The Professional Traders Opinion
May 1, 2014
Something’s Rotten in Denmark
With all due respect to Shakespeare and his character Marcellus, there’s a foul stench coming from the economic releases once again making us believe that there is something rotten going on. Perhaps the bond market is sensing the same. Certainly the equity markets are not concerned as they appear comfortably numb adrift in a sea of perpetual stimuli, zero interest rates into the outer reaches of space time and inebriated with the belief that there is nowhere else to place your wagers. And maybe their right … but we strongly feel a demand shock is hiding in the bushes right around the corner primed and ready to ambush for reasons that will become obvious once adjusting the rearview mirror.
First we look at Wednesday’s (April 30th) release of the Advance GDP quarter to quarter comparison that came out just hours ahead of the latest carbon copy decision by the Yellen Fed. The expectations, discounting for the probable dilutive effects of the winter storms ravaging parts of the nation, were for a paltry growth of 1.2%. Maybe understandable but that horse is getting whipped so hard it will soon be pleading with the Commissar of Season’s for cruel and discriminatory hate speech against a season already presumed to be of inferior weather. Oh no, the statisticians at the Bureau of Economic Analysis were only able to crank out 0.1%!! Given a margin of error of +/- 0.3% for one standard deviation, could this number actually have been negative? Oh wait, the White House (or whoever has their DNA staining the IRS’s quashing of conservative group’s tax-exempt status for political purposes) wouldn’t tolerate this reporting, so you can imagine the edict confronting the men and women needing to sharpen their pencils to push the number at the upper bounds of deceptiveness … sorry, acceptiveness. Unfortunately, the edict failed to include revisions from the previous quarter which was unceremoniously “marked down” from 3.2% to 2.6% … a negative 0.6% revision! Therefore, can you argue the additive change in this quarter’s GDP was -0.5%? Lastly, if tomorrow’s (Friday, May 2nd) employment numbers come in at the higher ends of expectations (currently 215,000), where did these jobs come from if winter took such a toll on GDP growth? If the employment numbers aren’t particularly bad then someone’s got some ‘splaining to do in our humble opinion.
So, did this abhorrent GDP release affect the brethren at the Fed? Not even a blink; taken all in stride or more so, by command from their masters on Wall Street. After all, it’s just another anomaly blamed on that miserable winter which will soon correct itself in the succeeding reports. But what if it doesn’t? Oh and tell the restaurateurs, service people, retailers et al that whatever statistical deltas you may have in your checkbooks will be properly adjusted come the rustle of spring.
No problemo right? But why did the bonds go bid and yields drop to the lowest levels of the year? Why didn’t gold rally along with the lower dollar and lower bond yields, both bullish drivers of the yellow metal? Why are the bond yields falling in the face of the Fed decreasing their bond purchases? Is there a new supply/demand math being circulated in the halls of the ivory campuses; or is the supply being soaked up by non-believers in the economic sustainability of this stimulus induced economy? The dollar is quietly at the lower bound of its nearly nine month trading range; what happens to dollar assets if this thinly veiled support zone falls victim to dollar disintermediation? If all is well in the global economy, then why are copper and other base metals hovering at the lowest levels of the past few years? To a lesser extent given the above ground supplies are at all-time highs, does falling crude oil prices presume the worst is over from a Russian invasion of Ukraine or does it discount the effects of an invasion with devastating consequences for the European economies, namely Germany?
But alas, none to worry as your stock-soaked 401K is hovering in all-time prosperity. Be long and be strong for the few shekels that may lie ahead; but don’t bend too far over picking them up ‘cause there’s a train a coming. Something ain’t right … and if something ain’t right it may darn well be wrong. Be cautious and don’t be afraid to watch from the sidelines whilst waiting for much better opportunities to fish where the fish don’t bite. In closing, we hasten to remind once again what we have been preaching in previous PTO’s regarding the Yellen Fed … there is no one home with any market experience; not at the Fed, not at the Treasury and not in the White House’s Economic Advisory Team.
Ronald M. George
William J. Taylor