Another missive on the US recovery from the SocGen bear-king Albert Edwards and, uh-oh, paging Ludwig Wittgenstein:
Words fail me
What’s up Albert?
Dylan’s latest weekly extolled the virtues of holding cash when expected returns on equities look as poor as they do now… This sort of language is an anathema to most of the buy side. Indeed it almost has no meaning in the investment world we now live in. Now I have hit 50, I increasingly understand my language of bearishness is simply not recognised by the younger fund managers I meet who look on me as if I have landed from Mars…
We’re not so sure about that, actually. In fact Albert’s latest note speaks a language that most investors can understand – a rugged dialect of durable goods orders, cyclical indicators, and near-term economic strength:
Despite the weaker-than-expected 1.8% rise in Q1 US GDP, overall economic activity remains pretty resilient. The Chicago Fed National Activity Index (CFNAI) is a weighted average of 85 existing monthly indicators of national economic activity and is constructed to have an average value of zero to reflect trend growth…
After accurately picking up the Q1 slowdown, the latest reading of the CFNAI shows activity increased to an above trend +0.26 from +0.16 in February. The Chicago Fed recommend using a 3-month moving average and that edged down to +0.20 in March, which suggests a patch of stronger GDP data ahead…
Although obviously Albert snaps out of it. Trends in core goods orders are going off-colour, and will take corporate profits with them:
Why might capital goods orders be slowing at exactly the point in the cycle when most commentators expect it to be making a greater contribution to overall growth? Well, contrary to most of the hype we are hearing in this reporting round, profits have not been doing so well recently…
Economists tend to look at national accounts measures of profits which, to the surprise of many, often tend to lead stockmarket profits. The right-hand chart above [click to enlarge] shows that the surge in profits from their nadir has actually flattened out over the last six months (we have always preferred to use pre-tax domestic non-financial profits with inventory profits removed and depreciation put on an economic rather than a tax basis). Although the rate of profitability remains high, it is the growth of profits that tends to be the largest determinate of investment growth. So the slowdown in capital goods orders makes total sense in this context.
Fair enough.
Is it us or is this all a bit sensible as a bear case? There is a lot of argument out there that various bits of stimulus encouraged US corporates into capital spending, which will deflate as 2011′s last fiscal and monetary stimuli are withdrawn, turning into the post-QE2 driver.
You can argue about it, but it’s not linguistic philosophy, is it?
Related link:
Permabear to English translation guide – Barry Ritholtz