This note was originally published October 07, 2010 at 08:12am ET
“There are two ways of being happy: We must either diminish our wants or augment our means - either may do - the result is the same and it is for each man to decide for himself and to do that which happens to be easier.”
It is nearly impossible to get away from talking about QE – believe me, I tried. But the quote below from Ben Bernanke is the first story that caught my eye today.
"Raising the inflation objective would likely entail much greater costs than benefits. Inflation would be more volatile, bring more uncertainty and possibly create destabilizing moves in commodity and currency markets that would likely overwhelm any benefits arising from this strategy."
Am I missing something or is this just another case of watch what I do, not what I say?
Mr. QE is doing nothing but destabilizing commodities and currency markets. Our contention has been for some time that quantitative easing leads to reflation, which can lead to inflation. Gold continues to signal high inflation expectations among investors. The Hedgeye math says: QE =Reflation = Inflation
Pick your duration of one day, one week, one month, or three months; as quantitative easing expectations have ramped higher, so has the outperformance of commodity-driven equities and the global recovery-leveraged Materials and Industrials sectors. Yesterday was no exception. With the S&P trading flat on light volume, the best performing sectors were Energy (XLE), Materials (XLB) and Industrials (XLI). The worst performing sector yesterday was Consumer Discretionary (XLY). Yes, inflation is bad for consumer spending!
Rhetoric from Federal Reserve officials on the need for quantitative easing may affect the markets but consumer behavior, and confidence, remain impervious to Washington, DC Groupthink. Downturns such as the one we are living through today (41m Americans on food stamps) deeply affect consumer confidence and attitudes towards debt accumulation in the name of consumption.
As I said on our 4Q10 themes call, the Consumption Cannonball implies that consumers will continue to save more and are “reconsidering” their living standards; the policies of the FED and the Obama administration are perpetuating this trend. While creating windfall returns for paper assets and financial institutions, quantitative easing has not met the expectations touted by many of its initial proponents. By failing to improve the unemployment picture (as was promised), the administration’s policy of quantitative easing is a failure as far as Main Street is concerned. The effect on the dollar (and commodities) of this policy is further hampering a consumer recovery.
The lack of traction in the labor market was reinforced yesterday after ADP reported that private payrolls fell 39,000 last month following a 10,000 gain in August, while consensus expectations were for a 20K increase.
Charles Evans, President of the Federal Reserve Bank of Chicago said because unemployment is not coming down nearly as quickly as it should, his conclusion is that “we need more monetary accommodation than we’ve put in place!” Yet there is no connection between QE and the ability to reduce unemployment! As Albert Einstein said, “The definition of insanity is doing the same thing over and over again and expecting different results.”
Despite the S&P 500 being up 8.7% in September, the consumer macro factors were mixed as confidence, employment and housing data all added further to our conviction that recent governmental policies are failing to produce a real consumer recovery.
For all the valuation junkies that will tell you that the market is cheap on a P/E basis, that metric will be fighting the gravitational pull of slowing growth. Despite all of the QE talk, 3Q10 will likely represent the last double digit EPS growth quarter for the S&P 500 for the next one, maybe two years. Which begs the question, have you factored in enough of a slowdown in earnings growth?
Looking out over the next 6 quarters, consensus is projecting S&P 500 earnings growth of 20% in 3Q10, dropping to 11.8% in 4Q10 and sub 10% for the balance of 2011. In a slowing growth environment, how do you manage risk around the fact that these estimates might be too aggressive? This is the question every portfolio manager/analyst needs to be thinking about as we head into the current earnings season.
As it relates to our 4Q10 Consumption Cannonball theme and the implied year-over-year deceleration in discretionary spending, Brian McGough asked the question: are management teams being conservative enough? How do you manage risk around 2011 guidance that companies might throw out to the Street before they know; (1) what will happen to the consumer, and more importantly, (2) how will they behave when desperate competitors react in a weak consumer environment?
How will you manage risk around this?
We are likely to get a small preview of these trends with today’s retails sales data. Most retailers are expected to meet estimates that are not viewed as overly aggressive; although difficult comparisons will also play a role as September 2009 was the first month of positive comps in some time for many retailers.
For the time being many American will be forced to diminish their wants in order to be happy.