IT’S NOT LIKE WHAT IT ALWAYS SEEMS
DON’S BLOG 2017.05.01
Last Friday, the U.S. economy posted yet another dismal real GDP quarter. We are now
“growing” at less than 1% but Wall Street tells us not to worry because the current (2 nd
quarter) will be 3%. In the world since 2009, the just reported GDP number is always weak,
however the next will always be great. It’s the same old Wall Street/Main Street divergence.
Years ago, when I first became interested in the then new leading indicators that came out of
the research of Wesley Mitchell and Arthur Burns, I began to notice some of the 12 worked,
and others didn’t. The reason of course is that a market economy is a living organism that
adapts, changes, and is anything but static. Can you believe it, every action creates its
counterpart? As the old saying goes, the only thing certain is death and taxes. As hard as we
try, the real economy is very difficult to predict. Many times, one can observe a trend but
turning points are near impossible. That doesn’t mean we shouldn’t try. Ditto except in
spades are the financial markets. On the other hand, it is quite easy to tell where the
economics and markets go in the opposite direction. Today’s stock market is following
sentiment rather than economic hard data. We know then that the market is extremely
overvalued, but you know what, it was that way five years ago. Many of the big gains come in
the topping process (buying climax). Most cannot stand to miss it, regardless of the risk.
Rather than me pontificating on this most recent illustration, please read the enclosed piece
from ZeroHedge, citing a Goldman Sach’s study:
Goldman Warns The Gap Between
Stock Investors' Hopes & Reality Is
Close To An All-Time High
By Tyler Durden Apr
29, 2017 4:00 PM
If US GDP growth were tracking sentiment data alone, Goldman
estimates the US economy would be growing at its fastest rate of
the post-crisis period... But as many saw yesterday - crushing the
hopes and dreams of a multitude of over-confident asset-gatherers and
commission-takers.
[4]
As Goldman Sachs' Himmelberg notes, the music has yet to stop for
market sentiment. Sentiment indicators are running extremely high
among both households and small businessmen. While there are some
signs of a peak in the sentiment surveys, the soft data are still near
the highest levels of this expansion.
[5]
Exhibit 1 drills deeper into the soft data to see precisely where the
improvements have been coming from. The cell values in this table
(illustrated by the heatmap) show the levels of GDP growth implied by
the univariate regressions of our broad CAI on each indicator (plus 12
lags). Both activity-oriented surveys (like ISM) and pure sentiment
surveys (like NFIB Small Business Optimism) are running “hot”, while
“hard” data indicators, like industrial production, are running cooler
(although still quite strong). And the implied magnitudes of GDP growth
are unrealistically high, with the Conference Board’s index of
consumer expectations implying GDP growth of nearly 5%, and the
NFIB’s small business optimism index implying growth of 6.8%.
[6]
Sentiment is running high in surveys of investor sentiment as
well. The International Center for Finance at Yale School of
Management surveys retail and institutional investors for their views on
current valuations and one-year-ahead expected returns. In previous
reports we have commented on the degree to which expectation
measures have been running ahead of measures that survey current
conditions. We can similarly use the Yale data to compare “expected
one-year returns” to the assessment of “current market valuations”.
The patterns are remarkably similar. Just as in surveys of consumers
and businesses, for investors (both retail and institutional), the postelection rise in expectations for year-ahead returns has materially
outpaced their relatively sober assessments of valuation. As a result,
the difference between the two survey questions – “expected returns”
minus “current valuation” – is close to an all-time high.
Exhibit 2 plots this difference for both institutional and retail
investors. In October, 83% of institutional investors expected the
market to rise in the coming year, while 50% thought the market was too
rich. By March, 99% expected the market to be higher in a year’s time,
while the percentage who thought valuations were stretched was
roughly flat at 49%. In short, optimism appears to be no less
pervasive among investors than it is among households and small
business.
[7]
Goldman concludes, we continue to worry that sentiment has
moved ahead of the (hard) data, that this divergence will close
from the top down.
[8]
And that is a long way down.
http://www.zerohedge.com/print/594845
Since November 8, the Dow Jones is up 14% and the S&P 500 11%. This is the largest increase
of any first term President in the first 100 days since WWII. It is obvious the animal spirits of
the risk-taking community are on fire. That’s a good thing, it’s been lacking for the last ten
years or so. But, and there is always a but, the entrenched political establishment of both
parties have no intent to give up their spot at the trough. Hopefully there is a trend toward a
friendlier business environment, but it’s a long way to Tipperary. Please remember the
business of America is business. In my opinion, we have used it as a whipping boy long
enough.