Subtlety

I think it worthwhile to juxtapose some pieces I read in the last day or so. The first is Bob Prechter’s “come-on” piece. Now I don’t place a lot of faith in Elliott Wave as a short term market timing tool, but Prechter has a pretty good sense of what’s happening in broad perspective. He shows the following diagram from his book:

The description of Wave B fits what we have now pretty closely, wouldn’t you say? The one thing that might use a little elucidation is the “subtle weakening” of fundamentals. So we have a nice collection here.

First of all, Lance Roberts rebuts the economic Pollyannas:

Currently, the parabolic rise in the markets, extreme bullish optimism, and high levels of complacency are “trumping” the drop the Q1 GDP in “hopes” that it was indeed just a “weather related anomaly.” This is very similar to what happened in late 1999 as the economy began its slip into a recession. The initial drops in GDP were disregarded by analysts and economists until it was far too late. The same thing occurred again in 2007 with Bernanke’s call of a “Goldilocks Economy.”….

…The current downturn in real final sales suggests that the underlying strength in the economy remains extremely fragile. More importantly, with final sales below levels normally associated with the onset of recessions, it suggests that the current rebound in activity from the sharp decline in Q1 could be transient.

David Stockman focuses on the consumer – real PCE.

In that context, yesterday’s punk number on personal consumption expenditures during May was the inflection point. Not only did American consumers not come bounding out of their winter ice caves as predicted by virtually every “sell side” economist, the number actually embodied a case of groundhog economics. That is, the May constant dollar PCE (personal consumption expenditure) print of $10.881 trillion suggested that consumers went back into hibernation! It was nearly the same as that during frigid February and actually below the March level of $10.916 trillion. Stated differently, the American consumer is dropping, not shopping, and the winter weather—-that surprising thing called snow and cold—had nothing to do with it.

So this is the time to call out the Wall Street amen chorus. Its impudent insistence that the Fed’s mad money printing campaign is the magic elixir that will revive the main street economy has gone altogether too far.

Finally, Charles Hugh Smith dissects the supposed boom in industrial production. He finds that there is, indeed a boom, but it is highly selective and is one thing: fracking – and the resultant oil and gas boom. Everything else – well, not so much:

The remarkable untold story: Ex mining and oil and gas extraction, US Industrial Production has been in contraction for most of the period since Peak Oil in 2005-08.

Subtle? Perhaps. But most if not all of the measures being championed by the bulls, like PMIs, are sentiment measures. And we know sentiment is strong – that’s why we are here. Those measures, as I showed a little while ago, were misleading in first quarter and there is much reason to believe that they are misleading now.

The Keynesian fantasy has created animal spirits and a massive bubble in financial assets. The hangover is going to be very painful.

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