Market Misdirection & Underestimation
Misdirection: "It is a form of deception in which the attention of an audience is focused on one thing in order to distract its attention from another. Managing the audience's attention is the aim of all theatre; it is the foremost requirement of theatrical magic."
That’s a reminder for the next time you think the world is ending; just remember the strings behind the curtain.
Underestimations
Dr Ed Yardeni put it best:
"Why are companies hiring so many unproductive workers? Why aren’t they investing more to increase productivity? Why isn’t weak productivity boosting price inflation more? Why are profit margins so high if productivity is so lacklustre? Could it be that output is being underestimated? Should high-tech freebies, such as free apps, be reflected in output? If companies are using more automation, robotics, and artificial intelligence, why aren’t these technologies boosting productivity? Might the aging of the Baby Boomers explain the productivity puzzle? Are the Millennials spending too much time playing video games?"
The easy answer would be in a year from now when we find output was being underestimated by a wide margin.
Remember our suggestion after the "ugly" April/May jobs report syndrome: "The processes we use to measure the economy today are the same general processes created in the 1950s. Does anyone truly believe that our economy today is anything remotely like what it was in the '50s?"
Here’s another example: We’re setting records in numerous categories, approaching the end of the earnings recession haze and have walked through quicksand for nearly two years. And all the while we’ve been afraid of just about anything that moved.
The "poor productivity issue" is set to end up like the feared weak jobs issue: Wasted energy.
There is Another Record to Note
We have a wave of good recent economic data that paints the picture of a strong US consumer. More have jobs, and the moderate (but steady) pay increases have made wallets a little bit fatter. The US Labor Department reported that 255,000 jobs were added to July’s payrolls and the unemployment rate stayed at 4.9%. On top of that, private wages & salaries in personal income rose 3.3% year-on-year in June.
This could explain the new record I noted; the mountains of cash piling up for a rainy day.
And the results of more misdirection…
That line shows you the ever-increasing bank account cash balances sitting idle and not building our economy in any way.
The number is staggering in the latest data at over $9.3 Trillion. And it’s a pile of cash that looks a lot like a pile of fear. So how can you look at this chart and assume Armageddon is near?
And consumer balance sheets look good too.
Misdirection: "Consumer debt is at all-time highs."
Fact: US household assets have grown far faster than liabilities since the recession, and are also well into record highs. Mortgage and home equity debt are still lower today than they were before the recession. Household debt as a percentage of GDP has fallen sharply to 78.8% during Q1 from a peak rate of 98.1% during the recession.
So noted, let's still be aware:
It’s the haziest part of the summer doldrums. Many are relaxing and doing little, paying attention to less and standing somewhere close to a beach, for example.
In other words: Don't be at all surprised to see some more misdirections coming.
So don't stagger into cascading fear when we hear of a "wilting consumer, poor consumer confidence, weak sales, car sales falloff, housing traffic low, etc., in August."
If you’re wasting any of your time listening to the two US Presidential candidates, you too would think the world was ending…again.
I would not be surprised at all to see it have an effect near-term while the summer comes to an end.
The Good News after the Misdirect?
Consumers have mountains of dry powder, with cash levels at record highs.
It’s no surprise then that US consumers are doing what they do best: Going shopping.
Real retail sales grew 4.2% (saar) in the three months through June (based on the three-month average).
Note that "core retail sales" (taking away autos, gasoline, building materials, and food services) is used by BEA to estimate personal consumption expenditures. It shows the increases over the last year are even more dramatic: at 5.6% (saar).
How Come?
Jobs. Plenty of them; with near-record amounts still going unfilled.
Check this data
In the first chart above, relative to employment as a whole, the openings rate ticked up month-over-month, again. Note, however that it sits below just May's record mark (there’s that misdirect again).
As is typical, the private openings rate remains above the total rate due to lower government openings, but both remain in their solid upward trend as labour markets tighten.
The lower chart shows some of the better news from the latest JOLTS data: it’s a series low for the lay-off and discharge rate, which matched its lowest levels recorded from back in 2013.
The bad news bears will point you to the private layoffs and discharges being above that level. Don't buy into it: The read is comfortably in the bottom end of their all-time range as well at 1.3%.
Still, even as the news underneath the bears' banter improves, sentiment amongst investors remains poor at best.
The last chart above is a repeat from earlier in the week: Wall Street's own sell-side guys feel as bad about stocks now as they did 14,000 Dow Jones points ago in the late 1980s and mid-1990s; the latter being a period where we were told to fear a double-dip recession for two full years.
Yes, more misdirection.
Too Much Time Wasted
Make no mistake - everyone thinks patiently waiting through the near-term pain of a bear market is tough, and even impossible for many.
Recent years show us that living through a bull market is no walk in the park either.
Our data still says this one is still a young bull, the secular kind; the kind that is driven by major shifts that last for many, many years.
Someday our kids will roll off their chairs in laughter thinking about what we did to ourselves since the Great Recession.
Even so, investors spend a lot of time fighting the last battle, so it’s understandable that after a 58% fall in stocks and the worst business contraction since the Great Depression, any market decline now almost immediately stirs fears of "this is it..." or “here we go again.”
The "Double-Dip" Misdirect
This term was widely used during the Clinton years back in 1994-1995, when any single weak economic data point was followed by an immediate reference to the "double-dip recession ahead," which, by the way, never arrived.
It visited us all again recently back in 2010, when the S&P 500 fell 17%. Of course, due to the severity of the just completed Great Recession, ignoring the media sideshow in financial news wasn’t a realistic option.
Below are a few quotes taken from that time to show how difficult it was to stay focused on the proper horizon:
CNN Money - June 2010: "Europe's debt crisis. Companies still not hiring. The Gulf oil spill. These are uncertain times to say the least."
(While you are laughing your ass off reading that, remember everything about the future falls into the "uncertain times" bucket. Don't fear it. That is the way it has been since the dawn of time.)
Forbes – March 2009 - The great Mr Roubini, who got rich terrifying you with great insights like this: "As early as August 2009, I expressed concern in a Financial Times op-ed about the risk of a double-dip recession."
You can't make this stuff up guys.
And here's one from Robert Shiller. In a May 2010 New York Times article, he asked “Will individuals continue to support the market, which is now highly priced?”
And Since Then?
Well, we know the story since then don't we? The grim-reaper fears never came to fruition and U.S. stocks rallied 35% over the next year - and even more since - as the waves of monsters kept washing over us and then washing away.
Sitting through a bear market is not the hardest part of an investor’s lifetime. Instead, sitting through the recovery that follows and being able to extinguish the ghosts of the past tends to be the tougher game.
The Bottom Line
I wrote at the start of summer - "the August doldrums are the worst. Volume will dry up, internal chop will be clear and earnings season's end will bring plenty of emotional reaction - almost all of it wrong when seen months later."
It takes time, lots of patience and extreme discipline.
As such, records show most get far less by reacting too much, making too many different choices, moving too many things, and listening to too much garbage.
Enjoy your last month of summer. Chop and hazy market movements should be expected.
Remember, that the red ink is normal and we still hope for the swoon.