Three months ago, I posted The Fed Three-Peats, in which I led with:
Oops! They’ve done it again. Maybe.
Here’s the evidence that the Fed aborted a mini-recession with Operation Twist, which in association with enlarging its balance sheet by reinvesting dividends from its mortgage-backed securities portfolio was essentially the QE 3 that Jeff Harding had been predicting months earlier. Cleverly, though, they and the media didn’t call it QE. But it had a similar goal and was achieved by Fed intervention in the markets. I’ll call it QE in the real world. Here’s some of the evidence that a brief economic cycle has come and is, perhaps, gone or going…
Regardless of how close those Fed actions were or were not to a true QE, they certainly were supportive of Federal and eurocrat deficit spending. We may now be seeing the negative effects of the upcoming withdrawal of those actions, though the evidence is not all in yet. In addition to today’s disappointing employment survey out of the BLS, which prompted a quick and devastating analysis by Mish (LINK), other data show that for a third spring in a row, economic momentum is on the wane. I am going to provide links and a brief description regarding several points on this topic.
First, consider the Citigroup Economic Surprise Index. (Click on the 5Y tab. Note I don’t know exactly which economic reports it looks at to see if they meet/exceed/fall below expectations.) It looks like last year in shape, extent and time of year, and both years look worse than the recovery year of 2010. Bad.
Next, consider Gallup’s daily survey of consumer spending, which I use as a proxy for discretionary spending. Look at the 14-day average data, not the 3-day, which is more volatile. Spending has reverted almost to the level of a year ago after looking stronger for several months. Note this is nominal spending, and thus a small increase would translate into a real world decline in actual purchases. Time will tell on this, but the year-on-year gains have decelerated sharply recently.
Then there is the longer-term view of ECRI’s Weekly Leading Indicator, (then click on the WLIW button for a 3 and 5 year view of the WLIW) which is mired in levels first seen in the late 1990s. This series of lower highs as each spring moves along since the bottom in 2009 forms one of their bases for their ongoing recession call. I proffer no opinion on that call, but simply observe that this is an unusually weak showing for a “recovery”.
Matching the negative progress of ECRIs WLI over the past few years are financial indicators that also are consistent with economic deceleration or even regression. One such iindicator is the stock market itself. Here is a link to a multi-year chart of the S&P 500. Please look at the levels in spring 2009 and yearly thereafter. The yoy increases have sharply diminished. 2010 was about 30% above 2009′s April level. 2011 saw a spring peak only about 10% above the 2010 peak. This year’s peak (to date) is only about 5% above that of 2011. So far, the evidence suggests a multi-year rounded top in the making at a lower level than the prior peak. If one deflates the averages by gold, one would hardly see any bump in the averages at all in the last 3-4 years.
Then there are interest rates. Returns from bonds have started leading those from stocks for the past twelve months. On a last-12-months basis, the plain vanilla MUB muni bond ETF has creamed the SPY when one compares capital appreciation in conjunction with interest/dividend payments. It’s not only the MUB. So has the ETF proxy for the very long T-bond, the TLT fund. What has supported stock prices is the amazing drop in interest rates. That support has given way from time to time in Japan during its ZIRP period, however. Why should investors in the U.S. markets be confident that what happened there will not happen here?
Unfortunately, matters are way past the level at which interest rates offer any competition to other assets. With so much of the globe showing known or threatened recession, the pattern being created suggests an unacceptable chance of another spring-summer three-peat for the U.S. markets to the downside.
On a related matter, does that stance necessarily mean a U.S. recession must occur for more market mischief to occur? No, not necessarily. But in part that response is an artifact of the severity of the 2007-9 downturn. Housing can no longer fall very far. Governmental finances could continue to go Japanese with much lower rates from here (!), allowing yet more – and timely support– of course with an activist Fed reopening the monetary floodgates if “needed”. All that’s needed for the market disaster of summer 2011 (into early fall) to repeat would be yet another failure of growth to do what the mainstream expects.
Thus, using a variety of tools that I have been looking at for some time (including others not mentioned above that I have previously discussed), I think that unfortunately we may be witnessing a form of blowback. When government and its central bank keep intervening in a Keynesian fashion and the recovery is as weak as this one, but the budgeting and planning (and “spin”) are for a more “normal” expansion, at some point the markets are prone to having a Wile E. Coyote moment and find that they are no longer on solid ground but are suspended in air with nowhere to go but down. That’s what causes crashes– a sudden revaluation downward of assets for any reason or no special reason at all. At such times, at least since 2008 it has been the much-hated Treasury bond that then rises sharply in price and can then be sold at a profit (plus accrued interest) and exchanged for the assets that were recently loved only to have been shoved into the bargain bin.
Please understand that this set of observations is in the form of risk management. It is not as if I am saying that there are wonderful investment alternatives to the stock market; and, different stocks exist in the market. I’m just pointing out all this because we live in a world of hype. It is in that world that the oft-brilliant short-seller, Doug Kass, could say several weeks ago that he gave the chance of recession this year a probability of … zero. When, early in the year, a short-seller gives recession a zero chance of occurring, I say that there is much too much complacency for my comfort.
What awaits? Let’s keep watching the markets and the data. Right now, it looks as if they are continuing the three-peat theme I described in February.
In this environment, I have concluded that for now, most people of most ages who are managing non-IRA-type money are at least as well off with various types of tax-exempt municipal bond investments as with general stock market investments.