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MorningWord 4/8/13: As I write, the S&P 500 futures are trading right where they were at 8:30, prior to the non-farm payrolls number that fairly dramatically disappointed expectations. Maybe you were confused like me of the desired outcome for those who think the Fed should continue with their endless bond buying mania. I guess the Bears are missing one simple fact, Bad Number = More QE, and Better Number Still More QE. SO you get the point, the Fed is here to stay, for the time being, as long as they think the economic recovery remains fragile and the economic world outside the U.S. remains challenged. I know I know, it is stupid to “Fight the Fed” but remaining cognizant of the diminishing returns of “QEfinity”, should be a continued background theme for any investor (raging bull or cautious bear).
John Hussman of the Hussman Funds, in his weekly letter to investors suggests that the U.S. may already be in recession:
The economic data are wrestling between two likely possibilities and a third less likely one. The first of the likely ones remains that the U.S. already entered a recession in the third quarter of 2012.
The second likely possibility is that the enthusiasm about QEternity (combined with a positive jolt to personal income from special dividends to front-run the fiscal cliff) represented another successful round of “kick-the-can” to push a weak economy from the verge of recession for another few months. When we look at the broad evidence from a variety of good leading and coincident indicators, that’s actually the possibility that I am starting to lean toward.
The unlikely possibility, in my view, is that the economy has started to walk on its own”
Husmman goes on to state:
Repeated rounds of QE have produced little but short-lived bounces to defer a recession that historically would have followed such deterioration more quickly. The chart below offers a good picture of this process.
Notice the successively lower levels, as each round of quantitative easing has smaller and smaller effects on real economic activity (speculative activity in the financial markets aside). The question at present is whether the recent bounce will prove to be temporary as well. This expectation is certainly consistent with the series of rapid-fire misses from the Chicago Purchasing Managers Index (particularly the new orders component), the national PMI reports for both manufacturing and services, and the unexpected weakness on both payroll and household employment surveys.
Now Hussman is obviously a smarter macro-mind than me, and while many market participants file him away in the perma-bear category, likely to be critical of the Fed no matter what their policy, I have always enjoyed his writing (having no knowledge of his performance). I think it is safe to assume that Chairman Bernanke is well aware of the diminishing returns of his policies, yet the nightmare scenario in my mind would be how successful will their doomsday plans (similar to TARP in 2008) work in the throws of the next financial crisis, after years and years of FED support with a massively expanded balance sheet?
ON ANOTHER NOTE, the Nikkei continues to rock and roll, making fresh 52 week highs on their own easing policies now trading at levels not seen since late 2008. While the 60% move off of last years lows seems fairly orderly when shown this way:
[caption id="attachment_24470" align="aligncenter" width="589"]
Nikkei 1 yr chart from Bloomberg[/caption]
When shown over a 10 year period, the chart below looks absolutely ridiculous when you consider that it is one of the largest equity INDEXes in the world.
[caption id="attachment_24471" align="aligncenter" width="589"]
NIkkei 10 yr chart from Bloomberg[/caption]
Many of you are keeping a close eye on Chinese equities as the Birdflu has apparently taken its toll, at least from a sentiment standpoint on Chinese equities in the last week. The Shanghai Comp closed down 62 bps overnight, recovering from a down 2% open, stopping on a dime at its 200 day moving average.
[caption id="attachment_24472" align="aligncenter" width="589"]
Shanghai Comp 1 yr chart from Bloomberg[/caption]
If you are a China Bear, the “impending” Birdflu epidemic is just the latest of worries coupled with the impending property market collapse, at a time the country transitions to a new Govt which is grappling with the realization of single digit growth for the foreseeable future. The chart above is a troubling one, with most European equity markets struggling (the EuroStoxx 50 (SX5E) is down 1.45% ytd and the EuroStoxx banking index (SX7E) is down 11% and looking precarious sitting right on massive technical support), the SPX and the Nikkei are becoming very very crowded trades.
Despite Friday’s bounce we remain very cautious at current levels and believe the next real catalyst for equities the world over is likely to be U.S. corporate earnings. If Q2 guidance reeks of poor visibility, I suspect investors hit the pause button for a bit as we digest the combination of a weak U.S. coupled with all of the macro problems that appear to be brewing overseas.
Also as bonus, I saw Green Day play last night at the Barclay’s Center in Brooklyn. Billie Joe is back and better than ever, he is a clip of the opening song 99 Revolutions and then one of my all time Green Day favorites, Jesus of Suburbia:
Jesus Of Suburbia: