One chart as usual does more to convey a simple message than all the Fed speeches equating the economy with the Russell 2000 ever could. Below we demonstrate the performance of three key market data points since the August Woods Hole speech: the performance of the S&P (via the ES), the price change in the 10 Year bond (TY1 inverse scale), and of course the change in non-farm payrolls (remember that old-school Fed mandate about full employment something something). Bottom line: the S&P is up over 30%, the 10 Year has plunged from over 126 to 118, while NFPs have added 392k, or 78.4 per month, nowhere near enough to even keep up with the natural growth of the labor force. So has QE been a success? We leave it up to readers to decide.
And just to make the message even more clear, here is how the dollar, cotton, rice and wheat have traded since August. Pick your winners...
Indeed, as David Rosenberg discusses, the number of "winners" (among which the NFP most certainly is not), are many other asset classes, whose returns put the S&P to shame:
So Ben Bernanke focuses on equity valuations and yet there is a wide array of other “asset classes” that have been affected by the Fed’s massive liquidity infusion. Just as equity wealth has an indirect impact on spending, higher commodity prices squeeze margins for many producers and pinch real purchasing power for those households who are not owners of equity but have to fill their kids’ tummies nonetheless and find a way to get to work if they live more than a mile away. Looking at what food and energy has done since August; it would seem a little circumspect to be fingering Asian demand as the primary reason for the latest leg in the explosive commodity price rally.
Here we are, with 91% of all equity holdings in the United States held by the top 20% income group in the country. The top 1% own 38% of all the equity valuation. The lower 80% of the income strata own the asset class that the Fed wants so desperately to reflate (and with unmitigated success to be sure!). That same 80% are now being crushed by the indirect impacts of monetary policy — the ones that Bernanke dismisses — and are also ones that are seeing their cash flow drained by the surging gas and grocery bill. Geez — real wages deflated 0.5% in November, by 0.1% in December, and by what looks like at least 0.3% in January. The last time real work-based income fell three months in a row was when the economy was plumbing the recession’s depths from April to June of 2009.
Then again, who cares? No hedge fund investor does that is for sure (we don’t intend to be mean — that comment only covers the hours that the market is open). As long as Bernanke is juicing it up for the equity investor, and Uncle Sam is looking after the poor sucker with 99 weeks of unemployment insurance, 43 million food stamp recipients, and a nice dip into the Social Security Fund to finance a payroll tax cut, then all must be good and we must therefore have a sustainable recovery on our hands.
As we have said time and again, there will be a reward for being patient. After all, this equity rally has already achieved in 20 months what it took 60 months to accomplish from 2002 to 2007. In other words, double from the lows.
Friends — there is going to be day of reckoning. Trying to time it is futile. Just know it is coming and sooner than many think. Stop watching the talking heads on bubblevision and start boning up on the history of how post-bubble credit collapses end up playing out, especially once the government runs out of gas. Please don’t be tempted into the same mistake you may have made in 2007 and 2008 by jumping in too the riskiest parts of the markets at this juncture. In our view, it is currently appropriate to be focused on long-short strategies where an investor can manage or hedge out market risk and at the same time generate significant risk-adjusted returns. We understand what the market did from the 2009 lows, but we also know what they did from the 2000 highs. And the 2007 highs. Don’t be burnt thrice.