Tuesday, January 12, 2010

A kick in the tail winds

Some folks look at an empty glass and call it half full.

"The economy's 'tailwinds' (tame cost-of-living, less inventory disinvestment, recovering stock prices, and a still relatively low dollar) should offset the familiar 'headwinds' (jobs and the credit crunch) enough to support moderate 2010 real GDP growth of 2.6%," wrote Maury Harris, chief U.S. economist for UBS Securities, and as reported in Rex Nuttings' MarketWatch report.

That's, first, "tame" cost of living. It's tame because deflation is so rampant in the US that, despite unprecedented US fiscal stimulus, the cost of living inflation rate remains with hardly a heart beat. Cost of living is no tailwind when lack of income can't take advantage.

Less inventory disinvestment is simply the reality check that car companies and other consumer product sellers must, at some point, have something to sell or roll over. The operative and relative words are less disinvestment. That hardly counts for something positive. Which, again, ain't much of a tailwind.

The recovering stock price story, now that is the cynical part. It is so dissonant with the world outside Guambat's burrow that it has caused normally not deranged people to go somewhat paranoid. See "Analyst charges that government is manipulating markets", another Rex Nutting report. Suffice it to say that it has been a lightly supported, exponential spurt of deadly but dubious detachment from Main Street. In other words, business as usual for Wall Street.

Which leaves us with the last "tailwind", the weak, indeed moribund, US dollar. To a great extent that is simply a derivative of the first factor, which has been a low cost of living regime brought on and/or propped up by Japan-style low government interest rates. And the low rates are still not low enough to encourage banks to lend. They won't even lend money that is being given to them.

So, Guambat turns to the head winds, and where better than to a bloody whinging Pom, who looks at a glass overflowing and will only concede it is half empty.

Ambrose Evans-Pritchard writes America slides deeper into depression as Wall Street revels:
The [US] labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.

Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck's Grapes of Wrath.

It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.

David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.

For the record, manufacturing capacity use at 67.2pc, and "auto-buying intentions" are the lowest ever.

The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.

[And note, US Consumer Credit In Record Drop, Biggest Since 1943 and US Home-equity delinquencies rise to record level.]

Europe is even worse.

Mr Rosenberg is asked by clients why Wall Street does not seem to agree with his grim analysis.

His answer is that this is the same Mr Market that bought stocks in October 1987 when they were 25pc overvalued on Shiller "10-year normalized earnings basis" – exactly as they are today – and bought them at even more overvalued prices in 2007, long after the property crash had begun, Bear Stearns funds had imploded, and credit had its August heart attack. The stock market has become a lagging indicator.

Tear up the textbooks.
Have a nice day.

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