The Problem with Cautious Optimism - When "Better than Expected" is still "Worse than Desired."

Better-than-expected is not the same thing as good…

Last Sunday, the offense-challenged Buffalo Bills scored an impressive 30 points against the mighty New England Patriots. Thirty points was double the Bills’ per-game point total from last season, and also double the Patriots’ points-allowed total from last season. So thirty points was definitely much better than expected.

The Bills lost the game – 30 to 38.

Last week, the growth-challenged U.S economy posted a 2% growth in durable goods orders for August and a 7.6% jump in existing home sales. Both reports were better-than-expected. And the stock market welcomed the news with a much better-than-expected response. But the economy is still losing the game.

During the last few weeks, the banter from the financial news play-by-play analysts has upticked from despondent pessimism to cautious optimism. The threat of a double-dip recession is receding, the analysts say, and the economy is slowly recovering.

But is it?

The only problem with cautious optimism is the optimism part. The caution is warranted. The better-than-expected durable goods orders, for example, were still pretty dismal – today’s durable goods orders remain lower than they were five years ago and much lower than they were three years ago.

True enough, say the Wall Street analysts, but you’ve got to look at capital goods orders – the subset of the capital good reports that, in the words of the Associated Press, “is considered a good proxy for business investment planning.”

Okay, so let’s look. What we see is a data series that has bounced off the bottom of very depressed levels, but is stalling well below optimal levels.

Existing homes sales also came in better-then-expected, or “above consensus,” as the Wall Street folks like to say. According to a survey of Wall Street economists, existing homes sales were supposed to increase 7.1% from July’s record-low sales number. Instead, sales jumped a better-than-expected 7.6%…to the second-worst level of the past ten years.

Maybe the economy is improving, but the better-than-expected reports that have been crossing the newswires lately are very far from good. The chart below shows one very clear picture of the difference between better-than-expected and genuinely good.

Here in the U.S., existing home sales have rebounded from disastrous to merely awful. Meanwhile, down in the booming Brazilian economy, home sales have progressed from strong to stronger.

These contrasting housing market trends correlate very closely with the contrasting trends of U.S. and Brazilian economic growth. During the last three years, the U.S. economy has produced zero net GDP growth. The Brazilian economy, meanwhile, has grown about 4% per year. This contrast offers just one glimpse into the compelling investment profile of Brazil…and of the Emerging Markets in general.

Last week, your editors here at the Daily Reckoning extolled the virtues of Emerging Market economies and investments. Continuing this theme in today’s edition of the Daily Reckoning, Chris Mayer, editor of Mayer’s Special Situations, provides a few thoughts on Brazil…from Brazil.

Eric J. Fry
for The Daily Reckoning