Phew, it wasn’t the end of capitalism — or the worst recession since the 1920s for that matter – after all. It was all just a bad dream. Consensus indeed seems to have it – the bull market is back, yeah baby!
Or is it?
Global economic indicators both in industrial and non-manufacturing activity do appear to be favourable. April’s GS Global Leading indicator, for one, does see global industrial stabilisation with some sort of recovery in industrial activity on the horizon.
Tuesday’s ISM US composite index of non-manufacturing activity meanwhile rose to 43.7 in April versus 42.2 in March and against expectations of 40.8 in the month. There was also (relatively) upbeat news in terms of new home sales in the US, and jobless claims, among others.
All of which is very nice, so why doesn’t it seem to tie in with the underlying commodity picture where petroleum inventories are running at counter-seasonal highs?
As Goldman Sachs point out in an energy research note out Tuesday:
In all, the continuing deterioration in current oil market fundamentals in the face of the improvement in forward fundamentals suggests that it’s always darkest before the dawn.
And yes there is some sign of renewed demand coming out of China, which by all means has been amazingly effective at implementing it’s economic stimulus plan.
But China is a command economy. It can just tell its banks and businesses to start lending and hiring. Its buying of commodities, meanwhile, can also be tied to a renewed thirst for real assets. Certainly the clearest trend in Chinese reserves accumulation this quarter has been a sharp refocusing on short-term debt, equities and commodities versus longer-term debt per se.
As Standard Chartered note in a recent research paper:
Although bulk buying of Treasuries has ended, China is not reducing its stock of US securities. It is reducing its holdings of agencies and maintaining growth in its holdings of Treasuries, but is switching from long-term to short-term securities (tenors of less than one year). As we show in Charts 5 and 6, holdings of short-term Treasuries surged to USD 182bn in February 2009 from USD 19.87bn in September 2008.
And here are the charts proving their point:
Here on FT Alphaville, meanwhile, we noted recently the degree to which China had become a major new buying force in the equity space over June 2007-June 2008 here. All of which could suggest China has a long term inflationary view regarding dollar-denominated assets and is switching into short-term debt securities and/or “real” assets like commodities and equities in its new purchases.
That’s the inflationary view.
Meanwhile, other indicators like wage declines should be triggering alarm bells not opening bells — wages being a notoriously sticky component to the economic picture and usually the last to see declines. Yet as Paul Krugman notes wages are falling all over America. So yes jobless claims may have fallen last week, but that’s no consolation if wages are falling too.
As Krugman explains (our emphasis):
Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.
And that’s because of the unhealthy paradox they create. As he goes on:
Workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment. Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.
But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.
All of which could certainly be seen as deflationary in the near term.
Taking everything into consideration, the market-bottoming euphoria could therefore easily be pinned to two key things: improving indicators based largely on not-as-bad-as-expected data, and some renewed demand for commodities.
Bears would caution, however, the data is still bad, and much of the demand for commodities is being propelled by China.
But that still doesn’t explain the market rally.
Well, Peter Schiff over at Euro Pacific Capital certainly has one view on the matter. In his latest video blog entry the well-known dollar bear, who appeared on CNBC’s Kudlow show on Tuesday, says (our emphasis):
It’s amazing how quickly everybody on that show turns bullish on the US economy simply because the stock market is going up. And sure, the US stock market is up, it had a big day today we’re up over 200 points, but stocks are rising all around the world – stock prices are going up everywhere on the planet.
In fact they’re going up a lot more slowly in the US than they are anywhere esle in the world.
But you don’t want to confuse rising stock prices with improving economic fundamentals, certainly not in the United States, stocks are not going up because the economy is improving — far from it. The economy is getting worse and what the government is doing is going to make it a lot worse. But what’s happening is people around the world are discovering the risk of holding cash and so what’s really happening is not a vote of confidence in the markets or in the US economy but a vote of no confidence in cash or the dollar. Look at what’s happening in the value of the dollar index.
As I pointed out on the Kudlow show I think strengthening stock prices are actually a negative for the short run for the US economy — or at least our bubble economy — because to the extent that investors around the world were afraid of being in stocks and falsely believed there was going to be a global depression this created an artificaal demand for treasuries and dollars and that’s what kept our economy from collapsing further because it put a ceiling on prices and interest rates and because the world was rushing to the dollar and rushing our bond market we were spared the full extent of the fallout of the bursting of this bubble.
But as the world sees that the coast is clear and wants to invest more in higher yielding assets around the world and if you look at the way a lot of these foreign stocks are moving, many of the stocks we’re involved with are moving up 5 or 6 per cent a day, people are going to want to get a piece of that and not cower in cash and venture into higher yielding assets.
Of course, only time will tell if the above is true — after all, it could just as easily be down to temporary euphoria stemming from better-than-expected economic data.
In which case Stephen Lewis at Monument Securities cautions as follows:
Equity investors are rather like travellers lost in the desert. They come across a discarded water-bottle in the sands and are delirious with joy when they find they can squeeze out a few drops of liquid to slake their thirst. They do not think at that moment of the expanses they still have to traverse or of the hardships that all too likely lie ahead.
Related Links:
Bull market Britain – FT Alphaville
Signs of recovery in China’s workshops raise fears for Asian industry and prices – The Times
Checking the markets - CNBC
Market sentiment: Faber et al take on green shoot ennui – FT Alphaville