Thursday, March 26, 2015

Investing Based On Unemployment Data Is Like Driving With The Rear View Mirror

Following the Fed's announcement last week I discussed how the U.S. employment data is showing strength while most of the other economic data is showing weakness. Why is this important? Employment data is a lagging indicator. During most recessions employment peaks after a recession has already begun. 

MISH put together some excellent information this morning on this topic in Jobs and Employment: How Much Recession Warning Can One Expect?:

In the previous five recessions, jobs peaked two months after the start of the recession once, one month later once, one month prior twice, and once during the recession month.

In the previous five recessions, employment peaked one month after the start of the recession twice, one month prior twice, and once during the recession month.

The NBER says the last US recession started in December of 2007 and lasted until  June of 2009. Let's take a closer look at stats from that recession.

2007-2009 Recession Stats

  • Jobs were higher three months after the recession started than two months before the recession started.
  • Jobs were higher two months after the recession started than one month before.
  • Employment was higher three months after the recession started than two months before.
  • Employment was higher two months after the recession started than one month before.
This is the bind the Fed faces today. The economy is weakening rapidly but the broader public has not noticed due to the jubilation around the jobs number (which I have shown numerous times is actually weaker than the data suggests due to how they calculate unemployment).

Meanwhile U.S. stock market investors believe any weakness in economic data or weakness in stock market prices will mean the Fed announces a delay in raising interest rates or additional easing (QE4).

The belief in the Fed "put" underneath the market has never been stronger. Market participants (behind the strength of the media) believed the Fed would stop any decline in the market in 2000 and 2008 with rate cuts and additional easing. The Fed began cutting interest rates in the fall of 2007 and continued cutting through March of 2009. Stocks fell close to 60% during that easing period.  

The belief in a Fed put only pushes stocks artificially higher in the short term which creates more damage when reality ultimately returns to the markets. Or maybe this time around the laws of gravity no longer apply and QE can keep stocks elevated forever. My personal investment bet is the Fed will not be able to stop the next decline and when it's over there will be an entirely new paradigm shift toward how the world views the Fed and other major central banks.

Tuesday, March 24, 2015

The Perceived Safety Of The Market

From STA Wealth this week discussing the mindset behind individuals blindly purchasing stocks:

Unlike Warren Buffet who takes control of a company and can affect its financial direction - you are speculating that a purchase of a share of stock today can be sold at a higher price in the future. Furthermore, you are doing this with your hard earned savings. If you ask most people if they would bet their retirement savings on a hand of poker in Vegas they would tell you "no." When asked why, they will say they don't have the skill to be successful at winning at poker. However, on a daily basis these same individuals will buy shares of a company in which they have no knowledge of operations, revenue, profitability, or future viability simply because someone on television told them to do so.


Sunday, March 22, 2015

Bill Fleckenstein: The Fed's Game Of Chicken With The Stock Market

Excerpt from Financial Sense:
The Bulls' Self-Deluding Prophecy
I'd like to take a moment to reiterate where I think we are. Since the Fed began tapering I have been expecting the market to have a nasty spill at some point. As I have said many times, the market is where it is because of money printing by the Fed (and other central banks). That's what drove the stock market to the moon and put rose colored glasses on folks of a bullish persuasion regarding the U.S. economy, and the combination of the optimistic outlooks for stocks and the economy has led to strength in the dollar.
So three major macro conclusions have all been reached based on the premise that Fed money printing has worked. It would appear that folks also believe that not only can the Fed stop printing money, but it will be able to start raising rates and withdrawing liquidity. I and others who think likewise don't believe that is the case. Thus, my shorthand expression has been that there is a game of chicken going on between the S&P and the Fed, fueled by the aforementioned beliefs of the stock bulls, which they will continue to hold until the Fed's actions — or lack thereof — produce a huge break in the stock market.
Overdue Diligence
Just because a big break has not happened along the way doesn't mean that it won't. Timing the ending of markets that have been kited higher by easy money is impossible. It couldn't be done during the stock bubble that ended in early 2000, the bond bubble that ended in 2008, and it can't in this bubble either (especially given the epic size of QE). But it will occur. The question then becomes at what point will the stock market start to sink, and when will expectations for it, the economy, and the dollar all change? As noted, we can't know that in advance, we can only react to change once it occurs.