Consistent with our views on China, the US is setting up to be in a difficult position in 2Q10, or what I’m calling BERNANKE’S BUBBLE. Like our 1Q10 theme, “CHINESE OX IN A BOX”, Ben Bernanke is in a jam.
Right now China is tightening monetary policy as inflation accelerates and that is exactly what the US needs to do. On January 13th, I outlined our “CHINESE OX IN A BOX” theme by saying, “Similar to our view that ‘HE WHO SEES NO BUBBLES’ (Bernanke) needs to remove his current unsustainable and unreasonable monetary policy of ‘extended and exceptional’, the People’s Bank of China has altered its policy verbiage from ‘appropriate increases’ in lending to ‘moderately loose’ monetary policy.”
Slowing sequential growth, combined with accelerating sequential inflation, is now BERNANKE’S BUBBLE, and it is putting pressure on the S&P 500 for the intermediate term.
Slowing growth and accelerating inflation? Just look at the math:
1. GDP growth will begin to decelerate in 1Q10 as the benefit of government stimulus begins to fade. Current GDP growth estimates are 4.0% in 4Q09 and 2.7% in 1Q10.
2. Consumer Price Inflation (CPI) and Producer Price Inflation (PPI) accelerated in December, up 2.7% and 4.4%, respectively, and both will continue to accelerate in 1H10.
As it stands now, the current 4Q09 GDP growth estimate of 4% reflects a range of estimates as high as 6.7% and as low as 1.5%. Given that real, annualized quarterly GDP growth over the last 30 years has averaged 3.2%, the 4Q09 numbers are well above trend.
If the consensus is right, then the 4Q09 GDP data point, which will be reported next Friday, will likely be bullish. That being said, it is an indicator of trends in 4Q09 and is more likely reflective of a topping process as we are lapping a 5.4% decline from 4Q08 and significant government spending has allowed significant growth to the upside. Going forward, GDP will likely moderate as implied by the 1Q10 GDP consensus estimate of 2.7%.
A number of sectors of the economy have bottomed out or are signaling a bottoming process (i.e. housing). Adjusting for seasonal patterns, real retail sales are not improving and look more like housing. Industrial production was up for the quarter, but without a subsequent increase in demand, this leads to increasing inventories. The trade deficit and the contraction in employment are a small negative for GDP. Regardless of how 4Q09 GPD comes in, it’s difficult to make the case that the U.S. economy is booming. Instead, it looks like 4Q09 could be the peak. Adjusting for “government stimulus measures,” GDP looks to be trend line flat.
Therefore, the only factor that could conceivably support such strong growth in 4Q09 GDP is an extraordinary buildup in inventories, meaning that stronger production has not been matched by stronger consumption. A sharp inventory buildup in 4Q09 would be consistent with a renewed slowdown in the first-quarter 2010, as inflation accelerates.
Growth decelerating at the same time inflation is accelerating suggest that BERNANKE’S BUBBLE needs to pop.
Howard Penney
Managing Director
