Disconnect Between Economy And Market Rally

Markets have had a good run from the third quarter earning`s selloff, the inevitable Santa Claus rally, and the first quarter new money being put to work. But all this talk about some Super Cycle turn in the economy is putting the proverbial cart ahead of the horse.

How quickly things can turn. The economy was reacting so poorly at Jackson Hole that Ben Bernanke needed to implement another round of stimulus in QE3, this stimulus measure failed to boost asset prices substantially, so Ben Bernanke tweaked QE3 to try and juice up markets with additional treasury injections.

The economy is so bad in Japan that they needed to replace another prime minister, employ additional stimulus measures, and weaken their currency.

Auto sales are so bad in Europe that major downsizing has occurred. Britain is currently in a recession, and China has been on a two year downtrend in growth.

Just to provide a little historical context to put this recent market rally in perspective. It is a good idea to separate results oriented thinking, i.e., higher markets from the actual global economic conditions.

Most of the earnings results have been tepid at best, these are numbers that are targeted as easy beats by corporations, and they are barely meeting these targets via share buyback programs. Not exactly the kind of profits necessary for 500,000 jobs being created every month reflective of a healthy cyclical turn in the economy.

I have seen nothing so far that differs from the same pattern that has taken place for the past three years. The pattern is a run-up of asset prices and markets for the first four months of the new year, then a substantial summer selloff, culminating with the need for additional QE programs, and a year-end rally in markets.

So we will not know anything about the economy until this pattern is broken. So asset prices continue to climb higher over the summer, the fed doesn`t need another QE program, and the market continues to finish the year strong.

The three things that I will be looking at to verify a healthy turn in the economy would be once the fed stops the QE stimulus, do assets continue to climb? So can the private sector take over where the fed leaves off? And I am not even talking about raising interest rates. Just the removal of QE stimulus programs of buying treasuries and mortgages.

The second component of a healthier economy would be raising wages due to corporations fighting over talent, the job pool getting larger as the underemployed start to become employed to their potential, and job creation numbers every month averaging 500,000.

Where corporations feel they better start hiring, even as projects are 6 months to a year down the line, just to ensure that they can get the people they need due to a tight job market.

The third element of an economy finally starting to recover would be a couple of 5.5% and 6% GDP quarters thrown in the mix, as given the pent up demand of a five year 2% growth trudge fest, a genuine recovery or turn in the economy should have some explosive growth quarters.

The kind of quarters where retailers can raise prices, and consumers can actually afford these higher prices, and not wait for sales to dictate discretionary spending. Therefore, higher margins in the retail sector would point to a stronger economy.

Why the rise in the transports can be misleading this time around is that with the revival in US oil production, the railroads are skewing the numbers due to a major increase in rail shipments of oil cargo.

It is easy to throw around slogans like the beginning of a new Super Growth Cycle when assets are ramping during what has traditionally been a strong period for assets during the last 3 years even with a 2% growth trajectory.

However, wake me up in May when the bulls have started locking in profits for the year, and all the sudden Europe is in trouble again, debt to GDP ratios actually matter, and no more fed purchases are running every month, and see if all the bullish euphoria still remains.

Because at this rate, if we truly are in a new super cycle growth era, by May the pundits will be talking about a “Once in a Generation Super-Super Growth Cycle!