Tuesday, May 05, 2009

Happy Days, Redux?

It's happy days again for the green shoots crowd, as the SPX finally completed its gut-wrenching round-trip to close up on the year yesterday. Man, those early January days of Macro Man loving risk seem like a long, long time ago.

In any case, yesterday's Fed Senior Loan Officer survey provided another arrow in the quiver of the recovery crew, suggesting that the worst of the credit tightening is behind us.
Throw in a solid Chinese PMI figure, and it's not hard to see how and why the reflationists are getting excited. USD/BRL is just one of many "risk asset" prices that appears to be sustaining a technical breakout.
At this point, readers may justifiably ask why Macro Man, a self-professed "data guy", has yet to exchange his bear claws for a shiny new set of bull horns. Well, it's a truism that we are all shaped by events from earlier in our careers. And Macro Man recalls the last recession very clearly, a time when he was serving as a buy-side economist as well as a portfolio manager.

And he vividly remembers looking at data such as that presented in the chart below and in February 2002 writing a big piece entitled "Happy Days" about the onset of a more vigoruous economic recovery.

Unfortunately for him, the chart above was punctuated by a very sharp downdraft in stock prices and a period of economic growth that was sufficiently tepid that the Greenspan Fed (including a certain B. Bernanke, esq.) was pooing its pants about potential deflation more than a year later.

So perhaps Happy Days really are here again. But you'll have to pardon Macro Man if he reaches for his hardhat whenever he hears the phrase; experience (and living in England) have taught him that the first sunny day doesn't mean that you can pack away your warm clothes until the next winter.


H(oratio) said...

Here in America, we have a theme song that you dour British chaps might be behooved to hear.

Sunday, Monday, Happy Days. Tuesday, Wednesday, Happy Days.
Thursday, Friday, Happy Days. The Weekend comes, my cycle hums,
Ready to race to you.

These days are ours. Happy and free. (Oh Happy Days)
These days are ours. Share them with me. (Oh Baby)

Goodbye gray skies, Hello Blue, 'cause nothing can hold me when I hold you.
Feels so right, it can't be wrong. Rockin' and rollin' all week long.

(Instrumental break)

Sunday, Monday, Happy Days. Tuesday, Wednesday, Happy Days.
Thursday, Friday, Happy Days. Saturday, what a day, groovin' all week with you.

These days are ours. Share them with me. (oh Happy Days)
These days are ours. Happy and free. (oh Happy Days)
These Happy Days are yours and mine.
These Happy Days are yours and mine, Happy Days.

And a few extra spy puts on top of that cone. It's on the house for now.

Macro Man said...

Hey, I'm a Yank myself who spent countless afternoons after school watching Happy Days reruns. (I even remember when the show was on prime time, pre-shark jumping!) I even put the Happy Days logo on the cover of the report....

Sven said...

I, too, doubt the longevity of this bull run. We still have not begun the healing process from the multiple damages inflicted on the system while practically all credit was disrupted for quarters. Unemployment will be on the rise for a long while yet, especially in Europe, and the de-leveraging that practicaly everyone considered the only lasting remedy hasn't even begun.

While people still worry about deflation, we have an unprcednted boost in money supply that surely must create a massive inflation problem at some point; sooner if the bulls are right.

Hell, the (car, steel, refridgerator, ball bearing, compressor) factories are shut down for months all across the globe. When did that much downtime come with anything but trouble?

Anonymous said...

I do somewhat understand why the equity market has rallied from cheap to fair value. It seems like it has been a cocktail of short covering, rebalancing and long only buying with a flavour of 2nd derivatives..

What I do not understand is how bond markets simply ignore negative surprises on any price indicator that is reported in the western world recently. The tail-risk of deflation has been priced out entirely it seems and this is what scares me most. I personally am not even sure whether it is only a tail...

Markets are basically agreeing that 10 Years from now any economic textbook will feature a special box on "Efficient monetary policy: How Bernanke managed the crisis"
It is at least worth a doubt and only time will tell

But What do I Know? said...

How about "One swallow doesn't make a summer?"

PPM said...

There seems to be a lot of faith being placed in earnings being marginally better than predicted by analysts. Yet, looking at sales, the situation isn't that rosy. The thing most difficult to manipulate on the income statement is the revenue number (Nortel aside). Is the market this easily mislead by accounting sleight of hand?

Anonymous said...

Macro Man, please forgive the ignorance, but how do you define "risk assets?" Thank you.

Anonymous said...

MM, I'm a bear myself, but I'd like to point out that one of the contributors to the continued slide in stocks when you wrote your Happy Days report in the last recession was the extremely high PE ratios...
This time around, PE ratios (using diluted earnings from continuing ops) bounced off of a low of 10, which was the lowest since at least the mid 80's. At a forward P/E of 15.8 now, however, all the good second derivative news has been priced in already. In fact, given that equities earnings yields are now 2% lower than IG corporates, I'd say that a V shaped recovery is now fully in the price. Happy Days indeed.

dblwyo said...

Sadly the real econ data is anything but sanguine:

YoY real GDP was down badly in Q1 vs Q4, wages are likely to start deteriorating once employment pressures swamp the inflation effect.

Not good but not in anybody's telescope that I can see.