From a macro perspective there are still a few major trends dominating future economic direction – primarily the government intervention and household balance sheet recession. Over the last 18 months the clear cut driver of economic growth has been the inventory restocking and government stimulus program as households have remained weak. According to Goldman Sachs the inventories and stimulus trends have helped enormously in bolstering GDP and are now likely to become drags:
(Figure 1)
While most economists and investors have now ruled out a double dip (mainly because of recent ISM reports) the inventory effect (or lack thereof) and the waning stimulus effect are likely to reveal a private sector that is once again very weak. This negative trend is really only just picking up momentum and is going to persist through 2011. I think we are beginning to see signs of this in the ISM New Orders and Inventories data already. The New Orders to Inventories ratio rarely turns negative (as it did last month) and when it does it generally precedes economic sluggishness:
(Figure 2)
The two macro trends above are also perfectly correlated with the strength in the ADS over the last 18 months. The ADS has only just recently turned negative and is forecasting a protracted decline. If the inventory and stimulus effect (see figure 1) are consistent with this data it is likely that the economy will remain sluggish for quite some time.
(Figure 3)
While we’re certainly nowhere near March 2009 levels in terms of household weakness it is still clear that the private sector is not ready to run with the baton. But the environment is vastly improved from the lows and there are signs that the private sector is at least accommodating weak economic growth (assuming no future exogenous threats). So what we have is a situation where a technical double dip might not occur, but economic growth is likely to remain very weak given the government’s lack of aid and the private sector’s continuing healing process. Thus, the economy is likely to feel like its in recession for much of 2011 and possibly longer.
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what does any of this have to do with stocks?
The economy? Oh, nothing.
Seriously, the way the stock market is acting, it makes you wonder if the economy DOES have anything to do with stocks!
right. come on TPC, the stock market and the economy, that is so 1980s. You need to get with the times. let’s talk about the new mac airbook, and let’s talk about how banana ben gonna buy my netflix from me at $300
I believe the Federal Reserve is offering $400 for all outstanding shares of Netflix. Ben loves rentals after all.
Is that a real question?
troll. I hope TPC bans you.
Troll? Here, let me help you out:
Definition of SARCASM 1: a sharp and often satirical or ironic utterance designed to cut or give pain 2a : a mode of satirical wit depending for its effect on bitter, caustic, and often ironic language that is usually directed against an individual b : the use or language of sarcasm
wikipedia: in social-news-based sites is a single /s placed at the end of a comment to indicate a sarcastic tone for the preceding text
oh we’ll get our 2xdip….the ultimate collapse of the flawed european currency and the papered over zombie-bank subprime house loans ensures it.
the end of the beginning is not in sight yet.
Here is my take:
Mar-09: Panic had set in about banks. The stress tests signaled that the government would protect banks at all costs. QE pulled down rates for borrowers of all stripes. Stimulus bill had passed. Result: stocks that were reflecting collapse began to reflect optimism and started their run.
Oct-10: Some indications of slow down (as seen above). Further QE is unlikely to dramatically alter cost structure for businesses. If anything, banks are under threat now from foreclosure putbacks. Stimulus is behind us. This suggests to me that stocks are now reflecting wild optimism. Reality is going to catch up.
Isn’t it interesting how these graphs mirror the Consumer Metrics Institute Index. A long period of slow decline than growth falling off a cliff. Next year is going to be traumatic.
Ya know? I might agree that sluggishness was the central play for the next 6 months if I wasn’t so skeered of: 1) foreclosure crisis, 2) Euro (twilight) zone, 3) commercial real estate resets.
I will marvel to see us stay sluggish and not get busted flat.
But then I am already marvelling w/ the DJIA > 11,000. That is an enormous amount of hot air…
P.S.: those first 4 posts were very funny (grinning). That was pretty snappy TPC.
Update on the foreclosure issue (from LRC: N.B. cuss words are involved)
http://gonzalolira.blogspot.com/2010/10/this-is-what-brian-and-ilsa-said-to.html#more
I wonder where my note is?
Jim Quinn of the Burning Platform:
“There were no credit cards in 1933. Without a job or a house, you needed to move to where there might be a job. Hence the mass migration from the Midwest to California "“ ala The Grapes of Wrath. Today, a neighbor in a matching McMansion down the street, with the perfectly manicured lawn, could be unemployed for three years and no one would ever know. They could sustain themselves on unemployment payments, food stamps, and credit cards. Welcome to the iDepression 2.0.”
Nice Read Via Zero Hedge: http://www.zerohedge.com/article/guest-post-idepression-20
Investors Can’t fight the FED –> FED can’t really fight the economy (with rates at 0%)
Thus, Investor’s cannot fight the economy.
It’s not a matter of if, more of when the market responds to a economic slowdown.
Oh wait, I’ve totally forgotten that all our public corporations are all going to be saved by Chindia and BrazUssia.
fast money playing catch up. hedge funds 3.5% on average in sep. casino up 9 or so %. hot money pushing the casino higher. it certainly aint retail or mutual funds and it aint pension plans.
it is downright confusing as far as s+p goes. according to COT commercials and large traders are short so that leaves who driving market? sovereigns?
I think a major point of interest is what will happen on the regulatory environment. Will restriction on capital flows grow because of the rift between the US pumping money and China stubbornly refusing to depeg. This could let to an escalation in their trade relations and retaliations in a way and another. And how will other developing nations react when they see their currency appreciate and appreciate and the US putting trade barriers. And what about taxes on financial transactions that are being debated in Europe, where politicians are trying ride a wave by saying that transactions should be taxed because they are at the root of the crisis. I think that political risks are becoming more and more important…
TPC, as I mentioned in the VXX post below, CR offers what I believe th be a more balanced view (vis-a-vis Yeves, CW) of the effects of FG/MERS on the economy (he belives the problems can be worked out and the effects on the economy will be minimal).
Does this change at all your outlook on the economy/short trade? Your thoughts are appreciated. Was just reading the Bloomberg’s headlines and it looks like we are in for another day for da’ Bulls:-)
This is the CR post. http://www.calculatedriskblog.com/2010/10/foreclosure-gate-investigations-and.html Whom do we trust CR or CW? I lean towards CR.
…then ask yourself what happens to profits. The withdrawal of stimulus is going to have ramifications for profits. I’m not optimistic about Q4 and Q1…..
We already knew at the beginning of September that sluggish growth was ahead of us. This did not stop the bulls. The projected economic growth is just one of the factors moving the market in the short and medium term. I have realized that a macroeconomic approach to investing is too blunt of a tool. It is good to put things in perspective but for successful investing more delicate instruments are needed. I would not move to cash or short the market just because the economy will be sluggish in the next several quarters.
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