If you can keep your head when all about you / Are losing theirs and blaming it on you; / If you can trust yourself when all men doubt you, / But make allowance for their doubting too;/ If you can wait and not be tired by waiting …
At times like this, I find the opening lines to Rudyard Kipling's If inspirational and soothing. Well, that and a tall glass of 15-year-old Dalwhinnie on ice.
Within a few weeks, and based on a spurious set of economic data (like the fact that nine U.S. states had to guesstimate their level of jobless claims in last week's "improvement"), a new consensus view has emerged that the double-dip scare of July and August was somehow just a bad joke and that everything from housing, to employment, to consumer spending is doing just fine, thank you very much.
Let's all take a deep breath and respect the fact that the equity market and bond yields both peaked in April, not unlike how they both peaked in 2007, 2000 and 1990 (and we can go on). These are very important market signals in terms of what they are telling us about the future direction of the economy, information that transcends what private payrolls or transportation rates are telling us, which is only about the present.
As is always the case, coming off peaks in equity valuation and bond yields, the markets do not move in a straight line down and volatility is the watchword. There is nothing untoward at all about the recent backup in Treasury yields; the bond market is correcting from deeply overbought levels as net speculative long positions at the yield lows have been closed. But, you see, pundits need to have something to say so they look at the recent runup in yields and in stock prices as a sign that there are no recession risks at all and that everything is going to be hunky dory. We're all going to muddle through.
I wish it was that simple. The reality is that Treasuries are deemed to be the enemy, because nobody really wants to contemplate the message that Mr. Bond is sending the growth bulls when yields out to the 10-year part of the curve are firmly ensconced in sub-3-per-cent terrain. It's much easier to dismiss it as a "bond bubble" instead of looking at it from the standpoint of a market signal: The economy is still struggling as it unwinds all the debt and spending excesses of the prior bubble condition.
No doubt the Treasury market has just completed its third losing week in a row and the yield on the 10-year note has climbed from the late-August closing low of 2.47 per cent to 2.80 per cent. Exactly two months ago the yield was sitting at 3.15 per cent, so this is no big deal.
Nothing moves in a straight line and it is true that at the lows we had some significant capitulation from long-standing bond bears who had been calling for a 5-per-cent-plus rate for some time.
At the same time, investors seem to have fallen back in love with the pro-risk trade and it looks to us as though this spreading view that the economy will not double dip just because it is not contracting at the moment is completely wrong. We have received analysis suggesting that the 67,000 gain in private payrolls in August was a "game changer." Well, how can that be when in November, 2007, a month before the onset of the so-called Great Recession, private payrolls were up 97,000. Great leading indicator, indeed.
What about the equity market? There is this view that the economy is turning some sort of corner - how can it not with the stock market rallying so much in September? Well, keep in mind how great the equity market behaved in the summer of 2000, the fall of 2007, the spring of 2008 and the fall of 2008 too - all huge head-fakes.
So we are at 1,109 on the S&P 500 - still about 20 per cent away from levels we would consider to be compelling value. Now, we don't want to hurt anyone's feelings by mentioning that we were also at 1,109 back on April 7, 1998, but for the here-and-now, this is also the same level the S&P 500 closed at back on Nov. 16 of last year. That is 10 months of nothing and the general belief is that we are still in a bull market. Moreover, over that 10-month period of a do-nothing equity market, the S&P 500 has crossed above the 1,100 mark no fewer than 15 times.
From my vantage point, the worst close for the S&P 500 this year was the 1,022 level it hit back on July 2. It was just a year earlier that it was sitting at that level as positive "green shoots" were being discounted by the market. So, how is it that at this same level in early July the market was pricing in a double-dip recession - it just doesn't hold any water. The same level that got people excited over a recovery a year ago all of a sudden becomes a level commensurate with a renewed economic downturn?
More than likely, what happened during that slide off the late-April highs of 1,217 to that 1,022 nearby low was the growing view - and an accurate one - that there was not going to be an V in the shape of whatever recovery we were going to experience. But to suggest that a "double dip" was ever really priced in despite all the rhetoric is just not true. I strongly believe that we will come back and revisit this one before too long.
David Rosenberg