2016/02/19 Commentary: Abysmal News is Good News
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COMMENTARY (Non-Video): Tuesday, February 9, 2016
Abysmal News is Good News
While there are ‘bad news is good news’ phases for equities, it seems this has evolved into ‘abysmal news is good news.’
While that might seem a bit odd, it is completely reasonable under the current circumstances. That is due to the concerns over the US Federal Reserve monetary policy being out of synchronization with the other global central banks. As we noted in last week Tuesday evening’s Commentary: Fear & Loathing in Marketland post, there were concerns that the Fed was going to continue to raise rates into a weakening global economic situation. That was brought home to roost in this Thursday morning’s release of the OECD’s Economic Outlook Interim Report showing further weakening of global economic growth in 2016 and into 2017 (more below.)
Fed capitulation?
Suffice to say for now that this is having the effect of encouraging the equities through fresh perceptions the FOMC might be constrained to limit (or even eliminate) any further planned rate hikes that would have been part of its ‘normalcy bias’ (see our December 16th Commentary Fed’s ‘Normalcy Bias’ Continues for more on that.)
And a bit of a capitulation occurred Thursday morning when normally hawkish St. Louis Fed President James Bullard was saying it would be ‘unwise’ for the Fed to raise rates further in the current environment. That fit in with Wednesday’s FOMC minutes showing a bit more dissent on future hikes than Janet Yellen’s Congressional testimony might have indicated. Not that Yellen was lying. It is more so that the Fed Chair gets to stamp their perspective on often far more varied views from the full range of members.
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
Abysmal outside of bright spots
That said, it is most interesting that the equities psychology has turned up since last week Thursday on such serial weak global economic data. Even allowing there were a few bright spots (mostly in the US), the general tendencies have been miserable. Just to hit some high (or low, depending on your perspective) spots in the data for the past week-and-a-half (since equities bottomed), consider serial weakness in the following:
Last Friday there was weak Australian Lending figures, German GDP and UK Construction Output, even if US Retail Sales were a bit stronger than expected. However, University of Michigan Confidence was quite a bit weaker than expected. From the top of this week while the US was closed for its Presidents' Day holiday there was very weak Japanese GDP and Industrial Production, Chinese trade figures that highlighted significant Import weakness and much the same for the Euro-zone Trade Balance, with the ECB’s Draghi informing the European Parliament he might need to expand Quantitative Easing to ensure that the Euro-zone does not lapse back into disinflation.
Tuesday was no better on weak UK inflation indications followed by a week German and Euro-zone ZEW surveys, with a below expectations reading for the already weak US Empire Manufacturing survey and unexpected weakness in the US NAHB Housing Market Index. Wednesday was kind of light, yet still brought somewhat weaker than expected UK Employment figures, Euro-zone Construction Output and US Housing Starts, even if US PPI and industrial production were stronger-than-expected. Then we saw those FOMC minutes that indicated quite a bit more dissension on the further rate hikes than Janet Yellen seem to indicate in her Congressional testimony last Wednesday and Thursday.
Thursday was also fairly light, yet with extremely weak Australian Employment figures, with Full-Time employment really suffering and the unemployment rate up taking two-tenths of one percent. There was also a weaker than expected Philadelphia Fed Index along with predictably weak US Leading Indicators. This morning saw very weak Japanese Department Store Sales along with their All Industry Activity Index. German producer prices were also very weak, yet with a bright spot from quite a bit stronger than expected UK Retail Sales.
That was the precursor to the stronger-than-expected US CPI, even if much weaker than expected Canadian Retail Sales were released at the same time. And on the late breaking news into 09:00 CST there was the coup de grace of a weaker than expected Euro-zone Advance February Consumer Confidence. All in all, fairly abysmal data that was able to act as the influence which encouraged a $120 rally in the S&P 500 from last Thursday’s drop near 1,800. So it would appear from the standpoint of possibly allowing for more FOMC forbearance on any further rate hikes, ‘abysmal news is (indeed) good news’, at least of late.
Bad news is bad news?
Yet all of those sorts of tendencies have historically hit a point of diminishing returns. At some point ‘bad news is good news’ for the markets becomes ‘bad news is bad news’ due to the overabundance of that less than desirable influence. We are getting the feeling that inflection point might be upon us as early as next week if the economic data remains as weak as it has been since the beginning of February.
Additional reinforcement for this comes from several key sources. Not the least of which is the OECD’s Economic Outlook Interim Report noted at the beginning of this post. The degree of the downgrades from already less than strong growth is striking. Overall they downgraded the global economy by 0.30% to just 3.00% for 2016. Within that there were particularly troubling downgrades for some key economies. Especially the allegedly strong US was downgraded by a 0.50% to just 2.00%, and this is supposed to be one of the better global economies. That means it is now below the 2.40% achieved in 2015.
As we noted in our December 16th Commentary Fed’s ‘Normalcy Bias’ Continues, the FOMC projections for the next several years presented at that meeting appear to already have significant internal inconsistencies. The fact that OECD has now also downgraded the US GDP growth to 2.20% is consistent with our previous analysis of that.
Also striking from a Europe that is ostensibly improving, German 2016 GDP was downgraded by full half percent to just 1.30%. Here as well that is now below the 1.40% achieved in 2015. It is also consistent with the anomaly we noticed in the February OECD Composite Leading Indicators (CLI) released on the 8th which seem to be showing the German economy is having peaked and possibly weakening once again. This is exactly the sort of thing that Mario Draghi had been warning about regarding the lack of structural reforms dulling the full effect of all that ECB Quantitative Easing.
And so it goes across every economy in the Outlook except for China showing some degree of weakening future economic prospects. There was vindication of sorts for why we have been so focused on not just each country’s Trade Balance of late, but also the overall level of trade. The OECD revisits its previous indication from the full Economic Outlook last November that overall global trade is slipping to the point that typically indicates the potential for a global economic slowdown. Back in November they were very clear that overall trade volumes dropping to or below 2.00% annualized growth had only occurred five times in the past 50 years, and in each case that had led to a more extensive bout of global economic weakness.
There is much more in the report on falling commodity prices, substantial financial instability risks, the widening of Emerging Market Economy (EME) bond yield spreads over there developed economy cohorts. While they are also always keen to encourage the fiscal responsibility across the cycle, Thursday's report it was very pointed on the degree to which a major dose of government-funded structural investment is probably one of the only ways to address the current weakness. Yet so much of the major developed economy fiscal focus is on continued budget balancing efforts, it is hard to imagine that will be seen anytime soon.
As such, we suspect that any sustained extension of the current negative economic news will begin to eat away at the confidence recently instilled by the prospect of less US central bank tightening. In fact, along with Mario Draghi and many others, we have noted for some time that the central bank quantitative easing cannot in and of itself actually restore the robust economic growth from prior to the 2008-2009 Crisis.
Dalio speaks
Added to those views in the past week were the revisited comments from the annual global economic symposium in Davos from a well-respected economic observer and analyst... and also one of the world's largest portfolio managers. It is the estimable head of Bridgewater Associates, Ray Dalio. The major points distilled from his discussion back in January were twofold. The first was that the sustained lower growth in the current economic recovery meant that investors had to be ready to accept lower returns while assuming greater risks at the same time.
As important, he strongly reinforced all of the statements from other folks on the limitations of central bank accommodation and quantitative easing. Specifically referring to the Federal Reserve, he stated that its ability to boost growth was weak due to global trends and previous central-bank policy. That likely means that all of the balance sheet expansion and sustained low rates so far did not leave the central banks much room for additional impact on individual economies or the overall global situation.
Extended Conclusion is available below
The COMMENTARY Extended Trend Assessment is accessible below.
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