The Perennially Surprised

Includes: DIA, IWM, QQQ, SPY
by: Acting Man

There Must be Bad Weather Everywhere …

Over the past few days and weeks the "negative economic surprises" sure have a way of piling up globally. We are by now used to US data regularly underwhelming the consensus, because US economic forecasters are apparently not paid well enough to be able to afford thermometers and/or barometers, and have no time to look out of the window or watch a weather report on TV. They all seem to possess a ruler though, which we guess is the main forecasting tool of economists and Wall Street equity strategists alike.

But why is consumer confidence "unexpectedly" plummeting in Europe, from one negative number to an even worse negative number? The weather is balmy, and has been so for some time. Not only that, everybody knows the euro area has been saved and the upswing is finally here. Why are consumers so grumpy? Factory owners also seem subdued ("unexpectedly", natch). Why? No-one seems to know.

Manufacturing in China isn't doing well either. We have not noticed any unusual weather news coming from China though.

Not even Japan's economic data releases are anything to write home about, in spite of the BoJ's frantic Abenomics contortions. In fact, the data are so bad that one must conclude that the BoJ's efforts have had either zero effect, or have managed to make things worse already (normally there is a bigger time lag between the feel-good sugar high produced by extremely loose monetary policy and the subsequent hangover). And guess what, this was "not expected" either.

As Reuters reports on Japan:

Japan's economy grew at a much slower pace than expected at the end of last year, posing a challenge to policymakers as massive government stimulus efforts showed few signs of sparking momentum in consumption and exports.

The data showing disappointing private consumption, business investment and shipments came as the Bank of Japan met to review its ultra-easy policy, with markets widely expecting the central bank to hold firm to the current pace of bond-buying stimulus.

(emphasis added)

Maybe it is a case of bad weather of the mind, animal spirits caught in an imaginary blizzard so to speak. Whatever it is, it does begin to look a tad suspicious. Reuters summarizes this situation under the heading “World economic recovery struggling to gain traction”, which is code for "global economy still deeply ensconced in Thomas Crapper's famous invention".

Is that really all we are going to get out of one of the biggest global central bank printathons in history combined with deficit spending at a manic pace? Perhaps it is time to examine the premises of these policies with a critical eye, although we suspect that our vaunted policy movers and shakers will be inclined to conclude that they will simply need to do even more of the same.

Surprise Measure Dives Below Zero

Below is the Citigroup guesser's index for the US, which measures how far from reality economic consensus forecasts are straying. It seems there is never a time when the consensus isn't surprised, otherwise this index would flatline at some point. It has yet to achieve that feat. Currently it is declining a slope of hope, i.e., the forecasts have proved to have been overly optimistic due to the recent collective polar vortex predictive failure (it seems by the way that the affordability of temperature gauges should not really pose a problem as we erroneously surmised above).

As can be seen on this chart, very often (but not always, otherwise it would be too easy) weaknesses in this index actually leads stock market corrections. Perhaps it will happen again, especially in light of how stretched the market has become.

Citi's "economic surprise" index for the US, via Sentimentrader.


Don't get us wrong – some of the weaker US data no doubt do owe something to the weather situation. However, there seems to be a more broad-based, globally synchronized weakening of economic data in evidence. Our best guess is that it has to do with the slowing of money supply growth in the US and Europe over the past year.