "Things are just about to get really ugly... just watch.  Tomorrow... next week... next month... in three months... well, soon anyway, that's for sure!"  

But still, the beast keeps on beating its chest and defying all odds.  Why?  Because global banksters, corporate thugs and corrupt "leaders" and government officials are feeding the beast constantly.  They know that if (when) it dies, they're toast too, so they have to keep the house of cards standing, at any cost, even if that means total chaos in the end, just as long as it doesn't happen on their watch.  

So here we are: you just can't kill the fucking beast, no matter how bad things are.  I'm now of the mind that I will believe economic armageddon when I actually see it, if ever...  

NEOSERF's picture

I share your sentiment and part of it is that reading ZH allows you to be TOO informed for the markets...the markets now have a 9th grade reading ability and simply go up on the possibility of something maybe happening.  Move the goal posts, riots, warships moving and it is all positive on the premise of "DOING SOMETHING".  It is all ridiculous and I hope that although I KNOW it will end up ugly that I don't get stuck with all the other sheeple scrambling for Spam and a handgun to defend my home...

Vendetta's picture

same here.  It seems others who hear our warnings think we like being prophets of doom.  I remember quite well when I was warning coworkers in 2007 and 2008 of a collapse and, of the ones who actually responded, they said "well my international funds are returning 22%".  Then crash boom bang and many 401ks lost > 40% and they looked at me with squinted eyes and kind of scowling.

franzpick's picture

"Normalcy bias" dominates the thinking of everyone around me too: their repeated responce to my warnings has been and remains that I have been 'negative' all along, on equities, real estate, the recovery and the future.  Fortunately for me I've been telling them since 2004 that my favorite colors are gold and silver, and I can retort: "Was I negative on the PMs also?".

Hobbleknee's picture

You've done your job and warned them.  You don't have to keep warning them.  Plan accordingly, stay the course and BTFD.

RockyRacoon's picture

I watched Peter Schiff get his brains bashed out on the tube by the shill talking-heads about the pending housing disaster and the inevitable financial crash.  He was proved right, but the same old WRONG people are still spewing their nonsense on the financial networks.   Better to have bad timing and be right than be late in any case.

I've already told those worth telling.  Not my job to educate the world.  There are a few who have followed up and see the same writing on the wall.  Those I stay in touch with.  The others can stay in the aforementioned purgatory.  If someone asks, I tell.  Otherwise, I'm done with the hard-headed.  I've got prepping to do.

adr's picture

I had a conversation with a guy about something similar.

Would you rather be in the endless nothingness of purgatory for eternity, or tortured in hell?

He chose purgatory. I said I would rather be in hell. At least in hell you will be engaged in something. If you were trapped in blank nothingness forever, you would beg for torture to end the sameness of it all.

QE'infinity has us trapped in purgatory, nothing is getting better or worse, just staying the same. Stuck in this endless loop of insanity.

The hell of a complete collapse will at least bring some excitement.

20-20 Hindsight's picture

I'm absolutely in agreement with you. Bring hell now, enough with this endless purgatory!

rlouis's picture

In 2004 the real estate bubble was readily apparent - prices were not suppoorted by median income levels, and loan programs were just starting to become suspect.  By mid 2005 the bubble had not collapsed and the people who were warning of it were not only frustrated  but worn out from being proven wrong for such a long time.  Reality did return - partly, to the dismay and heart break of many.   Banksters can keep these bubbles going longer than any of us imagined, but they do revert to the mean.

Bicycle Repairman's picture

It depends on who owns the bubble.  Joe Six Pack owned the housing bubble, so the banks didn't care.  The banks and government pensions now own the stock market.  Some assets are sacred. 

deagle44's picture

megabanksters gonna take that 40 billion a month and pump up stocks, commodities and bonds.

Boris Alatovkrap's picture

Gig is up, banksters is take $6T of shadow money and is buy EVERY FIJCKING thing not tied to ground. Amerika is screwed like war time whore!

NoControl's picture

What if banks see the coming storm and take that $$$ and go short? That wedge hasn't escaped their attention and maybe that's the same thing that made Bernanke shit a brick and blow his load

Bicycle Repairman's picture

If the bankers have bought the market, will they short themselves?  How can there be a "storm"?  The bankers own the atmosphere.

Fundamentals no longer matter.

LawsofPhysics's picture

Correct.  There is no "market" and the real members of the club will simply start setting up their feudal serfdoms.  Back to the middle ages bitchez.

Boris Alatovkrap's picture

Obama, Bernanke,... where is third mice? Boris is ready having butcher knife!