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Drip After Drip Of Deflation Data

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Today’s release on manufacturing activity by the Richmond Fed is pretty ghastly, as you would expect given that the effects of fiscal stimulus are now wearing off at accelerating pace – before the happy handover to the private sector is safely consummated – and given that the structural East-West imbalances that lay behind the global crisis are getting worse again.

The expectations index for the US 5th District is crumbling:


This follows yesterday’s horrendous fall in the Texas business activity index from the Dallas Fed, which fell from -4 in June to -21 in July. “Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June,” said the bank.

Texas New Orders were -9.6 in July, -8.2 in June, and +15.8 in May.

Capacity Utilization was -0.6 in July, +2.7 in June, and +18.7 in May.

This of course is why Fed chair Ben Bernanke has been giving strong hints of QE2 (helicopters again) if necessary.

Forgive me if I am becoming a “leading indicator” bore but these turning points in the cycle are fascinating. The US Conference Board’s index of consumer confidence fell again in July to 50.4 after plunging in June.

“Concerns about business conditions and the labour market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season,” said the Board.

This follows the fall in the ECRI leading indicator for last week to -10.5, a level that has always been followed by recession in the post-war era. The Economic Cycle Research Institute is careful not to jump the gun, waiting for further confirming data before issuing a formal recession call that would hurt its credibility if proved wrong by events.

All of this squares with the fall in truck shipments and rail car loadings over recent weeks.

“What we’re looking at is an invisible wall, which we’ve run into here. Which, essentially, as far as I can see, is a typical pause that occurs in an economic recovery,” said Alan Greenspan earlier this month.

“I will grant you that this is not a normal economic recovery. We’ve just come out of what I believe is the most extraordinary and virulent global financial crisis that the world has ever seen.”

“I don’t know where the end game is. Something has got give here. One possibility is there are fewer members of the European Monetary Unit,” he told CNBC.

The bond markets behaving in a way that is entirely consistent with these leading indicators. Two-year US Treasuries are still near historic lows at 0.63pc. The 10-year yield is at 3.03pc. Thirty-year mortgage rates have fallen to the lowest ever, which bleeds the profits of banks surviving on the internal “carry trade” – borrowing at super-low short-rates to buy safe agency bonds with a fat yield.

As David Rosenberg at Gluskin Sheff reminds us eloquently every week, the bond markets are telling us that we are already in a deep and intractable depression – which does not preclude Japanese-style rallies, technical recoveries, and bursts of growth, all within a Kondratieff Winter.

I have no idea what assets prices will or will not do. My area of curiosity is the global economy, and where it intersects with political, cultural, and historical forces.

But here is a note I received today from Tom Porcelli at RBC Captial Markets that puts uber-bullish earnings rhetoric in a proper context.

It seems like on a daily basis the headlines point to yet another company beating earnings expectations. The tally thus far shows 142 companies out of 172 have surprised to the upside for a significant 8pc beat-rate. On the face of it this seems promising.

But the sales figures (i.e. the part that measures organic growth) have been less than stellar. Thus far, they have shown just over 9pc growth versus last year’s figures. But sales were down nearly -14pc in 2Q09 – hardly a tough comp to best!

While 68pc of companies have beaten sales estimates, this is hardly anything to get overly excited about. Back in 2Q08, 69pc of companies had beaten sales estimates. We all know where the economy headed shortly thereafter.

The numbers should be taken with a grain of salt. Below the surface, the earnings reports continue to confirm what we have been saying – that this recovery is anaemic at best.

In the end, the global macro economy will dictate the outcome.

So watch the Chinese banking system. Watch Japanese exports. Watch OPEC as it keeps cutting output to hold up the oil price. Watch Euribor rates and the continued contraction in eurozone lending to companies. Watch French industrial output. Watch Polish sovereign debt (that’s a new one).

Watch the M3 money supply in the US as it contracts at a 10pc annualized rate. And for goodness sake watch the Fed Board.

More stimulus measures looming to try and keep demand at debt boom levels. The money which has been spent on bringing demand forward appears to be due and it doesn't appear that they can bring any more demand forward to continue papering over the cracks.

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  • 433 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
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