This note was originally published at 8am this morning, November 02, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
"My way of joking is to tell the truth. It's the funniest joke in the world".
-George Bernard Shaw
Both the Reserve Bank of Australia and the Reserve Bank of India certainly have their version of the truth today as both raised rates on inflation fears; for India’s central bank it’s the sixth such move this year.
At home we have multiple storytellers giving their versions of the truth. George Bernard Shaw was most commonly known as an Irish playwright skilled in many spheres of literature. As you can probably tell from this morning’s quote, his work tended to fall into the satire or black comedy categories. The black cloud that is the political theatre unfolding in the U.S. certainly would have provided Shaw with some material, were he alive today.
While Shaw held some controversial views that were anathema to many of those around him, his flair for music, literary criticism, journalism and drama was widely recognized. Reconciling the vilification Shaw endured for his stances on the World Wars and other topics with the broad acclaim he received for his work (including a Nobel Prize for Literature and an Oscar) is difficult. The bottom line is that most people love a good story line and can appreciate the person who can tell one.
In the run up to today mid-term elections, the Political Partisan Playwrights have been kicking into overdrive. Political Prose has been weaved around every political theme imaginable; government spending, taxes, and immigration, to name but a few. The resulting narratives have been recited ad nauseam and I can’t wait until it’s over. Political commercials seem to get worse every election cycle.
We can argue which political versions of the truth are more tenuously linked to fact than others but the only certainty about every politician on the soap box is this: none is as allied to the truth as they are to their prospects of being elected.
At Hedgeye, we prefer to examine data than listen to political sound bites (however amusing). As my colleague and Managing Director of Macro, Daryl Jones, wrote yesterday on the election, “The turnout measures for Republicans are very positive and should drive a big Republican win to the tune of a net gain of 9 seats in the Senate and more than 65 seats in the House”. Daryl’s mathematical reckoning anchored on a selection of political polls that he has been following closely as part of this macro process. While the likely Republican gains have already been priced into the markets, we will continue to be confronted with political versions of the truth for some time past today’s vote.
Economic versions of the truth are just as commonplace in our manic media. The interpretation of the ISM and personal income yesterday are perfect cases in point. George Bernard Shaw died in 1950 but even if he were alive today, despite his talent for literary criticism, I think he would struggle to follow the convoluted economic plotlines being laid out by some present day commentators – and he was a co-founder of the London School of Economics!
The main question I have for the storytellers is as follows: how does the economic reality we are faced with marry the expectations imbedded in Wall Street Groupthink? Yesterday I posted a note on the ISM and personal income print titled, “Q4 2010 THEMES UPDATE – CONSUMER CANNONBALL”, that outlined the moving parts behind a major component of the U.S. economy. The ISM print was less-than-comforting given that the upside was primarily driven by exports (a small part of the economy) while personal income and spending weakened (pertaining to the largest part of our economy).
Government support is waning and taxes are going up. We are in the midst of Jobless Stagflation and the data is continuing to confirm that. If you ever had any doubt that political motivations can sway departments of government to take artistic license (especially a week before elections) with economic data, take a look at the chart below.
The story of the 3Q10 GDP number would be a masterful piece of black comedy – and a fitting ode to Bernard Shaw – if it were funny. The consumer services sector is growing while consumer goods are decelerating but the evidence of government propping up the respective components of GDP is obvious. Inventory accounted for 72% of 3Q10 GDP growth and exports declined even with the Almighty Buck burning at the stake. Whatever version of the truth you choose to believe, the trends are unsustainable given our ever-increasing deficits.
One version of the truth that is front of you today is that risk is clearly building in the market and most choose to ignore the facts. Over the past six trading days the VIX is up 15.2% and the S&P 500 is UP +0.10%. The inverse correlation of the VIX and the S&P 500 is 0.84. The prospects of the FED saving the anemic economy are clearly priced in.
Some may find it unappealing to consider that America’s economy can be as fragile as the data suggests. As I wrote last week in my Early Look note titled, “BEING A LADY”, “America is a great nation and I’m proud to be an American”. As a proud American, I would pay good money to see any political party come to grips with reality and face the cold hard truth.
As Shaw himself would say, “All great truths begin as blasphemies”.
Function in disaster; finish in style,