Wednesday, September 15, 2010

US Deluding Itself Economically? Uh - YES! & SEX! DRUGS! And No Rock 'n Roll Except IN THE BEDROOM! (Whatever!) & Ghouls & Skulls & Bones - Oh My!

Friends and neighbors, don't read the following if you are still "hopeful" that we can escape the logical conclusion of our wicked ways. (No, not mine, of course. Or yours, even more, of course.) Lots of insight on the coming travails to be found at John Mauldin's Out of the Box (emphasis marks added - Ed.):

Market Still Deluding Itself That It Can Escape The Inevitable Denouement

Albert Edwards

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930's experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown.

In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.

I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can't remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% - the steepest fall since Q3 2006.

Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts' optimism confirms we are right on the cusp of falling forward earnings (see chart below).

I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August's 67k rise in private payrolls and an upwardly revised July rise of 107kbeat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (i.e., Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS, why can't the market? Because it is bad news, that's why.

August's rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging indicators. The leading indicators - new orders, unfilled orders and vender deliveries - all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (e.g., Philadelphia Fed work week) are SCREAMING that recession is imminent (see left hand chart below).

The real reason why markets reversed last week was that they got ahead of themselves. Aside from the end of 2008, government bonds were the most over-bought they had been over the last decade. And in equity-land the AAII two weeks ago recorded a historically low 20% of respondents as bullish (see chart above). These technical extremes will now be quickly worked off before the plunge in equity prices and bond yields resumes.

I am often asked by investors with a similar view of the world to my own (yes, there are some), whether the equity market will ever reach my 450 S&P target because of the likelihood that further Quantitative Easing will prevent asset prices from falling back to cheap levels.

Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a "portfolio balance channel", but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity.

Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes - (see GSW 21 January 2010, Theft! Were the US and UK Central Banks Complicit in Robbing the Middle Classes?).

The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below). The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.

In the absence of a cyclical recovery I cannot see how QE is any different in its ability to revive asset prices than lower rates in anything other than a temporary fashion. (Interestingly many of our clients think QE2 might give a temporary fillip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.)

If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week "let them keep pressing their buttons." Ultimately they cannot fool all of the investors, all of the time.

And then, of course, there's always this brand-new news:
The report, presided over by the former deputy director of Britain's foreign intelligence agency, MI-6, says the threat from al-Qaeda and Taliban has been "exaggerated" by the western powers.
You don't say. Okay, enough of that - back to the frat house party! And do they know how to party? Just listen! (Emphasis marks added - Ed.)
Frat House for Jesus

The Entity Behind C Street Peter J. Boyer One midwinter night in 2008, Senator John Ensign, of Nevada, the chairman of the Senate Republican Policy Committee, was roused from bed when six men entered his room and ordered him to get up. Ensign knew the men intimately; a few hours earlier, he had eaten dinner with them, as he had nearly every Tuesday evening since he’d come to Washington. Now they were rebuking him for his recklessness. They told him he was endangering his career, ruining lives, and offending God. The men leading this intervention considered themselves Ensign’s closest friends in Washington. Four of those who confronted Ensign— Senator Tom Coburn and Representatives Bart Stupak, Mike Doyle, and Zach Wamp — lived with him in an eighteenth-century brick row house on C Street, in southeast Washington, a short walk from the Capitol. The men regarded themselves in part as an accountability group. Despite their political differences — Coburn and Wamp are Republicans, Stupak and Doyle are Democrats — they had pledged to hold one another to a life lived by the principles of Jesus, and they considered the Tuesday supper gatherings at C Street an inviolable ritual.

The regulars at the dinner included the nine men who lived at the house, along with half a dozen colleagues and friends who were non-residents. Every Tuesday evening, they would convene in the first-floor living room of the C Street house, a large space furnished with a long leather sofa and stuffed chairs. A bookshelf was filled with political biographies and James Patterson novels, and paintings of hunting scenes and sailing vessels hung on the walls, suggesting the atmosphere of a men’s club, or, as Coburn put it, a fraternity house. (Some of the private bedrooms upstairs, including his, were usually in a state of collegiate disarray.) After some small talk and friendly ribbing, the group broke up, and the men took their places in two narrow, adjoining dining rooms down the hall.

The meals were prepared by a volunteer host couple who lived in the house, and were served by a team of silent young men, also volunteers, who were part of the group’s mentoring program. At mealtime, the tone turned more serious, but the subject of conversation was rarely politics. Spiritual issues and the most intimate personal matters were discussed, with the assurance of absolute confidentiality.

Coburn, the senior man in the house, enjoyed these sessions, but at dinner that Tuesday night in 2008 he was plainly troubled. Finally, he spoke out. “Guys,” he said, “we’ve got a problem in the house.”

One day some weeks earlier, Coburn said, he had learned that John Ensign, who was married, was having an affair with Cynthia Hampton, the wife of one of his aides, Doug Hampton, and there had been an immediate intervention that same day. Meeting in an upstairs room at the C Street house (a room that was occasionally used for marriage counselling), Doug Hampton, accompanied by Coburn and three lay ministers who manage C Street, had confronted Ensign about the affair. The encounter was filled with recrimination and tears, and culminated in Ensign confessing and vowing to repent. Coburn returned to the Senate, but the others remained with Ensign, handing him a pen and paper and dictating a letter to Cynthia Hampton declaring his intention to end the affair. “Cindy,” the letter began. “This is the most important letter that I’ve ever written. What I did with you was wrong. I was completely self-centered + only thinking of myself.” Ensign wrote that God wished for the two marriages to heal, and for the two lovers to “restore our relationships to Him.” The letter was put in a FedEx envelope, and addressed. The three ministers — Marty Sherman, Tim Coe, and David Coe — drove with Ensign to a FedEx station, and watched as he slipped the letter into the drop-box.

Hearing of this weeks later, the men at Coburn’s table were astonished. Ensign, a handsome, silver-haired conservative, was a Republican with national prospects. He and Doug Hampton had been extremely close, attending religious retreats together, and even buying houses in adjacent Las Vegas neighborhoods. Cindy Hampton had been Ensign’s campaign treasurer. Ensign’s Pentecostal faith, embraced when he was in graduate school, had been a central part of his public identity. An active member of the evangelical group Promise Keepers, he had publicly pledged himself to a life of “spiritual, moral, ethical, and sexual purity.”

According to Doug Hampton, Ensign, after mailing the letter and shaking his escorts, had telephoned Cindy Hampton and begged her to disregard the package he had just sent. He soon met her again, in Las Vegas, where they resumed the affair.

And on and on and on (read it all, folks). Gotta love those Xtian party animals! And wife stealers. Reckon there's anything in The Bible (brrrraaaaaaahhhh) about that? Like a special commandment or something? Ohhhh! Yeah! They must be just lovin' that forgiveness session.* On a more serious vein of thought, do you actually think you know all about Obama's advisers? I've had my problems with little Austan Goolsbee from the first, but I thought there had to be something special about him because with that name, how could he be anything but SPECIAL? My man Russ Baker has the real story (full of Skulls & Bones!). (Emphasis marks added - Ed.)
Barack Obama is on the road these days, taking off after the special interests and elites, and defending the middle class. He is talking about equity and openness. He wants to end tax cuts for the wealthiest. Given Obama’s rhetoric, one might think that in his appointment recently of a new chairman of the White House Council of Economic Advisers, he’d have turned to someone with special sensitivity to the plight of the average American. Obama said he did just that. In naming his choice, Austan Goolsbee, the president declared:“He’s not just a brilliant economist; he’s someone who has a deep appreciation of how the economy affects everyday people, and he talks about it in a way that’s easily understood,” Obama said.

Perhaps. But when you think of institutions that generate a deep appreciation of the plight of ordinary people, what do you think of? Surely not Skull and Bones.

In fact, Goolsbee, who is only 41 and therefore just two decades out of college, was a member of that exclusive Yale secret society that also produced so many bankers, members of the intelligence apparatus, and three generations in a row of Bushes. It’s not like Skull and Bones is a large outfit — just 15 people are “tapped” for it every year.

Goolsbee doesn’t want to talk about this. He demurred during an email exchange I had with him in 2008. The press itself is unsure of how to handle the matter, and usually doesn’t mention it at all, or at most, in passing, as part of long biographical sketches.

Perhaps it’s not fair to raise this issue. Perhaps secret societies are just trivial things, barely above fraternities. But they mean something to those who join — the promise of special access and insider status. The public and the media have a right to question how membership might influence decisions and favors affecting another fraternity that is so good at gaming the system: Wall Street. And wonder who is left out.

To quote John F. Kennedy, speaking to the American Newspaper Publishers Association:

The very word “secrecy” is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths and to secret proceedings. We decided long ago that the dangers of excessive and unwarranted concealment of pertinent facts far outweighed the dangers which are cited to justify it.
Suzan * You can't make this stuff up half as shocking as the truth turns out to be. (Although . . . considering that cast of hypocritical characters . . . maybe not.) _______________

3 comments:

Tom Harper said...

John Ensign, Tom Coburn, Bart Stupak, Mike Doyle, and Zach Wamp all in the same room -- didn't anybody have a grenade or anything? Or tear gas, or something :)

darkblack said...

Throw some holy water on them and they'd probably self-immolate.

;>)

Suzan said...

Tom,

Aren't we baaaaaad? I was thinking the exact same thing! Hope their Jesus is watching over us (cause we suuuuuuuuuuuure neeeeeed it).

DB,

heh heh heh heh

Love you guys.

Keep the non-faith!

S