Last week’s plunge in wholesale sales (and “completely involuntary” surge in inventories) has Gluskin Sheff’s David Rosenberg greatly concerned that current quarter real GDP will be very close to stall speed. However, as he notes, “either Mr. Market has yet to figure this out or simply doesn’t care any more because of the well ingrained belief that the ‘Fed has my back’.” When even the Fed is pimping stocks as cheap, he explains, you know what is dominating the thought process of the central bank’s targeting – “they say unemployment rate, but they really mean the S&P 500.” The ‘wealth effect’, however, only benefits a chosen few and as Rosie illustrates, an historically low 52% of American households have any money invested in the stock market (based on a recent Gallup poll) – which merely spurs the ‘bulls’ to argue that the Fed has to be more aggressive…
Via Gluskin Sheff’s David Rosenberg,
What a shocker! U.S. wholesale trade — which, by the way, is as big as the retail sector – plunged 1.6% in March and is down now in three of the past four months. The consensus was looking for +04%, So this comes as a big surprise and not only that, but February was marked down to a 1.5% gain from 1.7% initially. This not only suggests that we could see a downward revision to first- quarter growth but the momentum into Q2 is very tepid, as is the case for a variety of indicators. The declines were fairly broad-based to boot with computers (-0.9%), metals (-2.5%), machinery (-1.5%), paper (-2.9%) and chemicals (-1.8%) all down sizably.
At the same time, wholesale inventories rose 0.4%, taking the inventories-to-sales ratio back up to 1.21 from 1.19, and more disturbingly, the ratio for the cyclically sensitive durable goods sector rose to 1.61 from 1.59, which is the highest since October 2009.
From a going forward point of view, the fact that the inventory buildup looks to be completely involuntary is not good news for the production schedules in coming months. It could well be that current quarter real GDP growth is going to be very close to stall-speed of 1% at an annual rate, and either Mr. Market has yet to figure this out or simply doesn’t care any more because of this well ingrained belief that the “Fed has my back”. After all, when the New York Fed publishes a report entitle Are Stocks Cheap? A Review of the Evidence – a study one would think would come from a Wall Street investment bank – you know what is dominating the thought process at the central bank. They say the unemployment rate, but they really mean the S&P 500.
After all, to get the wealth effect to work on spending, you have to generate the wealth. And that is what the Fed is trying to do… use the equity market (real estate too) as a means to generate economic activity and a sustainable improvement in the stock market. The distortions cause by negative real interest rates, the mis-pricing of risk and promotion of leverage sounds a lot like the previous cycle, and as I told folks back in 2005 and 2006 when it was reflating commercial bank balance sheets as opposed to today’s primary influence which is the reflating central bank balance sheets, enjoy it while you can.
Interestingly, the folks at Gallup just updated their survey and found that only 52% of American households now have money invested in the stock market, down from 53% a year ago and 62% five years ago. This is historically quite low… and guess what? This is causing bulls to come out and argue that the Fed has to be even more aggressive and for longer because this reduced public participation in equities means that we need an even larger wealth effect for the half of the population that are not involved in the market in order for the Fed to ultimately get its desired ‘escape velocity’ for the real economy…