'I Love the Delusion of the Markets at this Point in the Cycle'

Since I started publishing Financial Armageddon in late-2006, I've often railed against the incompetence and tomfoolery of highly-paid Wall Street "strategists" (note the double quotes). Many of these so-called experts are clueless data-regurgitators or ivory tower economists with above average communications skills. Indeed, it seems to me that most of the "stars" of the forecasting game are simply being rewarded for having the gift of gab, rather than their ability to look past the trees and size up the layout of the forest.

But as with most generalizations, there are exceptions. Surprisingly -- yes, I am cynical -- a very small number of those who know what they are talking about, have something intelligent to say, and know how to translate their insights into clear and interesting prose have been recognized as such. I am referring in particular to Albert Edwards, the number-one ranked global strategist for I-don't-know-how-many-years running, and his sidekick Dylan Grice, who placed second overall in the 2010 Thomson Reuters Extel Survey, both of whom are members of the strategy team at Societe Generale.

In his most recent Global Strategy Weekly, Mr. Edwards touches upon two topics near-and-dear to my heart: the real state of the economy and the utter cluelessness of most equity investors [italics mind]:

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930's experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.

...

I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August's 67k rise in private payrolls and an upwardly revised July rise of 107k beat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS (link), why can't the market? Because it is bad news, that's why.

August's rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging indicators. The leading indicators new orders, unfilled orders and vender deliveries all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent.

The real reason why markets reversed last week was that they got ahead of themselves. Aside from the end of 2008, government bonds were the most over-bought they had been over the last decade. And in equity-land the AAII two weeks ago recorded a historically low 20% of respondents as bullish. These technical extremes will now be quickly worked off before the plunge in equity prices and bond yields resumes.

Comments

[crash hemut on?]

When realize that basic rights like due process have disappeared we'll question the whole model then crash.

September 6, 2010
Barack Obama, Where Is Our Constitutional Right To Due Process

My hat's off to all of the attorney's and the handful of judges around the country who have been willing to stand up for JUSTICE and The American Way but I fear that the handful of them are just not enough. What we need is a large grass roots effort by "The People" united as we must be to take back our rights and our country. We need to put the "us" back in the U.S. and fight the demons who will have us be the USSR.

We need to unite as Citizens For The Restoration of Our Rights, send letters with thousands - if not millions - of signatures to our President, Congressmen, US Attorney General, the Attorneys General of all 50 states and to the media to begin this "financial civil war" to restore the real Republic For Which We Stand.

For those of us old enough to remember the old Soviet Union (USSR), where the people had few if any rights might see some similarities.

Little by little our constitutional rights have been taken from us and what is taken is NEVER returned. It all began with the so called Patriot Act. A removal of many of our rights in the name of national security. Now this Act has bled over to other areas of our Constitution.

http://tinyurl.com/2wn7q4g

[statistical abnomaly?]

When Ignorance Is Bliss, The Recession Is Truly A Depression

With the market still drunk with hopium and grotesque stupidity from last week, after surging triple digits on an NFP number which was exactly as expected (returning strikers added 10,000 workers and the Birth-Death model, when accurately measured, contributed a net 17,000 jobs, so strip out these two effects and we actually end up with +40,000, which was bang on the consensus estimate) here is another reality check from David Rosenberg for all those who may be confused and believe that buying the "dips" or the market is in any way a prudent decision, when all it does is begs for someone to pull the rug from under the feet of speculators who believe that momentum and an implied correlation of 1 is indicative of improving fundamentals. Additionally, as nobody else seems to enjoy touching the topic, here is another observation on why we continue to live in a depression.

From David Rosenberg, calling it how it is as usual.

http://tinyurl.com/27cvc2c

[The public keeps getting fed the same bs]

If you play along and contribute to the mechanics of the great casino, then you are treated as a “serious” economist or analyst, regardless of how many times your advice has been completely off the mark, or how many middle-class nest eggs you destroyed in the process. If you question the conclusions of the pundits and talking heads, or, God forbid, question the validity of the system itself, you are immediately marginalized as a “kook” or “conspiracy theorist”. The workings of the mainstream financial world are more inbred than Hollywood and Washington D.C. combined.

Cable news providers like MSNBC and CNN have set the American people up for fall after fall; sometimes because they were blinded by their own bells and whistles, sometimes because they deliberately and blatantly lied in order to create engineered market sentiment. In the wake of the initial credit market collapse of 2008, these people, who didn’t see it coming and denied it was happening, still have their jobs, still have their TV shows and news columns, and, are still generally blowing smoke up our posteriors.

Counting U-6 measurements of those not considered by the Labor Department as unemployed because they are either off jobless benefits or are working part time, the jobless rate of the U.S. has hovered near 20% for over a year at least. During the Great Depression at its peak, unemployment reached 25%, but even this comparison is misleading. The population of the U.S. during the 1930’s was around 122 million, meaning far less working age adults than there are today in our population of 310 million people. In fact, the actual number, not percentage, of unemployed and underemployed today far exceeds that of the Great Depression. The number of desperate people, the critical mass of poor in a country, can have a far more insidious effect on its social environment than the abstract historical “percentage”, at least in my view.

http://tinyurl.com/22q5sgv

[kevinearick]

Gift of Gab

So, there I am, guy with multiple government checks starts telling me that the homeless are destroying the community. I let him get up a good head of steam …

Once across the gap, the new system may be disassembled and reassembled in any number of ways to create economic profit, but there is one and only one bridge construction, and each component has a unique key required for catalysis.

Those without sin, light the first match, among replicated libraries, driving fluctuating bits, inside variably unstable circuits, all riding on someone else’s kernel. Not even the cartels may be securitized.

Back to our elevator multinational example:

The vertically integrated system only cares about billable hours, because, one way or the other, the revenue is guaranteed by the nation/state system, as everyone is now learning, which efficiently sucks it up from the communities, through one-way gates built for the purpose, through all the misdirection under discussion. As a result, the incompetent mechanic that creates more work, creating additional billable hours, is rewarded, and that same behavior continues into the community, creating more demand for misdirection, make-work services with associated accounting revenue, and financial salespeople, Wall Street, ends up directing the show, transferring all economic profit from the communities to the multinationals, until there is no point in real work, and the entire economy becomes nothing but hollow make-work, going around in circles, and all productive wealth is replaced with non-productive debt.

The homeless may appear to be an easy scapegoat, but beware.

artificial borders with selective passports - did they lock us out, or themselves in?

[Progressive Ed]

"Ignorance is Strength"....(B. O'bama, 1984).

[cronyism works...]

cronyism works when your a crony....

Alan Greenspan Admits America Is A Crony Capitalist System

In the following exchange from a DemocracyNow interview, Greenspan is
forced to respond to his quote from Age Of Turbulence on the
definition of crony capitalism: "When a government's leaders or
businesses routinely seek out private sector individuals or business,
and in exchange for political support bestow favors on them, the
society is said to be in the grip of crony capitalism. The favors
generally take the form of monopoly access to certain markets,
preferred access to sales of government assets, and special access to
those in power." Greenspan's pathetic excuse is that while crony
capitalism is a "dominant force" in some other regimes, it is "not the
dominant force in this country." Perhaps all those who are fighting
with the virtual monopoly granted to certain players, such as Goldman
in fixed income trading, and Pimco in government bonds, would beg to
differ. So yes, according to the Greenspan definition America is now
nothing more than a crony capitalist society, which will only get
worse as more and more power it granted to those who are believed to
be able to ramp various asset classes, and thus the market in general,
higher, because as Greenspan himself pointed out recently, nothing is
as important a "driver" to the economy as the stock market: "if the
stock market continues higher it will do more to stimulate the economy
than any other measure we have discussed here".

http://tinyurl.com/2c5fzl5