Market Still Giving Benefit of Doubt to Recovery's Next Phase

In my short September 2 article on U.S. ISM and China PMI, I noted the weak market action to that better-than-expected data, which had shown that the global inventory cycle/manufacturing pick-up driving the initial phases of the recovery now seemed to be fully discounted by the market.

Positive market action on Friday (often the case anyway before a holiday weekend) in reaction to the U.S. employment report seemed to indicate that "high frequency" economic data, which I feel is best indicated by ECRI’s WLI, is construed as “better than expected." As long as key global central banks continue to be so accommodative, then the market still seems willing to give the benefit of the doubt to the economic cycle transition to the next phase, described below, rather than begin to more seriously factor in the risks of El-Erian's weak "New Normal" or the W-shaped "double dip" of Roubini and Xie.

ECRI's WLI Flattens Out Last 4 Weeks, Growth Remains at 38-Year High

ECRI’s Weekly Leading Index, released each Friday with a one-week lag, has flattened out the past 4 weeks at 124+, see table below.

WLI bottomed with SPX on Mar 6, and both have risen extremely sharply since. During this huge rally, WLI has flattened out for several weeks a few times, but never enough to make the 1-week change of its 4-week moving average go negative.

Because of that and WLI's extremely high "annualized growth rate," "Leading Indicators" remained highest rated ++ of my "Key Market Factors" in my weekly articles.

ECRI continues emphasizing its now 3-week old theme that the recovery will be stronger than expected, this week saying: "With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," see the chart below from ECRi of WLI growth.

I think that "snap-back" is an accurate term. This so far has been a "snap-back" "recovery" from a very deep recession. Still open to question is its strength beyond that phase, into the expansion, a distinction too often neglected in heated debates about the economy.

Risk in Economic Cycle Transition from Inventory Cycle/Manufacturing Pick-Up to Income-Driven Sustainable Consumption and Investment Growth

What would change that market view, and lead to a major correction?

The recovery phase is now in a critical transition from the inventory cycle/manufacturing phase greatly aided by government actions, to one based on more sustainable consumer and investment spending. The first phase was both earlier and stronger than anticipated by web permabears, catching them by complete surprise.

That has now created the risk for bubblevision permabulls of a pause in the string of “better than expected” news in that first phase in the transition to the next one, as employers remain reluctant to add new employees until they are more convinced of the sustainability of the recovery, preferring to lengthen workweeks and add temps.

At least so far today, the market seems to saying it is willing to live with that risk, for the time being.

By the way, data in my WLI table, shown in my weekly "Key Market Factors" articles, is as originally reported by ECRI each Friday, with revisions, if any, a week later; since that is the data I see in “real time,” it is not the final revised data.

Wk Ending	WLI	1-wk Chg	4-wk MA	1-wk Chg	4-wk Chg	AGR	1-wk Chg	4-wk Chg
28-Aug	124.7	0.4	124.6	0.7	5.2	20.8	1.2	10.4
21-Aug	124.3	(0.6)	123.8	1.2	5.1	19.6	2.2	10.8
14-Aug	124.9	0.5	122.6	1.6	4.4	17.4	3.1	9.7
7-Aug	124.4	2.7	121.0	1.6	3.0	14.3	3.9	7.3
31-Jul	121.7	2.2	119.4	0.7	1.7	10.4	1.6	4.2
24-Jul	119.5	1.2	118.7	0.5	1.7	8.8	1.1	4.9
17-Jul	118.3	0.2	118.2	0.2	2.1	7.7	0.7	5.6
10-Jul	118.1	(0.9)	118.0	0.3	3.4	7.0	0.8	7.6
3-Jul	119.0	1.6	117.8	0.7	4.6	6.2	2.3	9.7
26-Jun	117.4	(0.2)	117.1	1.0	5.2	3.9	1.8	11.0
19-Jun	117.6	0.6	116.1	1.4	5.2	2.1	2.7	11.4
12-Jun	117.0	0.8	114.7	1.5	4.8	(0.6)	2.9	10.9
5-Jun	116.2	2.7	113.2	1.3	4.3	(3.5)	3.6	10.1

Comments

[philais:]

"As long as key global central banks continue to be so accommodative, then the market still seems willing to give the benefit of the doubt to the economic cycle transition to the next phase, described below, rather than begin to more seriously factor in the risks of El-Erian's weak "New Normal" or the W-shaped "double dip" of Roubini and Xie."

Really? Just wait till the second round of bank bailouts happens because of the pending commercial real estate collapse!

The central banks are artificially lending at 0%. Is that a sign of confidence in the future ecomomy?

Look, the market is going up based on "not as bad news". That is not a good sign.

No, I'm betting on the big W, and we are closer than you think.

Sep 06 12:16 PM

[bottoms-up:]

Well, what do you expect when the US Government took all the wealth of the people of the country and put it the hands of the corrupt banks and the likes of GS? Anytime there is bad news, look at who is holding the DOW up... Financials throwing our dollars into pot to shill the market.

Still, I think there is a lot of money to be made in financials if you follow them closely. The US Government is using them for one of two things (or both). 1. To shill the markets up in the face of horrible economic data. 2. To act as a vehicle to launder money to Asia to pay off those leaders and others that Paulson and others ripped off.

You've got to remember how Paulson always spoke to "Main Street USA" on a Sunday before the markets opened in Asia. He always seemed to be in a real cold sweat!

In any case, the US Government is using financials as a vehcile for whatever, just day trade them and you can make big $$$$ IMHO.

Sep 06 12:20 PM

[bottoms-up:]

"Better than expected" is nothing more than catch phrase in this watered-down market... When you have absolutely no expectations, everything is better than expected.

Sep 06 12:27 PM

[investorinPA:]

Gotta love this story on Wall Street's next bubble...so evil and wretched these people are: contraryriches.blogspo...

Sep 06 12:54 PM

[RECESSIONPROOF:]

no recovery

Sep 06 02:24 PM

[Jan Paul:]

Don't forget the coming resets of Option ARMs and Alt A's. Ca. that is 13% of GDP has 57%, Florida 10%, Az and Nv. (small populations and yet) 3% of the resets.

We still have credit card defaults as people lose hours, jobs and buying power if fuel prices stay in this range.

We are just now seeing the cities and states laying off more and more people that will reduce profits on business that depend on government spending and employee spending.

Check out this article on how the states are doing and you can see another wave of trouble coming.

quote
At least 48 states have addressed or still face shortfalls in their budgets for fiscal year 2010 totaling $168 billion or 24 percent of state budgets.

www.financialarmageddo...
===============

Economic power is still moving from developed nations to emerging markets and will for decades. This is a monumental shift in economic power and will continue for the lifetime of most of us.

Sep 06 02:40 PM

[Zekeko:]

we are recovering like someone that attends the ALCOHOLICS ANONYMOUS meeting. We still have bad hangovers.

Sep 06 03:20 PM

[NationalDef...:]

It appears this crucial statistic has escaped most commentators and independent bloggers alike. The privately owned Federal Reserve reported on June 11, 2009 in its series issue Z.1 Flow of Funds Accounts of the United States, line Debt growth, borrowing and debt outstanding tables (see spreadsheet d3.csv inside the zip archive) the latest calculated debt levels by category of sector in the US economy. Once the category items are added up, an astonishing figure of $59933.6 billion or nearly $60 Trillion results. Has this been mentioned at all on the MSM or on the blogs? I can’t recall a single instance of it. Everyone still operates with the $53 Trillion figure from 2007 reports and the %350 Debt/GDP ratio.

By that measure if we were to take the Q1 2009 reported US GDP of $14,097.2 billion and divide Q1 2009 total US debt level of $60 Trillion by that GDP number we would get an astonishing record Debt to GDP ratio of 425%.

This is unprecedented and is showing that the US economy is being crushed by the debt that is growing in absolute terms thanks to all kinds of US Government and privately owned Federal Reserve’s liquidity injection and asset prop-up schemes while at the same time the GDP is shrinking. Hence the conclusion is logical that these efforts are not working while they are piling on unprecedented levels of debt outstanding that are not possibly going to be payed back, and therefore will be defaulted on by definition. This is going to blow up in a quite dramatic deflationary bust event soon enough. One can only surmise whether it will be some kind of a credit event such as default by major US coroporation(s) or fear driven bond price drop that may lead to jump in interest rate. But in any case this is going to be deflationary as debt bubble begins to crack at the seams in earnest. It is only a matter of time. By the way, in the week before Labour Day of 2009 gold prices spiked up to nearly $1000 which is indicative of credit stress as investors flee to safety of gold from even the safest U.S. Treasuries. Gold as we know is nobody’s liability and therefore rises during credit stress situation in the economy. Surely this spike was not caused by rising inflationary expectations as gold performs abysmally during periods of inflation as any one can verify it by looking at the gold price decline since 1980 through early 2000’s when economy was in its boom years.

As a side note, the above mentioned Federal Reserve spreadsheet pegs U.S. Federal debt only at $6.7214 Trillion which is obviously excluding the Treasury debt that various Agencies of the Federal Government are holding and therefore make it appear as if the Government ows it to itself. The $60 Trillion figure is therefore a conservative estimate.

ndainfo.wordpress.com/.../

Sep 06 08:40 PM

[rick12345:]

Mike Moore is not a bloody economist. He, like most Americans, is ignorant about the sheer scale of the problem that was about to evolve. The USA was literally on the brink of a financial collapse. I am well and truly glad that "John Citizen" didn't get their way; If they did then those bread lines would almost certainly have been a reality for many people. Think of 30% unemployment instead of 10% and a recession which lasts 10 years rather than 2 years. Yeah we'll be paying off the debt for years to come, but at least I have shelter over my head and food in my mouth.

Sep 07 08:43 AM