We have been successfully managing an ‘in motion’ market since the August festivities kicked off. It is October and Money Managers (NAAIM), Newsletter Writers (Investors Intelligence) are thoroughly spooked and Small Speculators are thoroughly short the market. It’s a perfect contrarian setup.
Meanwhile, over in Goldbugsville there is a lot going on as well. NFTRH 363 is 30 pages of commentary and in depth analysis on all of this and also gets its geek on (with the aid of FloatingPath.com‘s awesome graphical breakdowns) and gets inside the September Payrolls report in order to flesh out the dynamics in a flagging economy.
NFTRH 363, a very helpful market management report if I do say so myself… out now.
 +142,000… (BLS release). I’ll not give up my day job as a market manager. They’d laugh me right out of the Sacred Society of Gurus. Hey, at least the Squid was worse; I read a blurb that Goldman predicted +215,000.
I am the last person you will see playing Swami on important matters like when will the stock market’s bull end or when will gold’s bear market end. One remains above the October 2014 lows and is thus in a biggest picture up trend and the other is still in a down trend, current bounce aside.
Those are simple parameters that cannot be argued with. You add in some tools, like gold ratios or bond relationships or sentiment profiles, etc. and you can add in probabilities to help form your narrative.
The ISM for August was the lowest reading since the taper drama of 2013. At just 51.1, there isn’t any real basis for suggesting the manufacturing sector is even expanding (no matter what these sentiment surveys claim about that 50 dividing line). The “correct” interpretation is one which discards the exact figure for the relativism. For once, media commentary was in the ballpark:
Manufacturing in the U.S. expanded in August at the slowest pace since May 2013 as anemic demand from emerging markets such as China translated into leaner factory order books.
The Institute for Supply Management’s index fell to 51.1, lower than the Bloomberg survey median, from 52.7 in July, a report from the Tempe, Arizona-based group showed Tuesday. A measure of exports matched the weakest reading since April 2009.
“It raises a warning flag about the outlook,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “We’re going to have an inventory adjustment and, on top of that, weak exports are going to remain a weight. We’ll see a period of time when manufacturing is soft.”
With the direction for manufacturing established, what’s left is arguing about the degree of adjustment that is, in time, absolutely going to take place. The driving imbalance remains inventory which, in the context of sluggish and even contracting sales, suggests to me something far more than “soft.” And that view was formed even before the second “dollar” wave fully crested. I don’t think the sales imbalance from that is yet revealed, though the updates in manufacturing from the regional Fed surveys suggest it’s getting quite serious.
When I wrote on Friday that I was encouraged for the first time in years over the combined rise of Trump and Sanders I meant nothing by way of suggesting either as an actual candidate or what they might do should they pull it out. If anything, I implied that the political situation might have to follow the economy; that it should get a whole lot worse before it gets much better.
The point was not so much about the candidates themselves but the palpable angst that they loosely but clearly represent. It is a growing bipartisan rejection of the status quo as it relates to the economy. For years now, the political class has been lying about the state of the recovery because economists have so fortified their temple. Monetary policy and fiscal “stimulus” are all that there is and nothing else except that which retains the political hierarchy remains. It joins Tea Party and socialists alike, to tell Janet Yellen and/or Wall Street “enough.” The uniting factor is an as-yet amorphous or ephemeral sense that “something” is wrong and that those that continue to press on as if there weren’t need to be removed.
What I mean by the title of this post is that the central-bank tightening that almost always precedes an economic bust is never the cause of the bust. However, it’s a fact that economic busts are indirectly caused by policy mistakes, in that policy mistakes lead to artificial, credit-fueled booms. Once such a boom has been fostered, an ensuing and painful economic bust becomes unavoidable. The only question is: will the bust be short and sharp (the result if government and its agents stay out of the way) or drag on for more than a decade (the result if the government and its agents try to boost “aggregate demand”)?
The most commonly cited historical case of a policy mistake directly causing an economic bust is the Fed’s gentle tap on the monetary brake in 1937. This ‘tap’ was quickly followed by the resumption of the Great Depression, leading to the superficial conclusion that the 1937-1938 collapse in economic activity would never have happened if only the Fed had remained accommodative.
I am personally not yet convinced an ultimate bull market top is in despite the obvious similarities of the recent interim top to 2007 [the first sign in this regard would be a loss of the October 2014 and August 2015 lows]. It could also be a 1998 clone, as we have noted by chart similarities and by global financial similarities (China/Asia). However, in 2007 the stock market did a good job of forecasting the coming “Great Recession” (a sanitized way of saying ‘impulsive unwinding of leverage’). Here is what economists think today (ref. Bloomberg article): http://www.bloomberg.com/news/articles/2015-09-11/here-s-when-economists-expect-to-see-the-next-u-s-recession. 2018 it is, according to a majority of buttoned down dart throwers.
What were they saying in December 2007? Let’s take a look, also from Bloomberg…
“The bottom line looks like this: The economists project, on average, that the economy will grow 2.1% from the fourth quarter of 2007 to the end of 2008, vs. 2.6% in 2007. Only two of the forecasters expect a recession, although it might feel like one if there’s sluggish growth over the next couple of quarters, as many predict. Almost all think the risk of a downturn has risen substantially in recent months.”
The point is that the majority of experts usually do not (maybe even never) see recessions coming in advance. That is why they are economists. They will tell us all about its factors and elements after the fact. They will jargon us to death with all the why’s and what for’s after the fact.
Our job is to track events in real time, protect and deploy capital and most definitely not be part of the herd. In service to that, let’s look at one more graph (courtesy of TradingEconomics.com, mark ups mine) and go on our merry way, having fully put in context the opinions of experts like Bloomberg’s recent survey of 31 economists.
Despite already having the hindsight benefit of a readily quantifiable deceleration in economic activity (orange arrows) by December 2007, economists surveyed cautiously predicted 2.1% economic growth on average by the end of 2008. They were only off by about a million miles.
Today, with an uptrend in the GDP growth rate most economist do not see trouble until 2018 or later. Of course they don’t, because all they do is extrapolate trends in good times, as with a similar uptrend leading into the 2001 recession (green arrows) and put their heads in the sand in questionable times (fading GDP into 2007).
NFTRH 360 does a 360 all around the oh so highly anticipated FOMC ‘decision’, talks a little about the accuracy of professional economists’ recession predictions and talks a lot about the US stock market.
Playing it straight, we update the market’s long and short-term technical status and get more slanted in reviewing why this is not an organic stock market bull or economic recovery.
We cover most of the other usual suspects as well, including global stock markets and a clear view of the gold sector, which made a ‘Hammer’ on Friday, can bounce, but is giving a couple of concerning sentiment signals.
NFTRH 360, another in a long line of quality market reports, is out now.