Logo Background RSS


This Week’s Macro View.

  • Written by Syndicated Publisher No Comments Comments
    August 7, 2011

    “Even when there was the investor rebellion and even when we had these difficulties in ’06, I was 100% confident when it was going to happen and I would tell people: just wait. We’re on the cusp, 2007, it will happen.”

    – Michael Burry, The Big Short

    Today was a perfect example of how short sighted this market is and the disbelief most economists and market pundits live in. At 8:29 just before the NFP report for July was released the chatter was about recession, weakening economy, stats within the labor report that pointed towards pending economic woes. Fast forward an entire 60 seconds and a slight beat from a report and all is well, apparently.

    Europe is no longer an issue. US growth will solve all our problems. Seriously the words US growth and solve problems were used in the same sentence. The reason I say this is at some point in the near future, possibly as early as the coming week the market will shift focus from the reality of a weak economy to the fantasy of growth.

    You will be told stocks are cheap. You will be told the debt ceiling debate is the reason economic data “was” weak. You will be told that corporate balance sheets are flush with cash but no mention of their record debt. You will be told housing is so depressed now it cannot possibly cause a recession yet in reality it is still 15% of GDP. You will be told the yield curve is not inverted thus no recession even though it wasn’t inverted prior to the great recession. I can go on but will spare you the details.

    I believe the US is now in economic recession but regardless the economic reality between 0.4% growth or (0.4%) contraction is of little comfort to those suffering. For the first time since  Q2 2009 the consumer goods portion of GDP contracted. The inventory build cycle is coming to an end and rather than invest in deeper stock room shelves retailers will deplete existing inventory as consumer demand contracts. As earning season draws to a close profits in many cases did beat but guidance surely did not.

    Historical correlations with consumer sentiment indicate the fixed investment component in Q2 GDP was not only grossly misstated but ready for a serious contraction in Q3. China is setting record trade surpluses at the expense of US GDP while state governments forced by law to balance budgets will become a further drag on growth.

    Why do I say recession has begun when Q2 advance was 1.4%? For the simple reality of how the government measures GDP. The great recession officially began December 2007 with Q1 2008 the first reported contraction. Yet the initial reads on GDP were 0.6% later revised to 0.9% and then to 1.0%. It was not until well after the recession began that the final read was in fact (0.7%). Take Q1 2011 GDP revised from 1.9% to 0.4%. We are told the economy has slowed since Q1 yet we are also led to believe Q2 GDP was 1.3%.  As I stated before (found here) the numbers simply don’t add up.

    Below are a few more statistics to remember next time the S&P is up 5% and the likes of Jim Cramer tell  you things are fine or Barton Biggs says this is a great time to buy stocks. Ignore Ron Insana who had a failed hedge fund or economists like Joe Lavorgna and Mark Zandi.

    Food Stamps

    46 million or 1 in 7 Americans are now on food stamps. Just 10 years ago that number was 17 million. That is a 270% increase.

    Job Market

    Average duration of unemployment is 40 weeks a record never seen even in the Great Depression.

    Current NFP levels are similar to those in the fall of 2007 when the great recession began.


    Other than stocks home equity is the only remaining source of wealth yet 25% of mortgages are underwater, over $5 trillion in equity has evaporated in the US and the home price trend shows no signs of improvement.

    I talk about having the courage of your convictions a lot. I want to explain what I mean by that. Look at the data and the trend is clear. You see a shrinking, not expanding economy. You see a consumer struggling to put food on the table let alone grow Best Buy’s same store sales. You see a Federal government being forced to face austerity yet a vast majority of personal income growth is in the form of government transfer payments. You see Q1 GDP revised from 1.9% to 0.4% in less than two months. You see consumer goods contract in Q2 for the first time in two years.

    Conviction is not letting pundits, disbelievers or those unwilling to do the work get in your head. Conviction is following the path you know is right regardless of how difficult it is. Making money in the capital markets is made by doing the right trade, not the easy trade. It’s your money, your trade. Have the courage to follow the path you know is right and the ability to block out the noise. Group think is not only wrong but always on the wrong side of the trade.

    I believe we are embarking on a dangerous road ahead, the road less traveled. The noise will be loud but stay focused on the reality before you not the fantasy behind. Michael Burry could have easily given up on his short subprime bet as Chairman Greenspan mocked him or investors demanded their money back. He stood firm. He challenged his beliefs. He relished not in the financial windfall but in the ability to stay strong and do what he knew was right.

    Shared From (under licence)

    Macro View August 8, 2011- Macro Story.

    images: Flickr