Why Paul McCulley Would Be Shorting The Economy With Both Hands Right Now

Tyler Durden's picture

According to the plethora of long-only managers willing to trot out on the public stage and beg for more commissions, the US has been (and will remain) the cleanest-dirty-shirt in the global risk asset laundry basket; but as David Rosenberg of Gluskin Sheff points out not only has the S&P 500 hit a new record high in its total return index but it also possesses a rather 'ebullient' valuation premium (2012E P/E) of 13.8x relative to China 9.8x and Europe 11.4x. However, while this is more than enough to slow some investors from backing up the long-truck, Rosie goes on to highlight a very worrisome indicator - that favored by ex-PIMCO's Paul McCulley. The YoY trend in the three-month moving average of core capex orders (which was updated last Friday) has just cracked negative, crushing the hopes of US growth prospects and we assume equity superlatives. However, since the market no longer reflects anything; certainly not the economy, but merely who will ease more when and how, one really can't short much if anything, even if McCulley is 100% spot on.


The key piece of data on Friday was the release of durable goods orders and shipments for July.

The news here was not good at all.

The key leading indicator of business capital spending is the non-defense capital goods ex-aircraft (core capex) component, and it slid 3.4% in July on top of a 2.7% plunge in June for the worst back-to-back performance since December 2008-January 2009. These orders are down now in four of the past five months, and so far in Q3, the "build in" is a hugely negative -16.4% annualized tally and this follows on the heels of a -5.8% print in Q2. Now core capex shipments were flat in July, the softest reading in three months, but there is still enough statistical momentum being carried over from Q2 to keep the current trend running close to a +5.6% annual rate versus 5.4% in Q2.

But shipments are a coincident indicator while orders tend to be a leading indicator, and they are pointing in the direction of a very weak Q4 as far as business activity is concerned. Housing may be reviving, but it is only 2% of GDP whereas business capex represents a 7% share of the economy.

Paul McCulley, the former legendary economist and fund manager at PIMCO, who was once being touted to join the Fed as a policymaker, told me last year at the Altegris-Mauldin conference, the YoY trend in the three-month moving average of core capex orders had for a long time been his preferred indicator of how the broader economy was going to fare a few quarters into the future. Well, if you are bullish on U.S. growth prospects over the near-term, I suggest you look at the chart below:

Notice how the YoY trend just sliced below the zero-line in July (to -1.7% from +1.1% in June). Only once in the past did this NOT tip the overall economy into recession and that was back in September 1998 when the Asian crisis was at its peak, LTCM had to be wound up and Russia defaulted ... not exactly a pretty sign even if the recession was delayed for another two years.

In terms of sectors, it was order declines in machinery, electrical equipment and communications equipment that far outpaced gains in metals, autos, aircraft, and computers.

Source: Gluskin Sheff

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Jlmadyson's picture

Crises time is here boys and girls.

Only once means guaranteed.

vast-dom's picture




Tippoo Sultan's picture

Hold the phone.

"Legendary economist" McCulley was an Obama guy in '08 -- and now, he would short -- with "both hands," no less -- the very same economy forged by the policies put forth by his Generational Saviour ?

lotsoffun's picture

that lloyd guy is smart. really smart.  i mean - he didn't hire me and my cousin louie.  we've got offices in bay ridge.  who would you expect him to hire?  jon corzine?  jonnie boy is keeping a low profile now. he pissed off the gs partners in 1998 and played the same go for broke again.  he can't even hire anybody - he pays just to keep it off the charts.  

 it is all beyond funny at this point.  a hundred million can buy you a lot of friendship.

Cplus's picture

The rumor is, contrary to reports from Stone & McCarthy, Rosenberg and others today, Ben will make public in the annual Jackson Hole speech on Friday a scheme of open-ended QE3 to offset the effect of the fiscal cliff on equities.
This insanity was proposed last month by voting member San Francisco Fed and later endorsed by the Boston Fed.
Of course they claim to be targetting the economy, but in reality until now they have been hitting the stock market.
The markets' hopes for bailout have never been higher in spite of sound advice from the firms mentioned above, and if the Central Bank Cartel doesn't deliver in Jackson Hole and next week in Frankfurt, there will be fallout.

Jlmadyson's picture

Really the only thing left in the toolbox and anything less this market will take a dump.

However, it will still do jack squat for the real economy.

As the folks in the know keep saying;

It maybe crack like, but it is no panacea.

Meesohaawnee's picture

of course they have (targeting equities) effects on QE via interest rates is just chatter and secondary. Always has been. The "market", cough, is just a propaganda machine thats it. screw jackson hoe.im sick of the qe talk . Ben has spent a whole year scaring the shit out of shorts so you dont need actual QE to levitate the market. Traders are once bitten twich shy now.

Hype Alert's picture

It will be interesting to see how unlimited, open ended QE sits with Romney, who has stated he wants to replace The Bernank.


If Ben does announce that, the FED will have just bought BO the election.  After all, the FED has openly enabled all the political games of the last 5 years.  I know, more than 5, but blatantly the last 5.

bobert's picture

Perhaps a bevy of distressed assets to purchase would be most popular with Mitt (?)

Tommy Gunner's picture

Romney will do EXACTLY as the Fed tells him to do.   Just as Obama does.

If they Fed (Jamie, Lloyd, Rosthchild etc...) say Bernank stays.  Bernank stays.

If the Fed says print - Romney will print.  Obama will print.

When are you people going to come to your senses - the President has no real power - the Fed (bankers) own your Base.

Jason T's picture

retail sales is quickly racing to negative yoy growth as well.. 

in 1 year, I expect to see wages going negative year over year.. deflation time.

Ben "forestalled" it but can't prevent it.


lotsoffun's picture

that's right.  and in the meantime - all his pals got the wink,wink, nod, nod and got to buy stocks, because there was no WAY they would be allowed to go down - so it was get all the cookies out of the jar if you can, because we all know the end is coming, brother rats and we won't get away with this forever.

besides -  once they position themselves, they'll be all the shorts because that's when they tell bennie it's sell side - and then they REALLY sweep the chips off the table.



bobert's picture

Are you able to short?

lasvegaspersona's picture

of course Ben can prevent deflation...name one central banker who allowed a fiat currency to deflate...name one...it is not even possible.

  Ben will get a call and he will make more money available, he will hyperinflate ...yes...but allow deflation???   foolish talk...

max2205's picture

Go ahead. Short it punk

Rainman's picture

Nein...not with Nov 6 around the corner

fonzannoon's picture

Where is that Biderman anyway?

Doubleguns's picture

Stock up on TP. It retains its value.

XitSam's picture

But what if they confiscate my TP like they did in 1933?  

bobert's picture

U Line sells it by the case.

disabledvet's picture

This will sound strange but the problem with this article is that it makes sense. In other words "chasing performance" is as old as Wall Street itself. Not only that...this is more than merely "there's always a bull market somewhere." the folks tasked with investing these 100's of billions are TOLD to put it to work. The irony that it is the banks by and large that can't seem to find a way to invest in their own economy should be lost on no one. This has ALWAYS been true! The bears will be right in overall someday...perhaps someday soon. there are just to many reasons for the longs to keep putting that money to work however. Until that changes...

Racer's picture

The Central Bwanksters can remain illogically stupid longer than most mortals can stay alive

Meesohaawnee's picture

actually they are not stupid. Get away with the perfect crime in front of how many millions is actually quiet clever in my world.

bobert's picture


Another up arrow.

lolmao500's picture

What would Paul McCartney do?

freedogger's picture

Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman

If you drive a car, I'll tax the street,
If you try to sit, I'll tax your seat.
If you get too cold I'll tax the heat,
If you take a walk, I'll tax your feet.

Don't ask me what I want it for
If you don't want to pay some more
'Cause I'm the taxman, yeah, I'm the taxman

Now my advice for those who die
Declare the pennies on your eyes
'Cause I'm the taxman, yeah, I'm the taxman
And you're working for no one but me.

Randall Cabot's picture

Good one... but that's George Harrison.

Karlus's picture

Wont short when they can add zeros behind everything

papaswamp's picture

Looks like I picked a hell of a day to quit sniffing glue.....

geno-econ's picture

What can possibly spur economic growth in the face of impending deleveraging caused by huge credit over expansion during the past decade  ? Some possibilties;

    More credit expansion

    Technological breakthrough of major proportion creating wealth

    War, leading to expansion of population, territory or resources

    Change in sentiment and confidence

    Change in administration

    More trade  agreements

    Currency devaluation

    Shifts in income distribution

You be the judge or offer more workable options

fonzannoon's picture

Biderman is out there with a post. I will leave it up to ZH to decide if they want it up here.

"The fed will promise us everything and do nothing. The next QE will be it's last" Biderman

Biderman is Barliman?

centerline's picture

Market volume correlating to ZH volume.  We are in serious suspended animation territory now.  I have even found myself listening to music in the morning instead of news because the news radio has "gone dark."

This is a dangerous place.  Everyone here knows nothing is fixed and systemic risk is only greater now than before.  At the same time, public attitude is changing at an increasing rate.  I even got a phone call the other day from some group who is pissed off about everything Washington.  That has never happened before.  Up till now is just the usual red versus blue bullshit.  While their complaints are valid - they still don't see the bigger picture.  But, the point remains... more and more people are mobilizing against the status quo in one way or another.  Getting close to the moment where it is time to put the middle class down or something is going to break.


bobert's picture

Your friends should tune into the red and blue conventions.

They'll catch some stimulating debate and profound ideas there that will inevitably make them feel better about this country's direction.


magpie's picture

A 'market' trading on political directives and central banks printing presses doesn't have to respect anyones profit motive.

Bartanist's picture

I see no evidence to believe anything other than each individual stock price is 100% managed by the international banks and their proxies. Together they defraud and without fraud they most likely would die...

bobert's picture

Succinct and good!

Up arrow.

vertexa's picture

Feds: Too few Americans ‘turn to government for assistance’

More Americans rely on their families for assistance than the government, so federal officials have undertaken an effort to help people to apply for federal assistance.

“Given that only 15 percent of you turn to government assistance in tough times, we want to make sure you know about benefits that could help you,” USA.gov announced today. The ”government made easy’ website has created a “help for difficult financial times” page for people to learn more about the programs.

The government got that statistic from a poll asking Americans what helps them the most during tough times. Here are the results:

  • Savings 44%
  • Family 21%
  • Credit cards/loans 20%
  • Government assistance 15%

“Government assistance comes in different forms—from unemployment checks and food assistance to credit counseling and medical treatment,” USA.gov reminded readers.

Whoahthere's picture

I am poor and would like some of that Obama money, but I am not poor enough.  I would love to take the money and then vote his slimey Marxist ass to . . .

I guess some are more poor than others. Dipshit world.

bobert's picture

Incredible but true. Thanks for the post.

q99x2's picture

The markets don't have anything to do with the economy. The markets are a central banker mandate so why would the McCulley be shorting anything unless he has gone full retard. I'm short a little too. I'm only a little retard. Is that logical? What day is this?

intric8's picture

No shorting, heavens no.  Not while Bernanke is lying under the markets like a freaking mattress.

bobert's picture


I recently bet against the fed on interest rates and it hurt real bad!

chump666's picture

Everyone in the world is going to short US markets once it is finally realized that 1. HFTs are the only things left on the indexes, 2.  The Fed is an ineffective pile of crap