Stocks soared and bond yields bounced yesterday. If we didn’t know better, we’d imagine that economic conditions were pretty darn good. But we do know better…
America’s economic recovery contains more cracks than Humpty Dumpty…after suffering his “great fall.”
Somehow, all of Bernanke’s horses and men managed to slather enough monetary glue onto the fractured pieces of our economy to hold them all together. But the reconstructed economy does not look very much like the original one. Humpty Dumpty is now a Picasso.
While it’s true that a few “headline” economic numbers – like GDP growth and industrial production – are flashing signs of recovery, numerous other data points are flashing red. Net-net, this recovery is suspect. What’s more, every economic uptick seems to coincide with an inflationary uptick.
Quantitative easing has certainly stimulated some facets of the US economy, but it has also stimulated speculation in the financial markets and unleashed a dangerous inflationary trend… And that’s probably not a good thing. Historically, inflation has been the enemy of both economic growth and share price growth.
We trust history to repeat itself.
“Perhaps the most important event that the stock market will have to contend with is the end of quantitative easing,” observes David Rosenberg, Chief Economist and Strategist at Glusken Sheff. “[There’s an] 86% correlation over the past two years between movements in the Fed balance sheet and the direction of the S&P 500. This will come home to roost before long…”
In other words, whenever Bernanke’s quantitative easing programs come to their inevitable end, the Federal Reserve Chairman must withdraw the liquidity that has been fueling the stock market’s gains. The Fed’s balance sheet will contract…and stock prices are likely to do the same.
Out in the real world, meanwhile, Bernanke’s QE campaigns are already producing the sorts of economic phenomena that tend to undermine economic growth…and rising stock markets.
“The Fed so desires to have inflation,” Rosenberg remarks, “and yet when we see that Kimberly-Clark, P&G, and Colgate-Palmolive are all announcing price hikes, we wonder to what extent the central bank’s policy has managed to assist the typical family who is about to face not only higher costs in food and energy, but also other household items like diapers, tissue paper, soap, mouthwash and toothpaste. Is this the sort of inflation that is really that desirable?”
Meanwhile, incomes aren’t inflating at all, which means that the Smiths and Joneses are feeling the effects of inflation immediately and acutely. In February, the same month that consumer prices jumped 0.5%, average weekly wage-based earnings did not increase at all. In other words, as Rosenberg explains, “[Inflation-adjusted] work-related income was crushed 0.5% and has now deflated…in five of the past six months, during which it has contracted at a 2.3% annual rate…
“There is a well-defined historical inverse correlation between household inflation expectations and the direction of consumer confidence,” Rosenberg continues. “So it wasn’t at all a mere coincidence that in the same month that inflation expectations shot up to near-two-year highs, consumer confidence, especially for the low-income strata, fell back to the depressionary levels posted back in the 2009 winter of discontent. While the University of Michigan consumer sentiment survey for March revealed a steep slide to 68.2 from 77.5 in February – a five-month low – the sub-index for low-income households sank from 71.1 to 60.7. The last time it was this low was in March 2009 when the recession was at its worst.
“Finally,” Rosenberg winds up, “it is hard to believe, looking at the housing data and understanding the sector’s importance in driving growth for the entire economy given all the huge multiplier effects, that we can end up having much of a recovery during periods where there is scant government stimulus. Housing starts collapsed at an astounding 95% annual rate in February (yes, you read that correctly) to stand at 479k units at an annual rate, the second lowest on record and the lowest since the economy was plumbing the depths in April 2009. Normally, housing starts are up 34% from the time the recession ends to the 20th month of the expansion (where we are now) – not down 18%, as is the case currently. In fact, never before have housing starts been negative at this point into a recovery, let alone being down a huge 18% since the recession ended…The fact that building permits, which lead starts, plunged 8.2% after that dramatic 10.2% falloff in January suggests that a turnaround is not yet in sight, sadly enough…”
The news is not all bad, of course. But it is bad enough to give a stock market bull reason for pause…and it is certainly bad enough to give a dollar-holder reason to own fewer dollars.
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