From Cautious Optimist To Skeptical Pessimist

Thus far, the US has been the mainstay of Western recovery – the basis upon which investors’ cautious optimism is espoused.

As Diapason Commodities Sean Corrigan notes, this optimism is based upon “A large slug of non-recourse debt default in the residential mortgage area has helped people escape the yoke while not serving to imperil the state-supported banks. A drastic, 20%-plus fall in house prices has seen the market clear, forming a base from which many feel a new advance in construction activity is slowly being built. The shale energy bonanza – if not yet filtering through to the price of the consumer’s routine fill-up – has begun to alter the landscape as far as producer competitiveness is concerned.”

And yet…

Via Sean Corrigan’s Material Evidence, Diapason Commodities:

…a host of interrelated indicators are flashing red; especially when one notes that these are closely correlated with either non?financial corporate profits and/or the stock market level itself – and form the basis of an informed realist’s skeptical pessimism at equity market exuberance.


Take the industrial production diffusion index, for example. This is back at its lowest reading since the slump itself and the pace of deterioration these past few months is both unmatched in a quarter of a century and barely beaten in the troubled decade and a half which preceded that stretch.





Manufacturing – supposedly the great white hope of the new America – has seen wage rates creeping up by less than 1% p.a. in nominal terms and reverting to where they were in 1998 in real terms – hardly a sign of rising productivity. Hours worked tell a similar story: they have been flat to lower in 2012, having only recouped around a quarter of the losses suffered in the Crash. Here they rest fully a third below the stationary mean around which the first sixty years of post-WWII cycles gyrated. They are no higher now than before the Broken Window boost of Pearl Harbor and flounder not only 70% below 1953’s population-weighted high, but 45% lower than when the last pernicious wave of ‘hollowing out’ set in, in the wake of the Asian Contagion in 1998.


Core capital goods orders have suffered a summer and autumn every bit as bad as at the beginning of the Tech bust, if not suffering a decline any where near as precipitous as during the onset of GFC itself. Overlay a graph of these with the S&P500 and you will see that they have traced out a very similar pattern in the great bubble era from 1995 to date. In a like manner, durable goods shipments (which have enjoyed an r-squared of 0.7 vis-à-vis the S&P over the last 15 years) have dropped since July’s (double-top) peak at a pace only surpassed this last decade during the calamity of 2008-9 itself.




[Perhaps most incredibly – over the past 15 years, the 3-month change in Durable Goods Shipments has reached a 2-sigma drop just three times before the current plunge; the performance of the S&P 500 over the next two months was as follows:

  • June 1998 (from 1133 to 957) -15%
  • January 2001 (from 1366 to 1160) -15%
  • September 2008 (1282 to 968) -25%

But this time is different we are sure…?]


Turning to trade, the annual growth of container exports from Long Beach and LA is now incontrovertibly in the negative column after 2 ½ years of gains – once more, a condition associated with either regional (Pacific) or global contraction.




Finally – and a little more esoterically – the diffusion index version of the fairly reliable Chicago Fed indicator, after maintaining levels consistent with a somewhat anaemic recovery since the start of 2010, and having spent the last eight months edging ever lower, now hovers perilously close to a cut?off below which every official recession of the last half-century has been recognized to have held sway.

Some will say that the paralysis induced by the approach of the dreaded ‘fiscal cliff’ is at fault. That may well be, though bitter experience tells us that some sort of face-saving compromise will be hashed out, probably in the form of some token tax rises imposed on the friendless ‘Rich’, together with a catalog of largely illusory reductions to the currently scheduled rise in expenditures (no actual cuts are likely to be implemented in this world of Orient Express ‘Austerity’). No doubt, the latter while be concentrated conveniently out in the far years of the current projections. Both sides of the House will then claim a victory and both will make much ado about its laudable display of statesmanship and responsibility. Meanwhile, the debt will continue rising at something not that far removed from its present $1.2 trillion annual pace.


In any case, to the extent that the same arguments apply to fiscal laxity as they do to monetary – namely, that the system quickly develops a tolerance to any given level of artificial input, thereby necessitating a continual upping of the ante if the ‘stimulus’ is to remain effective – America has already jumped off a rather large cliff. We say this based on the fact that whereas the four quarters to Sep’08 saw a 7.5% percentage increase in government capital and current outlays over the earlier like-period which topped anything seen in the last 20 years (and which gave rise to a record?beating, nominal $525 billion increment in spending), the running total for the latest 12?months shows a near?zero increase in expenditures over the prior span for the first time since the end of the Korean War.


Air Force One – as a metaphor for the entire government component in the economic mix – may still be cruising at an unimaginable speed, therefore, but the afterburners are no longer propelling it to even greater prodigies of flight in the way they once were.


Ironically, equities are already trying to rally on the premise that a fudge will be achieved in the budget talks, yet unless every CEO in the land celebrates the striking of the deal by indulging in an unbridled orgy of ‘pent-up’ capex and hiring, the gathering weakness in the economy may only widen the disparity between a stock market artificially inflated by the Fed’s success at suppressing the correct pricing of capital and the underlying course of commerce and industry.


Oh, and just to make matters worse, the really disruptive ‘cliff’ we face over year-end may well be the regulatory one whereby the temporary Transaction Account Guarantee program – an FDIC scheme to extend a comprehensive safety net to deposits of more than the usual $250,000 ceiling – will finally expire and so potentially trigger a $1.4 trillion shift in the allocation of caution swollen, corporate cash balances.


Not the least of the side effects of this will be that it will render all attempts at monetary analysis moot for some appreciable period of time when clarity, not opacity, is what we so urgently need. Joy, indeed!

Full (must read) Material Evidence below:

12 11 30 Material Evidence

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