David Rosenberg - IT'S A MAD WORLD
Page 14 of the weekend Financial Times ran with this headline: Weak Jobs Data Help Propel Dow Above 11,000 points.
Think of how crazy that is. Jobs create income. Income creates spending. U.S. consumer spending drives 70% of U.S. GDP and 17% global GDP. GDP must equal GDI (Gross Domestic Income) of which 11% is comprised of corporate profits. And, equity investors supposedly are buying a profit stream?
This was not, by the way, the only article to cite the awful employment report as the primary reason for the stock market advance on Friday. I have to admit that this is totally surreal. At the same time, a mea culpa of sorts is necessary because Dave Tepper was actually bang on the money with his assertion on CNBC that soft data was actually a good thing because it would mean a more aggressive attempt by the Fed to prime the pump in the looming QE2 assault on deflation risks.
I still have difficulty with that logic, but no doubt there are enough investors who are buying into it. Someone was investing in the market last week in the face of not only a sick employment report but a very soft ISM release as well, which pretty well told everyone that the plug is being pulled on the inventory cycle, which was responsible for about two-thirds of the rebound in real GDP off the mid-2009 bottom.
And, page B1 of the Saturday New York Times ran with this: Faith in Fed Pushes Dow Past 11,000.
Page 15 of the weekend FT had this title in big bold letters too — Equities Fired Up for Fed Easing and on the front page, you can see this — Jobs Data Point to Fresh Stimulus.
This is a market completely based on hope. Throw fundamental investment principles out the window. It’s now all about how the Fed can manage to inflate asset prices now that fiscal policy has tested its limits with the voting public. But where does this renewed faith in the Fed come from? Is this not the same Fed that took the funds rate from 5.5% to near- zero? The same Fed that tripled the size of its balance sheet in QE1? The same Fed that thought the housing and mortgage crisis would stay “contained” back in 2007? The same Fed that confused a credit contraction with a liquidity squeeze? The same Fed that believed, in the summer of 2007 when the crisis first broke that we would see 2.5-3.0% real GDP growth in 2008? The same Fed that was contemplating its exit strategy just a short six-months ago and believed it could start to shrink its balance sheet last spring? The same Fed that investors have so much faith in, and is the same Fed that passively tightened poli! cy with a 25 basis point hike in the discount rate to 0.75% back on February 19th. The same Fed that just trimmed its forecast three times in the past four months, and is this not the same Fed that investors now have “faith” in? The question is, the “faith” to do what?
Give me a giant break. |
