Bullish commentators are grossly distorting recent US economic data to support their case that the US economy is in some sort of V-shaped recovery. The reality is that the economy is still largely flat on its back and facing at best a slow recovery, and at worst a second downturn as global deleveraging becomes essential to halt the rise in government debt.
Take the Bloomberg headline on orders for durable goods last week. It trumpeted the 2.8 per cent rise in bookings excluding cars and aircraft as the ‘best result in four years’.
Cars and planes crash
Fine, except that when you include those not inconsiderable items – automobiles and planes – then total orders actually dropped by a completely unexpected 1.3 per cent due mainly to a 67 per cent crash in commercial aircraft orders. Now the same distortion also applied to the US new homes data.
The headlines focused on the one-month 27 per cent jump in March to an annualized 411,000 homes. Great except that this bounce came off the all-time record low of 324,000 in February, and was supported not only by better weather but by the $8,000 tax break that expires at the end of this month.
So you might argue that US new home sales touched their pitifully low bottom in February, the worst figure in more than 60 years. But this is still a terribly depressed level for one of the motors of the US economy. And to try to claim that a V-shaped recovery is expected from one month’s data is just bullish nonsense and cannot be done.
If the bulls are sinking this low to prove their case what does that tell us? It surely signals that the rally in stocks is well, well overdone and due for a correction. What would it take now to stop this thundering herd?
The pictorial analogy is surely the herd of buffalo heading towards the edge of the cliff – perhaps being corralled by Indian hunters. They would now be the market professionals who can go short at the touch of a button.
What does it take to push this lot over the edge? Not usually very much. Indeed, herds of buffalo will fall over the edge due to the weight of the animals behind them.
By rounding up the last bears and strays and driving them into the bull camp Wall Street is setting us up for a huge market reversal when it comes. The bullish argument is that it just has not happened and so it never will.
The bearish lesson from experience is that the bulls are loudest just before the crash – although their arguments are woefully misleading on any rational analysis like just now – and that what has to obviously happen almost always does.
Only if you exclude US automobile, aircraft and house sales can the current US economic date be presented as positive. How bullish is that?
Disclosure: Author holds a long position in the US dollar