House of Morgan(s)

I think you’re wrong on the FIRST QUARTER, Barry. It’s going to come in hot!

Barry-

Conservative talk radio is bidding it above 6% as we speak. They are practically giddy over political capital for tax cuts, the Presidents agenda, etc. As we all know, the market doesn’t care much about the economy. Interest rates and inflation, yes. GDP figures, no. Except for the spin factor for the Talking Heads at CNBC.

Q4 last year seemed unnaturally low to me, and i’m basically with barry: the economy is weaker than gdp is making it appear.

so i wouldn’t be surprised to see a strong first quarter.

but for the year? good golly miss molly, it’s hard to see what would make gdp for the year much more than the low 3s….

This is a tough call. Forecasting folly . There is nothing out there pointing to a sustained slow down at all. Many spreads, commodities and industrials show certain behavior near economic slow downs and it just ain’t happening. In fact to the contrary……But are they telling us something we aren’t expecting instead of further growth? Is it possible to read the tea leaves incorrectly? Being a worry wart, I now fear a term we don’t hear much any more. That dreaded “S” word. Stagflation.

Only time will tell but I think the problem is going to end up too much easy money for too long creating too much leverage and inflation. We really have alot of liquidity sloshing in the system. Alot more than any cycle in my adult life. How that translates into future economic growth is really perplexing everyone. It may not make the consumer spend but it is having profound impacts on financial and derivative markets.

I am going to go out on a limb and say we are going to finally see wage inflation. No one thinks it can happen. That may end up being a fallacy that can be argued intelligently. Yes, many people in America are not participating but white collar workers and certain skilled trades are in tight demand and they have a disproportionate percent of wages. Repeat of 1970s. Blue collar workers were suffering through imports, globalization and job dislocations yet wage inflation did show its ugly head. It can and likely will happen. We’ve already seen certain data that shows the 4Q GDP is going to be pushed up quite a bit in the revision as well.

The one piece I was missing in a correlation to 1973-74 was what was the housing market doing.
-Oil mess
-Coming off low interest rates
-Coming off low inflation
-Commodity boom
-Misery and malaise more focused with the blue collar work force as today
-International pressure on our economy caused by cheap imports
-Even larger HOUSING BOOM than we have today that peaked just about right now along with the S&P according to some stats I found on the St. Louis FR site.
-Corporate profits were very high
-Wealth concentration at the top was forming

The market cratered by nearly 50% in that cycle. Even such a decline would only take the PE to 10, near the historical norm and the dividend yield on the S&P would finally be back in line with historical averages. I don’t think that is going to happen but………..what do any of us really know. Btw, hey, the 70s were actually a good earnings decade. Better than the 90s. So, the world likely won’t fall off of a cliff if something similar did happen.

Kind of weird to see so much bearishness near the top of a bull market. Just saying.

If we are certain that Bernake would continue to hike interest rate for fear of inflation, the Housing Bubble would have high chance to pop and if it pops, the GDP growth would fizzle out as consumer market would be hardest hit and undoubtedly, GDP would be strained. I tend to believe that the cycle for the current interest rate hike would peak at about 5% in May and by then, Bernake may likely call off any further rate change and at 5% federal funds rate, the Housing Market would be very difficult and further mortgage re-financing would be difficult and by then, consumer spending would retract definitely and finally GDP would shrink.
On the condition that the Housing Market would not pop but squeezed, 2% GDP growth looks optimistic

The yield curve becomes more relevant the longer it is inverted. And I don’t watch the 2-10. Everyone was screaming when the 2-10 inverted but it is highly unreliable historically according to Crecenzi. I take his word for it rather than back test it for a hundred years because I tend to think he is one of the few that really get it in bond land. So, the 90 day-10 year has really not been tight all that long. So, focusing on the 90-10, sustained inversion over time is where the odds go up signifcantly to some type of slow down. I see substantial evidence and historical precedence in certain intermarket relationships the long bond is going to crack and long rates are going to head higher. If so, and if relatively quickly, inversion goes away. So, net, net is inversion has not been in place long enough to put me in the high odds of a big slow down.

Then there are all of the other evidences. How does one explain why all cyclical measurements, all commodities and all spreads such as the platinum-gold spread, broker-dealers, etc are not pointing to a slow down………..yet. Taken cumulatively, the data in its entirety looks more like stagflation.

The dataq still has to unfold so I’m not stating it a slow down or recession won’t happen. Odds are definitely with a slow down but not necessarily a recession. We are not on a four year recession cycle like we are on a four year equity cycle. I’ve got all but my trading dollars in cash equivalents so I surely don’t like this market. And, I’ve believed for a month the top is in…..but………..the reasons for a decline are not yet clear. Just my opinion.