Weekly Bull/Bear Recap: Nov. 12-16, 2012
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.
+ Weak economic data and fiscal cliff concerns have produced a buying opportunity for risk assets. Firstly, weakness in this week’s economic data is due to Hurricane Sandy. Data will revert to trend growth soon and surprise investors to the upside. Finally, we are beginning to see the contours of a resolution as per recent remarks from Obama and Boehner. Democrats will pile the pressure on Republicans to relent. Lawmakers understand the consequences of non-action and will naturally act in time to avoid the bearish scenario.
+ Long-term U.S. economic bullish tailwinds are forming before our eyes. Shale oil and “fracking” look to make the U.S. an energy powerhouse, spawning a wave of manufacturing investment and job creation. The U.S. is forecast to be an oil exporter by 2030. Furthermore, the housing market is on the mend with housing bellwethers reporting improved earnings trends, economic data showing falling inventory levels, evidence of an improving trend in delinquencies, and leading indicators such as the S&P Homebuilders index and lumber prices signaling increased vigor ahead. Finally, China continues to show stabilization; a rebound will ensue in 2013. Longer-term, new leadership will ensure that the country’s important 5-year plan is properly executed. These bullish tailwinds will grow stronger in the coming months and will cause a further uptrend in Citi’s Surprise Index (a measure of investor sentiment)…
+ …In fact, sentiment on Main Street continues to improve and U.S. economic growth quietly surprises to the upside in the 3rd quarter.
+ Athens will likely be given additional time to digest austerity cuts. European leaders understand that they must give Greece time to adjust. This is a positive step and shows that political will for a unified Europe remains resilient. Furthermore, GDP data for France, Germany, and Italy print better than expected.
- U.S. companies fear the fiscal cliff and government gridlock is set to continue, all the while bailouts persist. Falling core capital goods orders (affecting manufacturing), souring small business sentiment, and weakening consumer spending are ingredients for a self-fulfilling prophecy of recession. Promises of further monetary easing are met with risk markets shrugging. Monetary policy has become powerless to stop continued economic weakness.
- Germany will be entering recession soon. The important ZEW survey implodes in November, falling 4.2 points to -15.7. A negative balance indicates that more experts expect the economy to contract over the next 6 months. A political crisis in the Eurozone is increasing in probability. How can Germany bailout other countries when it now needs stimulus of its own? That will be a major question on November 20th when the Bundestag votes on the next tranche of aid to Greece.
- Meanwhile, things are taking a turn for the worse in most if not all of Europe. For September, Spanish industrial orders collapse almost 6%, while Eurozone industrial production falls the most in 3 years. In France, recession is knocking on the door and Germany is pondering critiquing the country’s economy (good luck with that). Meanwhile, most periphery nations are plagued with increasingly violent strikes and protests; the Greek government is beginning to lose control as a GDP print of -7.2% in the 3rd quarter has prompted the Prime Minster to announce that a “Great Depression" has descended on the country. The IMF and EU continue to spar over the details of a new aid package —wavering IMF support is further fuel for uncertainty.
- Weakness in Europe is spilling into Asia, with Japan on the cusp of another recession and Taiwan experiencing some intense market declines. Meanwhile, geopolitics is further clouding the outlook. Israeli airstrikes kill the leader of Hamas’s militant wing. This is occurring within the backdrop of already high tensions in the region; a report from an U.N. agency fuels further fear of military conflict between Israel and Iran.
A weak economy and high unemployment could hurt President Barack Obama re-election chances in November and bolster Republican challenger Mitt Romney’s campaign. Republicans are in Tampa, Florida, this week to formally nominate Romney and have pointed to the dismal growth in making the case to elect their candidate. (via New GDP Numbers Do Obama No Favors — US Business News - CNBC)
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I’ve had a jump on this trend since the beginning of the year:
"While Obama has exercised enormous patience for China’s economic restructuring, political will is clearly decreasing. Mitt Romney looks to be the front-runner for the Republican Party in the presidential elections. It is clear that he has no misgivings on China being a currency manipulator. If the U.S. economy were to go into a double-dip recession, Obama’s chances of reelection would decrease markedly, while Romney’s would increase. The probability of this political outcome can be seen in real time here, here and here (notice the inverse correlation between the final two charts).”
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Here’s my mid year outlook:
"If one’s higher probability scenario calls further economic turbulence, like mine, it would be prudent to begin wondering what life would be like under a Romney presidency in regard to global trade."
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While it’s not a given that Romney will win, it seems that a worsening economy would doom Obama.
On the other hand, the revision upwards was due to stronger than expected consumer spending:
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“The upward revision to second-quarter growth was largely because consumers spent at a slightly faster pace than first estimated. Consumer spending grew a 1.7 percent rate, better than the 1.5 percent initial estimated. Exports, which add to growth, were also stronger, growing at a 6 percent rate.” — CNBC
The result may embolden the Social Democrats as they align with French President-elect Francois Hollande in an anti- austerity front pressing for steps to spur economic growth to counter the crisis, according to Thomas Costerg, an economist at Standard Chartered Bank in London. (via Merkel’s CDU Defeated in Worst Postwar Result in Biggest State - Bloomberg)
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We could be in the midst of a interesting turn of events.
Germany has gotten the message that austerity downright isn’t working and is creating an politically explosive situation. Meanwhile, the increased tolerance for inflation from the Bundesbank could be setting the stage for another round of monetary easing from the ECB.
A “Grexit” will likely result in turbulent markets. But it’s becoming clear that monetary authorities will fight the volatility the only way they know how. Ctrl + P. QE in the form of additional purchases of periphery debt (Portugal, Italy, and Spain in particular) to battle contagion.
Furthermore, China continues to shift its monetary stance towards growth-friendly rather than inflation-fighting.
For these reasons, it’s challenging to see how markets can enter a sustainable and uninterrupted bear phase. Volatility is set to rise and sell-offs are likely to continue in the short-term; however, from a medium to long-term perspective (1-5 yrs), these trends support positions in commodities and precious metals. The reflation trade may get an extra ooph soon.
Investor sentiment is increasingly bearish, therefore, this thought process isn’t all that mainstream.
(via Merkel resists calls to put growth before reforms - chicagotribune.com)
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Recent news; such as the Bundesbank softening its stance on inflation, the EU relaxing stringent deficit rules, as well as support for wage increases in Germany to support domestic demand, are signs that Germany is getting the message from the rest of Europe, growth must accompany austerity measures.
However, Merkel made clear again today that there will be no Eurobonds. As I said here, “we’ll budge here and there, but we’re not fundamentally changing our fiscal stance. No Eurobonds or a backtrack of austerity.”
Maybe it’s Germany sounding tough, but not backing it with action. In fact, we are seeing a trend of Germany extending more of a helping hand. The Bundesbank softening its stance on inflation is a big deal (a fundamental change in monetary stance). Perhaps this is setting the stage for monetary easing from the ECB while fiscal adjustments take place.
Furthermore Merkel is actually getting heat at home for not extending growth measures to the rest of Europe. The North Rhine-Westphalia election in 3 days will be interesting to see if Germans may be changing their mood to further austerity.