The wall and the writing on it
Economic and market things feel eerily quiet just now. The US$ has been resolutely range bound at 90% +/- 2% of its trade weighted index for the last 6 months, stocks likewise within about 2% of current prices. Meanwhile commodities keep trending up: metals between 15% and 30% this year so far, oil making its seasonal spring high 20% higher than last year's and threatening the hurricane high of 1st September 2005 (Brent crude actually made a new all time high in the last couple of days). The data continue to suggest that the US economy is doing pretty well. Countries holding too much US$ reserves are trying to diversify but being ever so careful about it.
Beware, this unnatural calm does not mean all is well. Collective breaths are being held, eyes determinely looking straight ahead, not up nor down or to the sides, thinking: please let this tightrope hold. I can tell you what happens next...
It snaps!
I can't say exactly when but it will be before November 2006 that the first significant breakdown happens. Between now and whenever that is there is scope for minor gains in stocks and the US$, and for a downwards correction in commodities, but that scope is very limited: at most 5% for stocks, 10% for commodities. When it snaps the initial move will be at least double that scope (in the opposite direction).
Some background...
The US housing market has slowed, the peak was around July 2005 in the 'hot market' regions, the number of unsold properties is at 15 year highs (up 250% in the last year), consumer 'remortgage ATM' use has slowed 15% in the last year - in 2005 it was $600 billion, accounting for more than all the growth in the US economy. A few links substantiating my outrageous claims:
http://www.safehaven.com/article-4801.htm
http://www.financialsense.com/fsu/editorials/wakefield/2006/0406.html
http://thehousingbubbleblog.com/
http://calculatedrisk.blogspot.com/
The US economy is not the healthy beast that bubble vision, the favoured pundits and government statistics try to portray. The statistics are severely and deliberately massaged. Even on government statistics the US GDP would have declined in 2005 without the stimulus of 'remortgage ATMs' and the Homeland Investment Act (which gave one off tax incentives for repatriating corporate profits). But the government GDP statistic is overstated by its very artificial measure of inflation, the 'GDP deflator'. The US economy is actually in recession already.
http://www.safehaven.com/article-2482.htm
http://www.gold-eagle.com/editorials_05/willie062205.html
http://www.gillespieresearch.com/cgi-bin/bgn/
'Real' US interest rates (as reflected by bond yields) have increased over 0.5% this year so far, previously they had hardly moved in response to the Fed rate increases. Borrowing costs are going up and the US consumer is immensely over-borrowed. This will constrain consumer spend.
Energy prices continue to increase. Gasoline is 20% higher than it was this time last year, this will also constrain consumer spend.
All the above indicate a significant reduction in consumer spending, which makes up 70% of the US economy.
The Fed is in a troubling position. Commodity prices, incipient inflation and the value of the US$ indicate higher interest rates, but the threat of higher rates to the US economy and possibility of triggering a recession indicate a pause in rate hikes and a reduction in them this fall. I will put you and the Fed out of your misery: a recession (according to official statistics) is a nailed in certainty and that will be clear before 2006 is out. Unless you are very lucky it will be the start of much worse than a recession.
For now I think the eerie quiet will continue a little while. I don't expect stocks to go more than 2% higher than now, despite Fed liquidity pumping. The US$ could go higher in the next few months, but not by more than 5% and it is as likely to go down by as much. Commodities should correct by between 10% and 20% sometime soon before leaping up again (so treat the correction as a buy opportunity). When the quiet is broken expect significant moves, I would get out of stocks now and be very careful with commodities - take profits on half of holdings and await the next significant dip before buying. Watch out for the US trade deficit for March due in a month's time, I think it will be a new record and break $70 billion.
Beware, this unnatural calm does not mean all is well. Collective breaths are being held, eyes determinely looking straight ahead, not up nor down or to the sides, thinking: please let this tightrope hold. I can tell you what happens next...
It snaps!
I can't say exactly when but it will be before November 2006 that the first significant breakdown happens. Between now and whenever that is there is scope for minor gains in stocks and the US$, and for a downwards correction in commodities, but that scope is very limited: at most 5% for stocks, 10% for commodities. When it snaps the initial move will be at least double that scope (in the opposite direction).
Some background...
The US housing market has slowed, the peak was around July 2005 in the 'hot market' regions, the number of unsold properties is at 15 year highs (up 250% in the last year), consumer 'remortgage ATM' use has slowed 15% in the last year - in 2005 it was $600 billion, accounting for more than all the growth in the US economy. A few links substantiating my outrageous claims:
http://www.safehaven.com/article-4801.htm
http://www.financialsense.com/fsu/editorials/wakefield/2006/0406.html
http://thehousingbubbleblog.com/
http://calculatedrisk.blogspot.com/
The US economy is not the healthy beast that bubble vision, the favoured pundits and government statistics try to portray. The statistics are severely and deliberately massaged. Even on government statistics the US GDP would have declined in 2005 without the stimulus of 'remortgage ATMs' and the Homeland Investment Act (which gave one off tax incentives for repatriating corporate profits). But the government GDP statistic is overstated by its very artificial measure of inflation, the 'GDP deflator'. The US economy is actually in recession already.
http://www.safehaven.com/article-2482.htm
http://www.gold-eagle.com/editorials_05/willie062205.html
http://www.gillespieresearch.com/cgi-bin/bgn/
'Real' US interest rates (as reflected by bond yields) have increased over 0.5% this year so far, previously they had hardly moved in response to the Fed rate increases. Borrowing costs are going up and the US consumer is immensely over-borrowed. This will constrain consumer spend.
Energy prices continue to increase. Gasoline is 20% higher than it was this time last year, this will also constrain consumer spend.
All the above indicate a significant reduction in consumer spending, which makes up 70% of the US economy.
The Fed is in a troubling position. Commodity prices, incipient inflation and the value of the US$ indicate higher interest rates, but the threat of higher rates to the US economy and possibility of triggering a recession indicate a pause in rate hikes and a reduction in them this fall. I will put you and the Fed out of your misery: a recession (according to official statistics) is a nailed in certainty and that will be clear before 2006 is out. Unless you are very lucky it will be the start of much worse than a recession.
For now I think the eerie quiet will continue a little while. I don't expect stocks to go more than 2% higher than now, despite Fed liquidity pumping. The US$ could go higher in the next few months, but not by more than 5% and it is as likely to go down by as much. Commodities should correct by between 10% and 20% sometime soon before leaping up again (so treat the correction as a buy opportunity). When the quiet is broken expect significant moves, I would get out of stocks now and be very careful with commodities - take profits on half of holdings and await the next significant dip before buying. Watch out for the US trade deficit for March due in a month's time, I think it will be a new record and break $70 billion.
posted by Agric | 01:47
2 Comments:
Hi and thanks, it's only been pressure of other things on my time that has kept me from properly reading and posting at TOD, will be back soon (though the next few weeks are looking very busy for me). The eerie quiet I mention above might be breaking very soon, though it could equally well persist for up to a handful more months.
Commodities, especially metals, are close to silly levels now, most metals are at alltime or 25 year highs; next month oil is within $0.50 of its Katrina high of $70.85 and June WTI oil which takes over as the oft quoted future within 2 weeks is at a $1.50 premium on the current future month (it broke $72 today). Gasoline futures are at higher prices than any time in recent years.
This won't continue long. Commodities must pull back or stocks must fall. Odds probably favour a pullback in hard commodities but any adverse geopolitical event would keep them going up with a vengance. Any significant real disruption to oil supply will mean $85+ oil and $750 gold within days.
Perhaps Morgan Stanley surruptitiously read my blog, checkout the first two articles on their April 18th missive:
http://www.morganstanley.com/GEFdata/digests/20060418-tue.html
...or maybe they can see and read the wall, too ;)
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