Diary of a Financier

Consensus Is Top-Ticking the “Economic Recovery”

In Economics on Tue 21 Feb 2012 at 23:27

I’ve discussed at length the Great See-Saw in which our economy/capital markets find themselves:

Markets will continue to trade in a broad range until the 2000-201x bear market comes to pass. Reflation currently has asset values ballooning toward highs again… Even consumer balance sheets have improved, with both the household savings rate and the consumer debt service-to-income ratio at the healthiest levels Americans haven’t seen since the mid-1990s. Indeed, the private sector looks vigorous too. EPS and Revs will keep climbing through this quarter, but the macro reality will anchor prices and growth expectations. From consumer to corporate, the non-government economy is heavily subsidized, hence a contraction in government spending will offset the nominal progress once quarterly macro data puts the net-net into perspective (2q12)… The economy can’t accelerate too fast because Washington DC sits atop an H-bomb of interest rate risk; the economy can’t contract because of the ginormous federal debt.

In addition to that top-down assessment, I’ve also discussed the growth recipe for American companies on a microeconomic scale:

Since the 2009 bottom, the microeconomic growth recipe has called for a rotation between widening margins (cost-cutting/layoffs/tax incentives) and inventory restocking. Nowhere therein does aggregate demand or nominal GDP reap organic growth. That, in essence, is the redux of the bifurcated American economy: a micro churn within a macro burn.

I wanted to illustrate both those points–the macro see-saw and the micro churn & burn–with some charts from economic data releases. Taking the aforementioned in confluence with these charts helps triangulate our position in relation to the next market correction…


Consumer credit has recovered in an elastic-like snapback effect since the 2008-09 plunge. I notice that it has only retraced about 50% of its decline, having been largely displaced by government intervention:

Consumer Credit- still recovering but only retraced 50% of decline since 2008

Same goes for Capacity Utilization:

Capacity Utilization

With these factors far from highs, the economy will struggle to maintain organic growth beyond its high water marks in terms of real GDP, real corporate earnings, and real revenues.

Inventories showed growth up to a historical point of oversupply before they were drawn-down from 3q2010-2011. We’re quickly approaching that point of resistance again as of 4q2011:

Private Inventories- notice the plunge from historical resistance in 3q2010.

Government Consumption & Investment correlate with private-sector inventories, since the government finances much of that activity. In the absence of a QE3,  however, Government Spending appears to decouple from 2011’s inventory acceleration:

Real Govt Consumption & Investment- 3q2010 decline in coordination with the fall in Private Inventories

Yet, Operation Twist & Fed Swap Lines to Europe (“backdoor QE“) do not appear on the government’s ledger.  They belong to the government’s off-balance-sheet entity: the Federal Reserve. Predictably, the Fed Balance Sheet ballooned in 2011 as a sneaky offset of falling inventories:

Fed Balance Sheet

True to my macro churn & burn meme, margin expansion has turned-on every time inventory growth has turned-off. Notice Personal Income decline about one calendar quarter after inventories reversed off highs:

Personal Income- when inventories stop growing, businesses turn to margin expansion, starting with wages.

Employment similarly declined, manifest here by a spike in Job Cut Announcements:

Job Cut Annoucements- spike in 2011 also helped margin expansion as inventories waned.


If that hasn’t made it infinitely clear, let me enunciate my point: I expect a risk-market hiccup as we enter the last week of February/first week of March. To wit, I chimed in with an important note on StockTwits last night:

Considering selling into strength this wk: #POMO net selling thru 2/28 & Greek bailout not til 3/20, net deflation now. http://t.co/3nfIfXbv

Thereafter, an earnest market correction shouldn’t arise until the first utterance of 1q2012 micro & macro data. Alcoa (AA) kicks-off everything with its earnings release around April 10. By that time, inventories should have just begun their decline from highs, about a month in advance of unemployment numbers rearing their first uptick of the year.


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