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    MARKET EDGES

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I understand the math behind Keith’s thoughts that Ben Bernanke (aka “He who sees no bubbles”) needs to raise interest rates and maybe he did what he needed to do to keep his job.   

Maybe the question for Ben is not whether he should raise rates, but rather, whether he can raise rates as he continues to behave as though he has a serious problem.  Maybe Ben is aware of another problem that is preventing him from raising rates (outside of political pandering).  The notion that his behavior is consistent with someone who has a serious problem suggests that going forward the “economic” character of the market could surprise to the down side.  If this is true, the FED will raise rates when Ben’s “problem” no longer exists, which plays into the belief that the market will rally in response to a rate increase.  Not raising rates may lead to a new set of problems, but we will cross that bridge when we come to it. 

Recent surprises in weaker home sales, new jobless claims and declining consumer confidence have not been of any consequence to the market.  Are we being set up?  The complacency surrounding the market reactions to those numbers should not be lost.  Will the market continue to shrug off disappointing news as the general outlook shifts, from one of ongoing economic growth, to one of slowing growth and the possibility of a renewed recession?

Consumers account for more than 70% of GDP, yet growth in personal consumption cannot be sustained without growth in inflation-adjusted income.  Short-term benefits can be gained through debt expansion, but consumer credit continues to contract, and disposable consumer income is not keeping up with inflation.  This is a long-term structural problem, and, until it is addressed, there can be no sustained economic recovery. 

The most recently revised GDP report revealed another structural problem as currents trends are not sustainable.  Private inventory growth accounted for 4%, or 67%, of the revised 5.9% annualized growth in 4Q GDP.  That was up from 3.6%, or 63.0%, of the 5.7% reported initially. 

Again, without end demand, the buildup in inventories could be more detrimental to GDP going forward than the benefit it provided during the fourth quarter. 

Keith’s criticism of Ben Bernanke is well grounded, as the data is now in Keith’s favor.  The only reason the FED chairman can ignore the facts is because he has a problem, and if he has a problem, we all have a problem…  

Howard Penney

Managing Director

PROBLEM BEHAVIOR - chained PCE vs Income