The Many Faces of an Economic Correction
Dow down 39 yesterday. Gold plus $2. And the noose tightens on Bernanke’s neck.
As of this writing, Wall Street is still in bull mode. Can you make money by joining it? Maybe. Is it worth it? Probably not.
If you do decide to play the game…just be sure you remember what game you’re playing. This is a Great Correction. Over time, prices are going to work their way down until the Dow has dropped below its March 2009 low.
And we’re not alone in this view. Here is Albert Edwards at Société Générale:
My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows.
I have for a very long time likened events now unfolding with what we saw in Japan a decade ago. Of course there are some major differences, but one can still draw clear parallels to see how extreme equity overvaluations unwind in a post-credit bubble world.
Edwards then goes on to make an important point. As we keep saying, this is not a recovery. Instead, we’ll have on-again, off-again periods of recession, deflation, growth and apparent prosperity. Some of these movements will be sustained and important. But investors beware: don’t forget; we are in a Great Correction, not a recovery. Edwards:
…there are huge returns to be made in equities from participating in short-lived cyclical rallies like the one we have just seen. The Nikkei regularly used to enjoy 40-50% rallies as policy stimulus drove pronounced cyclical upturns in both GDP and profits. You had to remember however that you were still in a structural bear market and you had to get out when the cycle began to top out. A downturn in the leading indicators proved to be a very useful sell signal for equity investors.
Here’s a contrarian indicator: investors are more bullish than they’ve been in two years. Bloomberg is on the case:
Investors are exiting bearish bets on global equities, pushing bullish wagers on stocks to a two-year high versus short sales, according to Data Explorers.
The firm’s long-short ratio has risen to 9.5, having surged from 5.75 in September 2008 when Lehman Brothers Holdings Inc.’s collapse intensified the financial crisis, the London- and New York-based securities-research company said. The reading is the highest of the data that goes as far back as July 2008.
While investors are bullish, consumers are bearish. Small wonder the consumer is feeling blue. Corporate profits are up to a record of about 8% of revenues. But business achieves these numbers not by increasing sales and payrolls, but by cutting costs – usually labor costs. This leaves the poor consumer with less money to spend. This from The New York Times:
…the Conference Board said its index of consumer confidence slipped to 50.4 in July, down from a revised 54.3 in June.
“Despite better-than-expected earnings reports, especially last week, unfortunately the economic data continue to be weaker than expectations,” said Conrad F. DeQuadros, and economist with RDQ Economics. With consumer spending accounting for about 70 percent of the overall economy, analysts closely watch the moods swings of Americans as guideposts to the recovery.
Analysts said that many Americans were worried about the weak labor market. In its survey of 5,000 households, the Conference Board found that the percentage of consumers who said jobs were difficult to obtain increased to 45.8 percent in July, from 43.5 percent in June.
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