While the auto sales data were strong yesterday, along with chain store sales (+4.7% YoY — and even the Gap surprised to the upside), we had this same dynamic in January and they produced 0% growth in total real consumer spending. Jobless claims are trending down but the employment is being centered in low-paying positions and spending is being held back by both a rise in the savings rate and the squeeze from higher gasoline prices, which has been captured by the weekly but not yet the monthly consumer confidence numbers. As I had been warning, Q1 GDP estimates, even at 2.5%, were too high, and the consensus is down to 2% right now and some are as low as 1.5%.
The ISM index, in particular the orders-inventory ratio which is down to a 5- month low, combined with the slowing trend in durable goods orders and shipments point to a rapid deceleration in capital spending ahead. This makes sense post the expiration of the bonus depreciation allowance but also the softening in the corporate profit trend, which has a high correlation with business expenditures. Lost in yesterday’s ISM and auto sales data was the news that non-residential construction expenditures were down 0.8% sequentially in January, the biggest setback in six months. The warmest winter in memory and a 35% share of home sales being accounted for by distressed activity (short sales) have the masses convinced that a durable housing recovery has arrived. Lost in the discussion is the reality that U.S. home prices have declined for eight months in a row and sitting at new post-crash lows. Some recovery.
So the virtual non-stop rally in the equity market does not really have much of a correlation to what is going on in the economy. At some point there will be some convergence, but today’s price action is a case in point. What can possibly be more meaningful than zero growth in 70% of the economy (the American consumer) for three months in a row? And a day after what was easily the worst durable goods report in at least a year. If there is a bull market, my friends, it is in complacency where the VIX index is sitting at 17x and the AAII survey of investor sentiment, which just came out, is testing 45% bulls against sub-27% bears (largely mirroring the previously released Investors Intelligence poll).
This is all about the LTROs. Have a look at page 17 of the FT — Draghi’s Cash Tonic Makes Banks Smile on page 17 of the FT... this program “remains widely popular”. No kidding. ... The banks ....are basically getting free money from the ECB for a three-year term...
At least LTRO1 was dealing with a possible breakdown of the system since the banks weren’t lending to each other. LTRO2 is clearly an overt policy move from the traditional central bank role of being the lender of last resort (which even LTRO1 was to a point) to being the lender of first call, as Peter Tchir aptly puts it...
Somehow a long gold, short euro barbell looks really good here. Bernanke, after all, now seems reluctant to embark on QE3 barring a renewed economic turndown while the ECB is moving further away from the role of a traditional central bank to take on the role of quasi fiscal policymaking... Why would anyone want to be long a currency representing a region with a 10.7% unemployment rate, rising inflation rates and free money? Mind you — the same can be said for the U.S. (where the U6 jobless rate is even higher), which is why the best currency may be physical gold (or the producers that trade very inexpensively here and you pick up some leverage)
As for equities, it’s been a very nice run since LTRO1 and there is clearly tons of enthusiasm out there. The same folks that were telling you to be 100% exposed back in 2008 are back telling you to ride the momentum wave today...
Beware of perma bulls at times like this.
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