We would be the first to espouse the view that, in speculative markets, the 'sentimentals' can long trump the fundamentals, but there is a counterpoint to such a projection, not that many wish to countenance it. The dispiriting truth is that some of the steam has already gone out of the US and were this to continue to be the case, given that esteemed institution’s pathological aversion to short-term difficulty, the Fed's "taper" might yet prove an all too short-lived gesture in the direction of a belated restoration of monetary sanity. As the following 3 charts suggest, equity 'sentimental' valuations are at extremes and fundamentals are deteriorating rapidly, making for an uncomfortable rock- and hard-place-straddle for a Fed that faces 4 reasons it has to Taper (sentiment, deficits, technicals, and international resentment).
Via Diapason Commodities' Sean Corrigan,
To take an obvious case, look at real estate where the equities of homebuilders have fallen 25% since May. Lumber is likewise 20% or so off its spring best. Housing data come with notoriously tall error bars attached, so we should not be too categorical in our analysis just yet, but new home sales did slip to a 10-month low in the latest release, with median prices sliding to their weakest in six.
Notional dollars spent (average prices x sales) thus suffered a 15% drop in the past three months, something not witnessed since Q1 2011 and a slump frankly characteristic of past housing busts. Furthermore, this same turnover number seems to have failed in its attempt to leave behind the recessionary lows when measured against earned wages, putting it back into a range which is the weakest in three decades.
On top of that, we have seen a 2-month decline in mortgage purchase applications, taking the gauge back below the lowly average of the last three years’ post-Crash ice age and to levels typical of the mid-1990s. Refinancing activity has meanwhile plummeted by a full two-thirds, to sit despairingly in the 4th percentile of the post-LEH Crisis range.
Business revenues, as we remarked the last time we put digit to keyboard, have been decelerating to the point where future profitability, investment, and employment seem less than well assured.
Moreover, if we put an Austrian-style spin on this by comparing ‘higher-order’ revenues (e.g., those arising from the sale of capital goods, or manufactured durables) with ‘lower-order’ ones (retail sales, in particular), we again find that the economy is beginning to trespass into the twilight zone between expansion and outright recession.
In passing, one might be forgiven for thinking that this subtlety would alone be enough to render the possibility of higher bond yields entirely moot, but that would be to suppose that the Fed has any concept whatsoever of the Hayekian 'structure of production' paradigm. If retail holds up awhile and the overall job count does not immediately decline, the Wise Monkeys of the Marriner S. Eccles building will not lose much sleep over any weakness which might emerge in the disaggregated numbers, much less pay heed to the message which might be deciphered from the incipient imbalances in them. Instead they will hew to what they know best: consumer spending up – check; payrolls steady - check. Warp Factor One, Mr Sulu.
Taken to the next step, this attenuation in revenues has led us to the point where the stock market has matched its modern era highs (set – when else? – at the top of the Tech Bubble) in its price to sales of durables and to where it is beyond its previous best as a multiple of core capital goods shipments.
At 2.5 sigmas over the past fifteen years’ average of that latter ratio, equities would need to fall 20% just to revert back to the mean of what is, in fact, a historically exceedingly rich range.
In outright terms, the S&P 500 is flirting with the whole QEternity/Abenomics trend line, threatening an end to the 27% move to new highs enjoyed since last November. Having lost both its 50- and 100-day MA lines, the 2007 highs at 1575 (upon which the remaining, possibly critical 200-day MA is fast converging) are a prime candidate for watershed status.