Markit [14](not to be confused with the centrally-planned market) is best known for providing its monthly survey of national (seasonally-adjusted) manufacturing and service industry coincident businesses (whose results just may be released milliseconds early to select, highly paying HFT clients). Surveys which, such as today, are released after extensive adjustments and revisions, at key inflection points designed to achieve one simple thing: restore confidence in the Ponzi, usually when "hard data" indicates a collapse or recession is nigh. Such as last week [15]:
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Case in point: in today's Chinese, European and US manufacturing, not one had underlying constituent data that could be called even remotely attractive. In fact, all the forward-looking indicators were decidedly negative and yet this led to solid headline beats in the two former regions after algos scanned the headline as quickly as they could and unleashed a spree of buying, enough to push equity futures well off the overnight lows and to set the bullish mood for today's trading day.
But why would one even look at a self-reported survey as an indicator of coincident activity: after all isn't it beyond obvious that every response will be full of confirmation bias and colored by the respondent's inherent optimism about the present and the future? Apparently not, and neither is it obvious that for all business participants, hope dies last, something which always influences their responses. The problem is that in a world in which central banks have made a mockery of all other coincident signals, one has to dig very low, although as even Deutsche Bank's Jim Reid says, "we've used this measure less over the last couple of years as central banks have increasingly distorted the relationship between fundamentals and valuation."
And as Jim Reid shows in the table below, the various regional PMIs have so consistently overshot in their expectations of where the manufacturing and service sector of a given country is throughout 2014, that not even the market believes, well, Markit. To wit:
Of our 8 sample countries plus the Eurozone, seven currently see manufacturing PMIs between 48.8 (France) and 51.7 (Japan). Depending on the country and based on these numbers, our regressions suggest that these equity markets should generally be flat to slightly higher than 12 months ago. In actuality they're slightly lower suggesting that the market expects PMIs to edge lower or that equities are cheap if they don't. The biggest exception is in the US where the last PMI was 56.6 which corresponds to a 18% YoY gain rather than the 11% we actually have. So the US is 'cheap' if the PMIs don't decline from current levels.
In other words, with central planners having lost control of the hard data, and only the soft-data remaining for influencing, bias and data manipulation purposes, it has gotten to the point that Markit's PMI universe is about to lose credibility too.
Just how bad is the problem? The table below shows two things: either stocks are underpriced by about 10% across the US, Germany, Spain, UK and 20% for Japan (green rectangle), or the latest PMI releases are painting such an abnormally rosy picture of various economies, their signal content no longer exists (red rectangle).
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There is, however, more to it: in all of the Markit economist comments today, the one recurring theme was simple - Markit, which recently went public, was begging central bankers to inject even more stimulus (6 years after the great stimulus experiment started) into stocks, pardon, the economy. And yet, Markit was unable to really take down its numbers at this key moment in the hand off from the Fed to the "self-sustaining economy" as a series of PMI misses overnight would have crashed the market. Instead, Markit is letting off air little by little, while doing all it can to preserve the illusion.
The question is will it succeed: will central bankers get the hint and inject a few more trillion in reserves into bank balance sheets, or will they stay largely to the side, forcing the market to fend for itself. If so, watch as the 10% expected pick up in stock performance through the end of the year surges as the QEvalary never comes. In that case, Markit will find itself in a very unpleasant place, when 2-3 months from now, risk selling off, it has to finally catch down to reality.
Will the dramatic tumble in PMI indices then serve as precisely the self-fulfilling prophecy catalyst that sends the world, of which both Japan and Europe are already in a triple-dip, but most importantly the US, in the long-overdue recession which as Albert Edwards opined earlier today, will be the one event that sends markets around the globe crashing.
We should know the answer within a few months.
