“Keeping An Eye Out”: October ’10

If you look at this article, it explains how I look for clues that my thesis is either playing out or I am full of hot air. The section is called “Keeping an Eye Out”.  You can find this section on every economic category in my Quarterly Outlook (Q2 being the most recent).  This section will be “Keeping an Eye Out” for clues that may be supporting or refuting my thesis.  To get the most out of this post, it’s a good idea to have it next to my outlook and read through both.  Note I will be posting bi-annual outlooks from now on focusing on January for my next outlook release.

+ Housing: “Faux-Closure” seems to be the icing on the cake for a double dip in home prices.  Going into October-end, we have already seen this issue reflected in purchase applications as they have slumped to near 2010 lows.  CoreLogic reported that Home Prices in August declined for the first time this year.  I’m beginning to note how deflationary behavior is beginning to permeate into buyers’ minds.  Owner’s equivalent rent remains too high and is indicative of a housing market that remains overpriced.

+ Industrial Production: We’ve had a declining dollar since the first week of June.  Notwithstanding any potential negative catalysts such as an increase in protectionism or China experiencing a hard-landing, this should become a consistent tailwind in the months ahead for the manufacturing and service sectors.  International demand remains relatively healthy and we have recently seen this tailwind exert itself as the latest Non-Manufacturing ISM index flagged a surge in export orders.  Overall, end demand in the US remains noticeably weak and this continues to translate into rising inventory-to-sales ratio.  The question remains, will a weaker dollar be enough to buttress the manufacturing recovery?  I don’t believe so.

+ Consumption: Pretty much the same as last month.  Things are not good with the housing market and there are more questions than answers regarding the recovery.

+ Job Market: The job market remains particularly cloudy but actually with a bullish hue.  We are seeing various metrics improve such as jobless claims and movement in the Gallup polls, however, the Conference Board of Employment Trends, a leading indicator of job growth is showing a flattening trend and points to further sluggish growth.  The economy is very fragile and I can think of quite a few exogenous shocks that could knock it back into a recession.  You also have  continued uncertainty being created by potential “currency wars”/protectionism and political deadlock.  Overall, I believe my thesis remains intact. However, it will be interesting to monitor confidence when there is a solution to the fiscal situation (Bush tax cuts; etc).

+ Gov’t Policy: Is the idea of cutting back runaway spending and a smaller governmet resonating with voters?  These articles seem to point to that.  Obviously voters are sick of both parties, but they are becoming more sensitive to gov’t spending.  This jives with my “Political Frugality” theme in my Gov’t Policy Outlook, (an excerpt):

My gamble here is that the population begins to realize that bailouts, consumption-based stimulus and quantitative easing are a long-term negative for our nation. Political blood will be on the streets come November. A fresh batch of politicians, put in power by an extremely frustrated electorate, will set a different fiscal path for our nation, one which does not involve failed consumption-based gimmicks. Unfortunately this new path will further solidify my double-dip recession thesis, but these new politicians may set very low expectations when they come to power as they will preach that we must take our medicine in order to form a stronger foundation for our long-term future. At this point the nation may actually well accept this fate as they understand that they have been irresponsible with their profligate spending for decades.

While the “fresh-batch of politicians maybe overstating the state of the political change for the time being, recent events still point to fiscal stimulus being politically unacceptable.  Quantitative Easing as a viable strategy continues, but is beginning to run into resistance.  If this bout of monetary easing is not accompanied with economic growth, we may see even more resistance to this strategy as all it does is create inflation in all the wrong place such as food and oil.

+ US Monetary Policy: Janet Yellen became the latest of Fed officials to question whether additional QE will do more harm than good.  The interesting point is that she’s a dove, so this commentary is quite surprising.  Also have a look at Dallas Fed’s Fisher strong words regarding recent monetary policy.  Once again, considering that most market participants are virtually assured that we will see a massive QE implementation, a change in sentiment on whether this method will work will most likely lead to a reversal in recent dollar weakness.

+ Stock Market:  The market rallied strongly in September continued into late October.  This has mirrored my forecast for a sizable rally due to anticipation of a restarting of QE near the end of the year (look at outlook).  However contrary to my initial forecast for a negative year in 2010, we are still positive for the year, go figure.  What is interesting is that high levels of commodity inflation are beginning to have an effect on manufacturer’s and retailer’s margins.  As commodity and raw materials rise substantially and companys’ pricing power remains weak, margins are getting squeezed.  This may adversely affect stock market performance anyways.  Stagflation may be the result if these policies continue.  Interestingly, I had postulated this exact scenario possibly occurring in my 1st Quarter Outlook (see “Inflation”) as well as my Investment Themes & Predictions.

+ Global Trade:  Take a look at this article.  I spoke about how I feel China is between a rock and hard spot regarding reigning in inflation but possibly undermining growth.  It seems that they have made their move in the form of raising interest rates vs. letting the Yuan appreciate.  The message that domestic consumption cannot carry the country yet is sounding loud and clear in my view as they would rather maintain the value of the Yuan at low levels to protect their exporting sector.  Authorities must now be very careful not to inadvertently pop a potential real estate bubble in this delicate process.

—> Like what you see?  Want more?  Check out RCS Investments for my expanded and detailed Outlooks (thesis), and my “Market Radar”, what I believe are the main factors currently affecting the economy and financial markets.


This entry was posted in Current Events. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s