A 'Cheer-Cheer Spiral' Appears to Be Taking Hold

In an earlier article I wrote:

....Of course, these policies take time to show their positive effects, just as the terrible lapse of regulation took time to show their terrible effects. Once market psychology changes, the fear-fear spiral will give way to a cheer-cheer spiral. I had been championing a housing buy-back program as a ‘fail-safe’ way to prevent the deterioration of bank balance sheets. They certainly would have accelerated the recovery. But I had argued that a successful lifting of toxic assets off the troubled banks’ balance sheets will still be effective.

Just as expected, such a “Cheer-Cheer Spiral” appears to be taking hold. Stock market indices are surging ahead, economic indicators, though still mixed, are showing improvement, and the two are feeding each other in a healthy fashion. Before long more positive signs will surface, and by the second half of the year the economy will start to show improvement. Even Roubini is sounding positive and that the sharpest decline of the economy is probably behind us.

Against the expectations of many, the UK is showing the earliest signs of life among the industrial nations. Its ISM index in March stood at 39.1, against market expectation of 35 and well ahead of the ISM indices of other European nations and that of the US. The nationwide housing price index (pdf) even showed a rise of 0.9% in March, the first monthly rise since October 2007. Not long ago some commentators were telling people to dump UK assets as if it were another Iceland. The British pound has now surged to recent high against the US dollar.

Among the developing nations, China's Purchasing Managers’ Index (otherwise known as the ISM index (pdf)) in March rose in excess of the critical 50 level, to stand at 52.4. 14 of the 20 industries surveyed recorded PMIs above 50%, whilst 5 industries reported PMIs below 50%. Of which, both Electrical machinery & equipment and Transport equipment registered readings higher than 60%.

The main worry these days is a resurgence of inflation. But even that I am discounting for the time being. There is just too much lax or excess capacity in the economy, but commodity prices may well rise ahead of the economic recovery on account of improving market expectations, but not so much because of the inflationary effects of a monetary expansion.

Comments

[Fighting Yoda:]

“Even Roubini is sounding positive and that the sharpest decline of the economy is probably behind us.” – this may not be true. Roubini is consistently bearish – only bullish thing he said (if bullish at all) – “economy may turn by early 2010”
I personally think the worst is definitely NOT behind us – the jobs report on Friday clearly indicated that. Temp jobs, the leading indicator of jobs rebounding,– down 70,000.
- Job loss revisions – keep increasing – August to January averages downward revision – 125,000. So the March number 0f 663K can potentially be revised up to 788K.
- 9 Million people working part time but want full time work.
- And of course ISM went down

And Commercial real estate starting to fall off the cliff – Vegas Casinos, Hancock Tower in Boston sold for 65% less than its price 3 years ago

Much more bad news yet to come, TARP/PPIF, FASB, G-20 etc euphoria will quickly die – reality will set in – with earnings this week.

Apr 05 02:46 AM

[Lok Sang Ho:]

Unemployment rate is often regarded as a lagging indicator. The sharp decline in mortgage rates, the rise in the stock market, rising home sales, fairly resilient retail sales, etc., all point to the beginning of life in the US economy in a matter of months.

Apr 05 05:40 AM

[huskerbob:]

There is light at the end of the tunnel, but it's not bright enough to do me any good. Good point that unemployment is a lagging indicator. Unfortunately, expect those numbers to continue to climb for the foreseeable future.
The rise in the stock market doesn't indicate anything to me right now, as I don't see the conditions which led to the downturn being resolved yet.
Add the impending crash in commercial real estate values and increase in vacancies. Increased unemployment. Is PPIF going to work? Not a lot of enthusiasm. New accounting rules to paper over problems.
Not cheering yet. The cheer cheer is spiraling the down the drain for now.
On the bright side, when things do turn around, you can be the first to say "I called it!".

Apr 05 06:18 AM

[Steven Hansen:]

the question that keeps rattling around in my head was a comment made one one of my articles.......

"how do we know that our economic profiles are still valid this time around?"

the indicators are beginning to show signs of bottoming, it is exhibiting a classic 1 - 2 - 3 recovery. i am torn.

but there are so many indicators out of position, and so much artificial elements due to economic manipulation - i would be surprised if what happens next resembles anything normal.

Apr 05 06:33 AM

[Lok Sang Ho:]

I did not mention rising factory orders and declining current account deficits. These are positive signs and the decline in GDP in Q2 is probably much less than most people expect.

Apr 05 09:09 AM

[basehitz:]

CNBC needs you. I suggest pairing with Erin Burnett or Dennis Kneale. Even Larry Kudlow. They could find reason to cheerlead of WS were hit with a nuclear device.

Now some sobering thoughts.
1) Total US debt as % of GDP hit 360% in 2008. The 100-yr average is < 200%. In the 40s thru 70s in ran about 150%. Only once in our history was it even close to today. It hit 299% . . . (drum roll) . . . in1929. Kinda sticks in your throat, doesn't it? And we didn't begin to start growing again until that debt was worked down to something reasonable. Say Helicopter Ben prints another $1T, or The Chosen One racks up another $2T in debt, that is a tiny portion of the excessive debt that needs to come down. We need to knock about $30T off our debt to reach the normal level of 50 years ago.

2) We are dependent on strangers. If China and others don't buy our debt, we cannot afford to buy OPEC's oil. None of these people like us much. Yet we are totally dependent on them.

3) Changes contemplated on tax policies has resulted in a new shuttle service between US and Switzerland as former tax-paying US large corporations moving to avoid taxation rates that would put them at a global disadvantage. That includes RIG, WFT (I own both), NE, FWLT, to name just a few. Their reason stated. . . tax changes anticipated from Washington.

4) Cap and trade - Electric utilities have estimated that YOUR power bill will go up 40% with proposed legislation. And everything you buy will reflect the added cost of business while US companies are further comprised on a global competitive basis. China and India have already said they would not comply with this. But The Chosen One imagines if we lead, they will follow. In reality, they will watch us go off a cliff increasing their advantage over us. That's why they clap over there as we shoot ourselves in the foot.

5) Energy dependency- we are the Saudia Arabia of coa. But The Chosen One said (I saw the live interview) that he "wouldn't ban use of coal, but would tax it so heavily it would bankrupt those who tried." And of course we can't drill offshore cause the tree huggers would rather we send $700B (at it's peak)/year to foreigners with money we borrow from China.

6) Unfunded liabilities - for all the massive debt problems we face, and are aggressively compounding with policy mistakes, the SS, Medicare and Medicaid unfunded liabilities which will dramatically escalate in about 10 years will dwarf all the current problems. Almost hard to imagine.

Yet we continue to add massive social programs paid for with more borrowed money. Face it, if we don't change course, we are screwed.

Apr 05 10:36 AM

[BxCapricorn:]

How is it that we are able to consider February factory orders more important than March electrical usage, in both China and the US?

www.controleng.com/art...

Name one factory that is hiring workers. ONE. If you do find one, please list their HR address, as the 1,000 Caterpillar workers being laid off in Decatur, IL, would probably like to know this information. GM CEO Henderson just said that five more factories are on the line this month, but you'd rather believe government data?

Are these goods being built without the use of both workers and energy? Just like the sub-prime problem, it is obvious if you just LOOK and stop listening to and believing PR nonsense.

Apr 05 04:40 PM

[Lok Sang Ho:]

A reply to basehits. Wbat you mentioned are longer term problems that need to be dealt with over the longer term. What I am addressing is short term. Many of the longer term problems were there 10 years ago, like dependence on foreign oil. But actually some recent trends, particularly the narrowing current account deficit, are encouraging and begin to address the global imbalance problem. Regarding employment, it is typical that workers are laid off before a full recovery and labor productivity is known to be cyclical. There is no mystery in there being excess capacity in most factories even though orders are picking up from their very low levels.

Apr 05 06:35 PM

[BxCapricorn:]

You've used the beautifully constructed, and never proven rule....that "the market precedes the economy by 6 to <insert however many months you'll need here> months..."

I love it! Do you realize that in any other profession, that kind of guideline-nonsense would not be tolerated. Only when money mangers are using their clients cash, as the fuel to fund the future rally, is it acceptable.

BTW, AA missed, credit usage contracted BIG TIME today, bond defaults are at record levels, and the deflationary spiral continues unabated. UNABATED.

Apr 07 05:01 PM

[slurfer71:]

We are in the calm before the storm.

Historically economies that become to dependent on debt and finance tumble.

Our debt is high; our infrastructure poor; our workforce poorly educated compared to other developed economies; health care is poor and the equivalent of 18% of GDP.

5 years ago we were the last, only superpower. My best guess is 5 years from now we will be a third-world economy mired in debt.

We have stimulated but not done anything to address the fundamental problems of too much debt, lack of and poorly enforced regulations and crony capitalism.

Jul 06 08:54 AM