Nothing that we haven't said already many times, but always good to hear someone, in this case SocGen's Albert Edwards, observe what is patently obvious - namely that the start of every year now sends a consistently wrong signal that the economy is improving due to seasonal adjustments that no longer are applicable in the New Normal. This coupled with the liquidity boost that takes places just prior to each and every run up completely explains why 2012 is not only deja vu, as it continues to be a carbon copy replica of 2011 (when the market peaked in late April), but is really a treja vu, mimicking the action of 2010. After all it was none other than Reuters who in its puff spin piece tried to caution readers that we have been here before: "This time last year, the U.S. economy was adding jobs at a similar pace of more than 200,000 a month between February and April...Growth was nipped in the bud by the Arab uprising, which sent oil prices soaring. In 2010, prospects had looked even stronger. Between March and May, companies were adding a net 309,000 new jobs each month, and first-quarter growth came in at a 2.7 percent. The rebound proved temporary." And yet here we are, wondering if this time it's different. It isn't. Albert Edwards explains: 'With bond yields breaking out to the upside and the equity bull run continuing, investors are back to their same old hopeful habits. Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011." And here is why Edwards will once again be unpopular with the permabull, momentum chasing crowd: "Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011."
The Chinese data have been weaker than expected and the authorities there have shifted their stance on the currency in response. That call has been going our way. But the stronger US economic data have shifted the market further away from our vision of sub-1% US bond yields. This does not concern us. We have been here many, many times before.
It is clear to us that despite the economic data looking a bit perkier, the underlying profits situation is deteriorating significantly. This earnings season has produced its usual burst of manipulation, but as my Quant colleague Andrew Lapthorne points out, the Q4 EPS outturn looks decidedly weak - perhaps not being subjected to the same faulty seasonal adjustment as the economic data. And, as our erstwhile college James (or Jim as Zero Hedge now call him) Montier has pointed out, US margins have already begun to turn downwards - link.
Those suffering from treja vu are forgiven - just look at the chart.
Many commentators have noted that the bounce in US activity in Q4 2011 and Q1 this year mirrors closely what happened towards the end of 2010 and start of 2011. This may have more to do with faulty seasonal adjustments in the wake of the economic slump at the end of 2008 and start of 2009. Hence seasonal adjustments for subsequent years are incorrectly inflating turn-of-the-year activity. We note this concern and if correct, investors should ready themselves for noticeably weaker economic data as we move into Q2 and Q3.
The recent US bond sell-off is overdue and nothing to get excited about [see first two charts above].
Have investors already forgotten that, in the mini-recovery at the end of 2010, bond yield surged from 2¼% to 3½%. Then too there was a touching level of investor confidence that we had moved into a self-sustaining recovery and that the multi-year bull market in bonds had ended. Only a few funds thought otherwise and remained committed to The Ice Age. These funds saw 30%+ returns in 2011.
It is always the case that, in the long bond bull market since 1982, cyclical upturns push bond yields higher for a short while - most especially when nominal GDP rebounds above bond yields (see chart below). Nominal GDP growth in this cycle is now declining from the weakest cyclical high since the war and very low bond yields now reflect the unusual weakness in nominal quantities as the cycle abates.
Alas, not only is institutional memory so short it has no recollection what happened one year ago, it no longer even habituates to disappointment, since what happened in 2011 happened in 2010.
And for those curious why Goldman is now bidding up every TSY it can get its hands on and selling equities like a man possessed:
We are not at all surprised to see implied inflation expectations now beginning to tick upwards as the market responds to rising unit labour costs (see chart below). In the next few weeks though, I expect a return to weaker economic data in the US as the seasonal uplift unravels and as already signaled by the rolling over of the Conference Board leading indicator (on the 3-month change definition shown previously on p3). Bond yields will move back down to new cycle lows and the equity market rally will dissolve into dust just as it did in 2011.
God bless central planning though, which manages to step in just when the bottom is about to fall out of the market, and make market participants believe it can control the business cycle entirely on its own. Until it fails, and starts all over again.
Incidentally, when bond yields really start moving, it will not be a smooth transition. It will be quite violent, as it will be the precursor to the Fed losing control of it all.