Why on earth have markets chosen to completely ignore worrying words that Fed Chairman Ben Bernanke used just two weeks ago in the semi-annual Humphrey Hawkins testimony? Could it be that despite an increasingly mixed outlook for the global economy and following what has after all been a remarkably fast ‘recovery’ in certain sectors of the economy there are still a majority of investors out there that believe equities are still undervalued? Clearly there are! I wonder, have we now become so short-term affixed that we are no longer able to see beyond the end of our nose? I for one certainly hope not though I do wonder why markets are showing a complete disregard to fears that some have that we might now move into a double dip recession! First though let me remind what Mr. Bernanke actually said in his very simple and straightforward manner when providing a view on the US economic outlook “that the course of economic recovery was unusually uncertain”. In other words outlook unclear, a nod is as good as a wink or if you prefer, there’s a bank of fog ahead. At a stroke the Bernanke words wiped around 120 points off the Dow immediately whilst sending other US and global markets reeling into decline. Such words of wisdom from the highly respected Fed chairman and who unlike his predecessor latest set of wheelchair publicity gabbling should in my view be heeded. Given subsequent confirmation that US Q2 GDP growth slipped from an annualised rate of 3.7% in Q1 to 2.4% we should see America as at best walking only sideways carrying as it does some 9.5% of the population as unemployed. The message to President Obama and the US administration then is that with mid terms elections just weeks away more stimulation is required!
No matter what goes else is going on in Europe or Asia the economic health of America really does matter for the rest of us. Arguably despite the potential from pushing or indeed pulling the plug from domestic growth the health of America matters to China as well. China matters to the rest of us too meaning unless some growth taps are turned off wage pressures will unlikely abate. Meanwhile watch equities by all means but better still watch what currency and treasury markets are saying as well. As my chum Anthony Peters at Swissinvest frequently reminds me, volatility in underlying US Treasury markets right now remains extraordinarily high not least because the great recovery story which is currently being traded by equities is not being reflected in rates.
Meanwhile US manufacturing, well at least ‘growth’ may now be running out of steam or at the very least, pulling back to a more average and mundane pace. For all that we may not be going all the way back down to where we have been but unless I am walking around with my eyes closed I can see little in the global economy that is about to push mature western markets further up. We may as well admit now that the stimulation based recovery that began late in 2008 is all but done and dusted. The question though is do we have to go down again before we can come back up? Right now those eyeing the US economy are increasingly turning attentions onto prospects for construction growth. True, construction can and does tell its own particular story in various states and is certainly not without plenty of positive elements along with woes. Along with banks and manufacturing the construction industries in the US have been perhaps the most interesting and formidable elements of recovery. Now though having feared for some time that house sales were flagging one has been forced to note latest figures covering new home sales in the US for June which although admittedly up on those of May provided little scope for excitement. Suffice to say that the US homes market is at best probably about as dull as dishwater and at worst, showing all the signs of heading into a double dip.
Back at the equity market ranch and with the Dow standing at 10,674 points at close of play last night (a level at which ironically is little better than the average it had been throughout the second half of 2009) I continue to view that the current high equity market levels are both in the US and UK purely reflective of unsustainable results based euphoria and likely ignoring the probability of some ill winds ahead.
True, in equity as in all other markets it takes two to tango. The opposite view is one that appears to believe recovery has certainly not been built on sand and that despite a few hiccups along the way that it will after all be sustainable. Maybe it will and I certainly hope so. But neither in the US or Europe have we yet seen any signs of decent and sustainable improvement in full time employment. For now I am not about to go down the road preaching the words double dip recession quite yet but at least and until I can see evidence of a jobs based recovery I do fear that I will be forced to continue looking at the menu of ‘Restaurant Euphoria’ and finding that what I see is not to my particular taste. My personal view is that it won’t be that long now before we start hearing more talk about extension of quantitative easing and further stimulus measures being applied. Whether this might should it occur do the job meaning change the current situation from being that of a cost based to jobs based recovery remains to be seen? However, I am certainly not in the camp that is about to worry unduly that growth in China might have slowed or that is about to worry unduly about inflation in an era that still to me smacks of deflation. The global market will in my view still move forward led by countries such as China and India. We should be thankful for that but it isn’t all doom and gloom for us. Ideas and opportunities do abound and we should start looking more to what might be growing up in the western technology nursery. We should look again at banks too despite the EU having committed the cardinal sin in the wake of bank stress tests of leaving the situation in a greater mess than they found it. Yes there are a few to avoid but overall US and European banks are in a very much sounder condition than they have been. Given also that situational concerns on sovereign debt have I rightfully subsided from gaze suggests to me that most banks are through the worst.
Neither can we lose sight yet that while the better politicians in the EU have decided to bite the spending bullet as they get on with the job of sorting ridiculous levels of government deficit and borrowing albeit that the effect will be spread over very many years it seems that others will remain in denial of what needs to be done. The US is one of those nations that rightly or wrongly believe creating an environment to spend your way out of a mess presents the best way forward for the economy. It is absolutely true that despite carrying frightening levels of debt and running with a deficit for most of the adult lives of we so called baby boomers such policy has worked for them. Will it continue to be the way forward for the US? I guess that it probably will though it will be interesting to watch those opposed to continuation of such economic policy air views through mid term elections.
