FLECK: That jobs report was no reason to celebrate
moneycentral.msn.com
The disappointing jobs report on Feb. 4 was not a reason for the stock market to cheer. But cheer it did. Think of this economy as an airplane -- one that's losing altitude.
By Bill Fleckenstein
Last week, I looked at how denial has let tech-stock lovers vaporize facts in favor of fantasy. Now I'd like to show how denial again carried the day on Feb. 4, when the implications of a disappointing jobs report took a back seat to bullish bravado.
It's a pretty tall task to believe that the economy is creating jobs in any kind of meaningful way compared with what we used to consider a normal economic recovery. If you think of the economy as an airplane, it's been losing altitude since last spring, when the tax-cut and Fed-rate-cut stimulus stopped.
Denial reports to work
When I relayed that analogy to a friend after the jobs report came out, he responded that 5.2% unemployment and 150,000 jobs created aren't too bad. I tried to explain that it's not the current data that are necessarily the problem. It's how the numbers were created.
In other words, the underlying source of economic growth over the last couple years has come from folks using the housing ATM -- which I'll explain shortly -- to live beyond their means. (Of course, the housing ATM was created by more bubble-blowing on the part of Easy Al to bail out his last mistake with the late 1990s stock mania.)
The ATM financing vehicle has caused tremendous imbalances. It, and the imbalances from the original stock bubble, are reasons to be concerned prospectively. It's not what today's data say. It's the trend of the data and how it was created that's so dangerous.
My friend asked: Why does it have to be so apocalyptic? Can't the economy just chug along at an underwhelming pace? My answer: No, it cannot. Because of the unstable, speculative nature of what I've described, there is no slow, steady state that will work.
The lesson of Japanese quicksand
When I was short Japanese stocks in 1989, a very smart friend told me: "They'll never let that market go down. It will just work off the excesses by going sideways for maybe a decade." Well, we now know that was not the case. The reason Tokyo unwound the way it did was because of the unstable nature in which the Japanese stock and real estate mania had been created.
That's similar to the situation we face today. Again, it's not so much the current data. It's how we got here, and what that implies going forward.
Anatomy of the housing ATM
I'd like to share a quote from a recent report by Charlie Peabody, who is a brilliant financial-stock analyst, because he described "the housing ATM" rather succinctly:
"Liquidity seeks an inflating asset (not a deflating asset). When the Fed pumped liquidity into the system to salvage the TMT (technology, media and telecom) sector, that liquidity was redirected toward the residential-mortgage market, thereby extending the housing-market bubble beyond its normal cycle. This price appreciation allowed the consumer to prolong a debt-induced consumption binge (i.e., the consumer drew down the appreciated equity to finance his/her newfound higher standard of living). However, we have now entered a period where liquidity will increasingly be withdrawn from the residential-mortgage market, and thus, we are at the onset of experiencing price deflation in this asset class."
Combine a price decline in real-estate assets with maniacal lending -- where anyone can buy a house for zero-percent down and, with a little effort, get their loan up to 120% of value. Now you can see why we have a recipe for a financial calamity. That's especially true when we have such a tough time creating jobs (since the speculative-financing mechanism doesn't create real economic growth, only more speculation).
In any case, after the disappointing January employment data came out, I thought folks might finally be convinced that the economy is, in fact, slowing down, and that the Fed is dead-wrong in its view that things are getting better. That sobering conclusion was apparently reached by the bond market, as it exploded when the data were reported.
Ignorance ignites euphoria
But not the stock market. On Feb. 4., at the open, it burst out of the blocks. It kept going from there. Folks happily ignored the ramifications of economic weakness and cheered the lower rates forecast by the bond market. They figured that now the Fed might slow down its rate hikes, never bothering to understand why the Fed would have to slow down, and what those ramifications were.
One measure of the level of denial and willingness is to suspend disbelief: The Philadelphia Semiconductor Index ($SOX.X) rocketed better than 2% higher in 30 minutes that day, before closing up 6.7%, helped on by an analyst's upgrade of the group at a big dead-fish house. For close to nine months now, I have been detailing all the inventory and excess capacity that's piled up in that industry. Recently, I've been able to chronicle the slowdown in end-demand that will only exacerbate existing problems in the chip sector, and, at some point, will create an implosion in its stock prices.
But all of that was forgotten when this dead fish raised his price targets and upgraded the group: "Our price targets are largely based on a 20% premium to pre-bubble median P/E multiples on our '06 estimates." That's all it took to get the OPM crowd to go for the beta.
Meanwhile, the craziness was not confined to chip land. Housing stocks were also on a rip in response to the bond market's celebration. It was rather remarkable to watch the bond market (which has been suggesting that things were slowing down, confirmed by the utilities) go wild and stocks go wild too, when each market has been rooting for the exact opposite job-report outcomes.
Till dislocation do us part
I have made no secret of my belief that the unstable nature of the market and its participants will lead to a dislocation, most recently in my July 12 column, "Odds of a crash are higher than you think." So, I found it interesting that on the very day of the jobs report, when animal spirits were running wild, Bloomberg News ran a story in which newsletter writer Joseph Granville predicted a stock market crash. (Of course, he has made some bad calls in the past, along with some great ones.) I also note the recent comments by Richard Russell, who pens the Dow Theory newsletter, about the potential for a market dislocation for reasons similar to mine. Days like Feb. 4 only serve to strengthen my belief that a dislocation is exactly how this will end. |
