From Tim Bond, BarCap’s thoughtful head of global asset allocation (and an incurable bull, by the looks of things):
Existing data confirms that a sharp improvement in the US labour market is due over the next three months. The June payrolls report, contrary to market perception, was entirely consistent with the recovery story. The return to positive growth, whether in output, profits or employment, is in the process of occurring right now, with the “turning point” covering the June-September period. Historic data is therefore much less meaningful than usual. The current consolidation in the markets is a good opportunity for investors to raise exposure to cyclical assets.
Bond, for new readers, is the antithesis of Albert Edwards, SocGen’s incurable bear. What the two men share is a kind of surety about their projections that leaves us lessor mortals kinda lost for words. Witness the prose - it has a momentum that is quite impossible to resist:
The June employment report appears to have raised concerns regarding the fate of the US economic recovery. In a market that remains generally sceptical of an imminent return to positive US growth, the latest payrolls data are being interpreted as a signal that that the risk of a more prolonged recession has risen. In fact, such fears are groundless.
As self-appointed Guardian of the Green Shoots, Bond has been determined to have none of the caution that has permeated both equity and bond markets since the end of May, when Bill Gross raised the prospect of America losing its triple A status. Stocks might have fallen by circa 6.5 per cent in the US and close to 8 per cent in the UK, but Bond is un-moved.
To be sure, he’s knocked up a model to show how the jobless numbers in the US will soon be screaming ‘recovery’:
Voila!
A sharp improvement in the payrolls trend should be visible in the data for July and August, with the weekly initial claims data providing a contemporaneous indicator of developments in the labour market. Markets are currently reacting to the June employment report. In so doing, they are offering an opportunity for investors to position for the sharp change in labour trends that will be visible over the remainder of the summer…
We note that a similar timing applies to the trend in company earnings. At the moment, the focus of scrutiny is on Q2 earnings. Such a focus is backward looking and not particularly relevant to the impending trend in profits. Profits are due to rise with output, as the past savage decline in employment feeds into a sharp rise in operating leverage once volumes begin to increase…
And since we are in the midst of the cyclical turning point, historic data is of very little relevance to the actual state of the economy. We reiterate our advice to use the current pause in the cyclical asset rally to add to long exposures.
Related links:
Tim Bond: “Upside down bulls” - Long Room
Guardian of the Green Shoots - Long Room
