Wednesday, March 23, 2011

What about US?

We have now had a couple of days of relative market calm and, as the dust settles, it's time to emerge from the bunker and see if the map in TMM's hand still reflects the landscape in front of them. We were originally thinking of doing another hatchet job on Mervyn King, but instead decided that he was doing a good enough job of that himself. TMM reckon Gaddafi stands more chance of winning the Nobel Peace Prize than Merv does of ever hitting the inflation target. Needless to say, were the Governor in the employ of a private company, he would have been sacked months ago.

As readers may recall, TMM had been inching towards positioning for a growth scare as their Dr Copper-based ISM model was flashing a warning light, the bond market began to trade as though economists were too optimistic and about to downgrade their growth forecasts and Chinese exports - whether a result of the New Year or not - suddenly woke up those caught lazily long of risky assets. The ongoing MENA unrest and background bid to Oil are certainly bound to have a negative impact on the US consumer, and sure enough, the recent Michigan Consumer Confidence numbers showed something of a collapse... Indeed, TMM's US consumption model (see chart below - based upon consumer credit growth, consumer confidence, income growth and household net worth), having diverged from Real PCE growth during 2010 was showing signs of re-accelerating prior to the recent calamities, but has now dived back to the 2010 lows as Gasoline marches towards $4 a Gallon. It is not looking promising for Joe Sixpack...

The eyrar of Dusky Swans TMM mentioned two days ago had them expecting what began as a de-risking episode to morph into a fully-fledged growth scare. However, despite all of the above, Real Money refused to be shaken from their positioning (through either skill or rabbit+headlight functions) and instead we sit 4% off the intraday lows in Spooz. So what is clear to TMM is that in order for markets to undergo a more meaningful growth scare, Real Money will need to be persuaded that the macro outlook has changed materially. And while TMM reckon the outlook has certainly changed negatively for the global production cycle (given Dr Copper's dancing and China's sequential growth slowdown) and also for the consumer (as a result of MENA spill over into Gasoline prices), they were forced to reassess their view with last week's exceptionally strong Philly Fed survey. In this, the 6m ahead CapEx expectations component rebounded to multi-year highs, pointing to a re-acceleration in Non-Residential Investment (see chart below)...

...and TMM's private payroll model is also consistent with a second month of ~220-250k job growth...

...which means that they are forced to turn neutral on growth given the mixed messages.

Of course, the other wild-card that a few of TMM's smart mates have highlighted is the potential knock-on effects to the global supply chain as Japanese IP collapses due to plant shutdowns. Now, TMM do not have a clear idea as to the effect of this, and will have to do some work on it before deciding whether it is a game changer or not.

But, as a result of the past week, the market has been reminded that Real Money is the strong hand out there and until the economic message turns more decisively, then the pain trade for markets has to be higher as HFs are forced to chase. That economic messsage may not appear on the real money radars for a couple of weeks as post-swan data starts to be released. But until that happens the real money mob will continue playing Achilles and buy equities.

12 comments:

Minty said...

I did a fairly chunky trade with one of these real money chaps yesterday and discovered today that their portfolio was underweight risk. Now they are flat risk and from next month they intend to get long risk.

I am not an eternal bear like some but I do find this a peculiar time to be thinking about getting long risk. Perhaps their investment strategy (read: bonus cycle) is longer than mine...

Bob_in_MA said...

One problem with using growth in outstanding consumer credit over the last couple of years is obviously the extraordinary level of write-offs. Not only do they mask what might be increases in new lending, they also increase disposable income. When my brother-in-law got the bank to take 20 cents on a dollar on his massive credit card debt, he could spend more burning hydro-carbons, his main recreation.

You can see the combination of lower debt and and rates in the big fall of debt service ratios:
http://www.federalreserve.gov/releases/housedebt/default.htm

Not that accounts for the entire gap in your graph...

cpmppi said...

Bob,

Thanks, that is a very good point. But yes, even applying a ~10% discount for those writeoffs doesn't account for all the divergence - perplexing.

cpmppi

nick said...

I have two questions...Are there many places that there isn't some form of unrest going on or building right now..? This scares the s**t out of me...I totally agree that we are going to witness some growth shock sooner or later...
If the war in Libya goes on longer than planned is it going to have an impact on the UK fiscal situation...?
A great post as always...cheers guys..

Sid said...

Don't forget about the ongoing QE. As long as part (or most) of these flows gets allocated to risky assets, they provide some level of support during risk-off moves and amplify gains during bounces (and seem to disrupt market's natural dynamics by making the retracements more shallow, at least for equity indices).

Leftback said...

Sid puts his finger on it. The ongoing liquidity tide apparently lifts all boats, including oil tankers, European yachts, US aircraft carriers, Chinese junks, and even radioactive boats.

This will be true until one day it isn't, at which point others will notice what we have already discussed here - that many of these boats are exceedingly leaky. That day will arrive unannounced, but before the scheduled end of QE2. Sell in May.....

Nic said...


There isn't any way to hide how bad the new home sales numbers were yesterday in the US.

Fits with your chart on non-residential investment

abee crombie said...

BTFD is so ingrained right now I think we need a big shock to turn the tide. Even those who were expecting a pull back prior to the past 2 weeks, were really only looking for a 7-10%, which we got

Stocks are still decently cheap, earnings growing and liquidity ample.

I'm waiting for:
-earnings misses/downward revisions
-bond market sell off (30y > 5%, 10y >4) before sticking my neck out

Skippy said...

What an innings by Ponting!! Will it be enough?...

Tyler said...

Great post.

I'm holding out a bit longer...but you're probably right, JBTFD.

yakoondah said...
This comment has been removed by the author.
yakoondah said...

great post as usual, but I can't help but wonder - are you long UK rates or what?? why continuously nag on the King? he's doing such a fabulous job, holding out with hikes until he sees a real recovery.
you think a rate hike will help hold commodity inflation?
you think the brit soggy economy needs some cooling down?