Just four months ago…
Markets have had a good run from the third quarter earning`s
selloff, the inevitable Santa Claus rally, and the first quarter new money
being put to work. But all this talk about some Super Cycle turn in the economy
is putting the proverbial cart ahead of the horse.
How quickly things can turn. The economy was reacting so
poorly at Jackson Hole that Ben Bernanke needed to implement another round of
stimulus in QE3, this stimulus measure failed to boost asset prices
substantially, so Ben Bernanke tweaked QE3 to try and juice up markets with
additional treasury injections.
The economy is so bad in Japan that they needed to replace
another prime minister, employ additional stimulus measures, and weaken their currency.
Auto sales are so bad in Europe that major downsizing has
occurred. Britain is currently in a recession, and China has been on a two year
downtrend in growth.
Just to provide a little historical context to put this
recent market rally in perspective. It is a good idea to separate results
oriented thinking, i.e., higher markets from the actual global economic conditions.
Same ole pattern so far
Most of the earnings results have been tepid at best, these
are numbers that are targeted as easy beats by corporations, and they are
barely meeting these targets via share buyback programs. Not exactly the kind
of profits necessary for 500,000 jobs being created every month reflective of a
healthy cyclical turn in the economy.
I have seen nothing so far that differs from the same
pattern that has taken place for the past three years. The pattern is a run-up
of asset prices and markets for the first four months of the new year, then a
substantial summer selloff, culminating with the need for additional QE
programs, and a year-end rally in markets.
No summer selling allowed
So we will not know anything about the economy until this
pattern is broken. So asset prices continue to climb higher over the summer,
the fed doesn`t need another QE program, and the market continues to finish the
year strong.
The three things I will be watching
The three things that I will be looking at to verify a
healthy turn in the economy would be once the fed stops the QE stimulus, do
assets continue to climb? So can the private sector take over where the fed
leaves off? And I am not even talking about raising interest rates. Just the
removal of QE stimulus programs of buying treasuries and mortgages.
The second component of a healthier economy would be raising
wages due to corporations fighting over talent, the job pool getting larger as
the underemployed start to become employed to their potential, and job creation
numbers every month averaging 500,000.
Where corporations feel they better start hiring, even as
projects are 6 months to a year down the line, just to ensure that they can get
the people they need due to a tight job market.
The third element of an economy finally starting to recover
would be a couple of 5.5% and 6% GDP quarters thrown in the mix, as given the
pent up demand of a five year 2% growth trudge fest, a genuine recovery or turn
in the economy should have some explosive growth quarters.
The kind of quarters where retailers can raise prices, and
consumers can actually afford these higher prices, and not wait for sales to
dictate discretionary spending. Therefore, higher margins in the retail sector
would point to a stronger economy.
Why the rise in the transports can be misleading this time
around is that with the revival in US oil production, the railroads are skewing
the numbers due to a major increase in rail shipments of oil cargo.
Wake me up in May
It is easy to throw around slogans like the beginning of a
new Super Growth Cycle when assets are ramping during what has traditionally
been a strong period for assets during the last 3 years even with a 2% growth
trajectory.
However, wake me up in May when the bulls have started
locking in profits for the year, and all the sudden Europe is in trouble again,
debt to GDP ratios actually matter, and no more fed purchases are running every
month, and see if all the bullish euphoria still remains.
Because at this rate, if we truly are in a new super cycle
growth era, by May the pundits will be talking about a “Once in a Generation
Super-Super Growth Cycle!
Further Reading - Get Ready for Another Sell in May and Go Away (Published April, 2011)
Further Reading - Get Ready for Another Sell in May and Go Away (Published April, 2011)
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