By Raúl Ilargi Meijer at The Automatic Earth blog
It seems like every blue moon or so I need to return to Groucho’s definition of chaos theory, it keeps on popping up. The first time I used it in an article goes back to at least May 2009, incidentally for many people the starting date of the financial crisis in their part of the world. This time around, it’s there because it’s what a lot of people in the financial markets must be feeling. And I mean ‘must’ in the sense of ‘should’ be feeling, though I don’t think they are. Yet.
But if the demise of US QE means anything, it’s the end of certainty, of confidence that someone out there would be holding your hand all along the way to riches. The difference between complacency and volatility, in a nutshell. Which is, predictably, going to freak a lot of people out. Ain’t nothing feels as comfy as a bearded gnome or a grandma in charge of the mega money machine to do your work for you. Those days are over. Might as well get used to it. First, here’s Groucho once again:
Well, art is art, isn’t it? Still, on the other hand, water is water! And east is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does. Now you tell me what you know.
So what do you know after Yellen’s long and generally awaited announcement yesterday? Quo Vadis? Where are stocks going to go, and bonds, and oil, and gold, and the dollar now the reserve currency meta multiplier machine has been shut down? I know a lot of people, probably most, are thinking ‘they’ are going to find – other – ways to ‘save’ the economy and the markets.
If I were you, I’d ask myself a question or two in that regard. It market stability were one of the Fed’s priorities, their surest bet would have been to maintain at least some sort and some amount of QE. Meanwhile, their argument that jobs are so greatly improved is simple nonsense. So again, and I’m asking this a lot and not getting answers, why did they do it, and why the timing?
From what I can see, the Fed is -successfully – fooling Americans into believing their economy is doing well, if not great, and they used Greenspan yesterday to inject some doubt, or realism if you will, that Yellen couldn’t have included in her speech lest she’s be perceived as doubting her own words.
It’s all a message, a spin, a story that they want people, including you, to believe. It’s a certain version, a particular interpretation, of what goes on, but that says nothing about the level of thruthiness in that message. Yelllen’s speech was followed today by the first (preliminary) Bureau of Economic Analysis US Q3 GDP report, which cheered its way all the way into a 3.54% growth rate. So people think: she was right, we don’t need QE, we’re doing great!
But behind the veil of that growth number lie far less positive ones, as for instance described today by Rick Davis at the Consumer Metrics Institute:
In their first estimate of the US GDP for Q3 2014, the BEA reported that the economy was growing at a +3.54% annualized rate, down a little more than 1% from Q2. “Improving” imports and government spending are the stars of this report. Imports swung into positive territory with a +0.29% contribution to the headline number, up +2.06% from the prior quarter. Similarly, governmental spending contributed +0.83% to the headline, up over 0.5% from Q2 (with Federal defense “consumption expenditures” creating a +0.76% boost to the headline number all by itself even as growth in state and local spending softened).
Essentially all of the other line items were either flat or had a negative quarter-to-quarter impact on the headline. Inventories (as expected) reverted to mean and took -0.57% out of the headline. Commercial fixed investments grew at about half the rate reported during the prior quarter, the growth in exports lost about a third, the growth rate for consumer spending on goods was halved, and although consumer spending on services did increase, the increase was a relatively mild +0.10%.
Inflation (or disinflation/deflation) plays a major part in this report, since during the quarter dollar-based energy prices were plunging. US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and a -33.8% annualized rate – pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly deflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP – which arguably reflected the real experiences of American households) was slightly more deflationary at -0.18% (annualized).
Those of you who know me also know I have a hard time seeing people equating price rises one on one with inflation, since that’s far too crude a definition, which renders itself useless in short order. There’ll always be things whose prices rise or fall, but that can be for a thousand reasons, and you want to know those reasons, or you should. What counts today when it comes to inflation is really just one single factor: spending. By people like you and me. And that kind of spending is way down, as reflected in velocity of money stats.
Which is why all the efforts to raise inflation numbers are doomed to fail before they begin. Why is spending falling the way it is? Unemployment in all its facets including persistently high personal debt, a shrinking labor participation rate, alt-control-deleted benefits and lower wages. Add to that the at best jittery numbers for M2, M3 money supplies and you’ll never get any inflation by definition. That doesn’t mean some prices won’t rise, but that just adds to the pain, it’s not the root cause.
So what do we see today in the markets? Stocks are up, because the crowd just can’t believe grandma left them to fend for themselves. Hey, it’s only been a day. Give it time. The euro falls below $1.26, first time in a while, because dollar hunger must set in for real with the free for all punchbowl taken away, oil has a hard time negotiating the $80 a barrel divide, and gold lost its battle with $1,200.
Yeah, I know Greenspan said something about holding gold yesterday, but why pay attention to that if you don’t believe one single other word he says? Gold has lost a lot of people a lot of money over the past few years, it’s not hard. And you can say that gold has been solid over the past 4000 years, as a commenter at the Automatic Earth did today, and that’s absolutely true, but your life is way shorter than that, and there’ve been many longer times of depreciated values. And there’s no way for you to know how it will keep up as a safe haven during your lifetime. So don’t bet your life on it. Don’t make it a religion.
Sure, the dollar will die at some point, but that point is not near. There’s a whole slew of fiat currencies dying to precede the greenback’s demise, first and foremost the euro, which will be killed by simple politics. And whatever the weakness of the USD may be, it’s not that Kansas will fall out with Idaho and decide to mint its own coin. Still, that’s exactly the euro’s foreland.
The US economy is much weaker than Janet Yellen and the BEA let on. But it’s not the weakest animal in the herd, not by a long shot. The American leadership can keep its predominance alive for a whole longer, albeit only at the – further – expense of the American people. Who soon won’t be able to afford even the cheaper gas prices.
Meanwhile, the Europeans still make faint attempts at convincing us their economies are doing well, but their messengers are too scattered to present a coherent picture. And Draghi’s 2-year old ‘whatever it takes’ shows wear and tear. It’s all out QE or the big flood. And QE has been a horror for the American people, even if they don’t yet realize it, so Mario won’t be allowed to unleash it. He’ll soon be campaigning for leader of Italy. Unless he’s got even darker skeletons in his closet than the rest of the candidates. Which I wouldn’t rule out.
China, like the US, survives through manipulated data, claiming a 7%+ growth rate where they have probably just 3-4%, but who’s going to know? Smarter investors are, that’s who, once they’ve dumped the dupes who clung to grandma’s aprons.
The US dollar will come home in very large amounts, because there’s nowhere else to go that feels anywhere near safe. That can be a big problem for the US economy, but then, that’s what the Fed is preparing for today. It’ll all leave China, Japan, Europe et al scrambling for the crumbs that fall off the table, unless and until some regions or smaller nations decide to go it alone and ditch the larger networks and organizations and treaties they’re presently subjected to. But that will take time.
Until then, it’s chaos theory. If you can figure out why if you take cranberries and stew them like applesauce, they taste much more like prunes than rhubarb does, you’ll have it made