August 18th, 2009
The nation has been put on the highest security alert. The Federal Reserve Chairman and Secretary of The Treasury have made a joint statement saying that a three percent or greater decline off highs is unacceptable and a matter of national security. The Secret Service and Delta Force have swept onto exchange floors and rounded up all sellers and seized program trading computers. The President is expected to make a speech to the nation this evening in an attempt to calm nerves and restore confidence. The Press Secretary has made the following statement: “I want to ensure the American public and all citizens of the world that we have deployed all available assets in an effort to arrest this drop in prices. The President’s Working Group on Financial Markets has been meeting around the clock to discuss all available options. We ask that citizens remain calm and continue on with their day-to-day affairs. The Administration wants emphasize to all Americans that spending, consuming is saving.”
Now on to some creative writing….
The Expanding Triangle Lives
(click image for larger version)
The Friday of August 7th I identified and shared the emergence of an expanding triangle on the Standard and Poors 500 chart. At the time it looked like the reaction to the “less bad” employment data was going to break the pattern out and up. That obviously didn’t happen as the high on that Friday has so-far proven to be the high water mark (for the SPX, at least) for the “new bull market”. Since that day, while the S and P 500 briefly traded back to the highs post-FOMC meeting, price has generally consolidated in a choppy fashion. Before yesterday that is. Yesterday’s sharp decline, the steepest drop in over a month and the six largest percentage decline since the March lows, pushed prices back toward the lower boundary of the expanding triangle formation.
Nothing is absolute in pattern recognition, especially in this unprecedented environment where intervention seems to be occurring, but it is options expiration week so I leave open the possibility that prices consolidate, causing the formation to evolve into something that may resemble a diamond pattern.
For some background on the archs seen on the chart read the post entitled The Hand-Off or Conflicting Robots.
Consumer Confidence Falls In August
The consumer confidence number released last Friday, in my estimation, was a very important data point. If you have not heard the University of Michigan Consumer Sentiment Index fell to 63.2 in August from 66.0 in July. The Expectation Index fell to 62.1 from 63.2 in July and the Current Economic Conditions Index dropped to 64.9 from 70.5 in July.
With the financial sector and “systemically important companies” effectively bailed out, and the threatening collapse of the system seemingly snuffed out, the game has turned to resuscitating confidence amongst the general population. Considering the consumer represents two thirds of the economy, it seems logical that all efforts be focused on slowing, if not stopping, the new paradigm of saving versus consuming. A paradigm that led me to create the Orwellian-like phrase cited above of “Consuming Is Saving”.
With the labor market and housing market unlikely to turn around anytime soon the focus has turned to boosting stock prices to create the impression of a return to normalcy. Bailing out sagging 401Ks and IRAs, it is thought, will revitalize animal spirits. August’s Consumer Confidence number seems to imply a sort-of diminishing return in such efforts. That is to say, “The World Greatest Confidence Game” seems to be losing momentum. If the consumer cannot be encouraged to return to their pattern of (in my opinion, largely conspicuous) consumption, what’s the economic recovery going to look like? My best guess is it won’t look like much of anything, as it is unlikely to exist.
Let’s face the facts- something changed over the last few years and that change is likely to be structural, generational even. With the bubble blowing potential of every asset class now exhausted (equities, real estate, commodities) — excepting for inflation adjusted average incomes, and a bubble there is unlikely to happen given the “supply side” philosophy dominating the debate — there are no longer any easy fixes.
I suspect, discounting for the monetary and fiscal efforts to do otherwise, we’ve transitioned into a more “normal” economic environment. Healthy even. An environment that is going to require the repatriation of manufacturing and production, and a move away from a predominant service base, to revitalize economic prospects. Simply put, if America doesn’t rediscover it’s ability to actually make stuff I expect all economic rebounds to be fleeting in nature. And for this to happen, the structural changes will need to be global. Specifically, a convergence of the average global wage and the development of a sustainable consumption base in emerging markets.
I’ve long thought this was the game at hand and that the world’s economic button pushers were attempting to navigate to such ends in the least painful manner possible. That is, slow the pace of the inevitable so as to maintain control and avoid any potentially revolutionary disruptions that threaten the established status quo. The near collapse last fall was the result of a hastening of the pace to a point of becoming virtually unmanageable in the real time. It took extraordinary measures to regain some semblance of control.
Boiling It Down
From a stock market perspective, and in the simplest sense, if this chart of the Nasdaq100 is going to keep rising and break what I have named the “recession trend” (lower line is the “depression trend”) the economy will need to demonstrate indisputable signs of not only healing (i.e. “less bad”) but actual and accelerating growth (“more good”). The problem is, with bubbles exhausted and the consumer tapped out, what is there to drive economic growth while also maintaining the current political system?
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