"There are no facts, only interpretations." — Friedrich Nietzsche. (February economic notables)
Below is a concise 2-page report recapping economic data from the U.S., Europe, and Asia released in February. My next report will cover recent geopolitical events (Ukraine; droughts in South Asia, etc.)
Investors are interpreting worsening economic data in major economies as transitory and manageable. Upcoming months will be key in discerning the genuine trend.
Weekly Bull/Bear Recap: Feb. 18-22, 2013
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
+ The U.S. economy is set to continue its recovery. The Conference Board’s leading indicator increased 0.2% in January. ”The indicators point to an underlying economy that remains relatively sound but sluggish,” said Ataman Ozyildririm, economist at The Conference Board. Meanwhile the ECRI’s leading indicator growth-rate remains in solid positive territory at 7.6% for the week ending February 15th — Lakshman Achuthan has egg all over his face due to his premature recession call.
+ U.S. Manufacturing is undergoing the beginnings of another inventory build. The American Trucking Association reports that its tonnage indicator rose for the 3rd consecutive month in January, notching its highest ever reading. Meanwhile, Markit reports that its PMI registered further expansion for the sector. Chris Williamson, Chief Economist at Markit said: “U.S. manufacturers reported the largest monthly rise in production for almost two years in February, suggesting that the economy is set to rebound from the weak patch seen late last year and allying fears of a double-dip recession.”
+ While the Conference Board has reported declining confidence from the U.S. consumer, on the whole, it has stabilized. Gallup reports that its measure of consumer confidence remains near a 5-year high. Bloomberg’s Consumer Comfort Survey is carving out a bottom, as is the University of Michigan’s Consumer Sentiment survey, which last week signaled a 3rd consecutive increase.
+ Home prices continue to increase (due to falling inventory levels) and will support consumer and investment psychology. Zillow reports that their pricing index’s 15th consecutive increase was also at the largest annual rate since early 2006. Meanwhile “the number of American households behind on mortgage payments fell to the lowest level in four years at the end of 2012,” according to the Mortgage Bankers Association. In the commercial real-estate sector, the AIA announces a strong surge in its Architecture Billings Index.
+ Global trade flows have bottomed and look to pick up throughout 2013. Japanese exports for January grew for the first time in 8 months, rising 6.4% on a year over year basis. Exports to China increased for the first time in 8 months, while exports to the U.S. jumped more than 10%. Meanwhile, Markit reports that increased demand from Asia is percolating to other major economies, such as Germany.
- Things are taking a turn for the worse in Europe. Markit reports a deepening downturn in February, tempering expectations for an end to the region’s economic malaise any time soon. Moreover, Italian leading indicators point to further weakness ahead (elections are coming up this weekend!) and Euro-wide car sales slump to levels last seen in 1990. Unfortunately, bullish German business conditions (due to the country’s reluctance to rebalance its economy, which is sorely needed for a long-lasting Eurozone solution) only serve to create complacency in the country. Perhaps such good economic conditions will make German citizens feel like their economy will not suffer if it left the Eurozone. A Taylor-Rule analysis of Germany vs. France clearly demonstrates why a one-size-fits-all monetary policy is tearing the region apart. Meanwhile, financial institutions in Europe remain very vulnerable and Friday’s news that only half of the LTRO money will be repaid speaks volumes of the distrust still present in the banking system. Liquidity schemes such as the LTRO only mask the underlying fundamental problems plaguing the Eurozone. They do nothing to solve them.
- Market action this week accentuates the extent to which Fed officials have warped financial markets. After a surprising hawkish set of FOMC minutes, the S&P 500 tumbled over 2 percent. The weakest multi-year economic recovery on record has only occurred because of unprecedented monetary stimulus. Any hint of ceasing, or even reducing the dosage of Bernanke’s monetary drug will induce sharp sell offs in risk markets. The foundations of the global economy remain unhinged and pose grave long-term risks to the investment outlook. Indeed many are becoming worried with the degree to which the Fed has likely affected long-term economic growth.
- Quietly, gas prices have increased for 32 consecutive days and endanger PE-multiple expansion. Along with the expiration of the payroll tax cut and the significant possibility of sequestration, investors will be surprised by deteriorating consumer trends.
- China’s Shanghai Composite falls roughly 5% as officials signal more tightening measures for the property market. Despite a rallying U.S. equity market, China’s equity measures remain mired in a long-term downward trend, which is a red flag. Want another red flag? Copper plunges more than 5% for the week. A look at the 3-yr price chart shows us that a bearish solution to a symmetric triangle is looking increasingly probable.
- An awkward moment for U.S./Chinese relations occurs with Mandiant announcing that the Chinese military accounts for a large number of cyber-attacks on America, an accusation immediately disputed by Chinese officials who point out that the U.S. also accounts for a large number of cyber-attacks on their country as well.
Weekly Bull/Bear Recap: Jan. 28-Feb. 1, 2013
U.S. Economic Activity is beginning to reaccelerate:
- Manufacturing reports this week show an improving picture. The ISM Index increases from 50.7 to 53.1 in January. New Orders and Employment subindicies are in solid positive territory. Meanwhile Markit’s PMI Index rises from 54 to 55.8. Both notch their best readings in 9 months. Regionally, the Chicago and Dallas Feds report that activity is picking up steam. Furthermore, Durable Goods Orders are pointing to a stabilization in demand with business investment increasing for the third consecutive month. Manufacturers are becoming more confident in future demand.
- Upward revisions in November, from 161K to 247K, and December, from 155K to 196K, together totaling +127K, accompany a positive BLS jobs report for January (+157K). Meanwhile ADP reports that companies hired at the fastest pace in almost a year. Challenger, Gray, & Christmas announces that job cuts for January are the third lowest since 1993. Firms do not see deteriorating conditions in the months ahead and are maintaining their headcount. The job market continues to heal.
- Light Motor Vehicle Sales start off strong in 2013. Consumption growth continues and will support the economy.
- Overall, Consumer confidence is stabilizing. While we’ve seen some indicators point to souring prospects, other surveys, such as Gallup’s Poll of Consumer Confidence and University of Michigan’s Survey of Consumer Sentiment point to reduced concern over upcoming negotiations in Congress.
- Rising home prices remain a positive for consumer psychology. Prices are set to climb throughout 2013, partly counterbalancing worries over higher taxes. Meanwhile Detroit is seeing a revival —(told you so!).
+ The global economy is set to reaccelerate in the coming months according to JP Morgan’s Global Manufacturing PMI, led by a reacceleration in China (due to domestic demand) and firming U.S. activity. Improvement in these countries is spilling over into Europe…
+ …Germany’s Markit Manufacturing PMI is now just a smidgen below 50, which delineates between contraction and expansion, at 49.8 (an 11-month high). Furthermore, Consumer climate, reported by the Gesellschaft für Konsumforschung (Gfk) group, reveals an improving state of confidence. Perhaps this is due to a recovering job market. Meanwhile, while still contracting, the majority of country-specific PMIs (Spain, Italy, Hungary, and Czech Republic) indicate the worse is over of the region’s recession. The improvement in the global economy can also be seen in Brazil, where the unemployment rate has fallen to a record low.
(Source: Markit Economics)
- Investors have piled into bullish bets (but earnings have flatlined since Q2 2011), economists all agree that the economy is poised to expand, the VIX is at 2007 levels before the crisis struck, and the bears are capitulating. All are signs of extreme complacency in the face of festering bearish macro trends……
(Weekly Readings —— Solid Line = 32-week average)
- …..and why are investors giddy? Because stocks keep on rising. But smart investors know to use REAL, not Nominal gains to correctly value wealth. "Zimbabwe’s stock market was the best performer this decade — but your entire portfolio now buys you 3 eggs." — Kyle Bass
- The U.S. Economy is extremely vulnerable and is on the cusp of recession:
- Bull are doused with a bucket of cold water as 4th quarter U.S. GDP prints negative for the first time since Q2 2009. The negative print is a crystal clear indication of how weak and vulnerable this recovery is. Curtailing government expenditures, higher taxes, and rising gas prices as the summer approaches will be too much for the economy to bear.
- U.S. Consumer confidence, as per the Conference Board Consumer Confidence survey, plunges again in January, erasing all of 2012’s gains. Furthermore, the Bloomberg Consumer Comfort Index falls for the fourth straight week. Weekly sales metrics, such as Goldman ICSC and Redbook, reveal weakening consumption trends. This ongoing trend casts a cloud over the direction of consumer spending as worries over reduced incomes due to the expiring 2-yr payroll tax holiday ferment.
- The Household Survey, embedded beneath the widely touted headline jobs number this morning, has not confirmed the improving job market for the third successive month.
- The FOMC meeting reveals that Fed officials are worried about a stalling economy (confirmed by Q4 numbers) as well as creeping disinflation. Monetary policy is powerless to arrest continued sluggish in the economy; worse, as investors appreciate the negative impact of reduced consumer incomes, there will be a crisis of confidence. ”Don’t Fight the Fed” will be a maxim of the past.
- Europe’s troubles lurk in the background, receiving very little press. The budget scandal in Spain is quietly picking steam and Retail Sales in the country fell for the 30th consecutive month in December. Spanish 10-yr borrowing costs advance roughly 5% this week. Looking at a 3-month view, we now see a higher high. Meanwhile, car sales throughout the periphery remain in a distinguishable downtrend and retail sales throughout the region signal consumer retrenchment. Moreover, Italian Consumer Confidence slumps to a 17-yr low and Business Confidence unexpectedly falls.
- If China has really bottomed and is on the brink of a sustainable recovery, try telling that to the Australians. Straya’s mining-based economy is signaling a red flag for global recovery enthusiasts.