For months, Washington and Wall Street have been slathering lipstick on a giant pig. Thanks to the latest GDP report, investors are beginning to see past the lipstick.
Per the usual, this piece is being written a day or so in advance (so you can read it with your morning coffee).
Also per the usual, I write with a keen eye on the trading screens. With just under two hours to Monday’s close, things aren’t looking good for the bulls. We opened higher, then slid lower throughout the day.
By the time you read this, we’ll know the final tally. But in truth, Monday’s close was likely to be an afterthought either way. The needle and the damage done came on Friday, when the S&P cut through a maginot line of support. While small-cap stocks had already busted the primary trend line but good, the bellwether S&P had one last chance to rally hard off the 50-day moving average. No dice.
Plenty of investors ignore trend lines and moving averages. But the big black-box "quant" shops that run hundreds of billions of dollars – and whose trading represents a mammoth portion of share volume each day – pay attention to this kind of thing. Various “momentum” factors get plugged in to their high-powered computer programs when deciding whether to buy or sell.
If the programs start sniffing out weakness instead of strength, things could snowball quickly.
And at the same time, many long-only money managers sitting on a fat book of profits got a very rude wake-up call last week. One wonders how many equity guys were thinking this over the weekend (or something like it):
“Gosh, my fund has really fattened up on this crazy rally. In fact, my big losses from ’08 are nearly one-half to two-thirds wiped out. I know this thing should keep going – that’s what all the analysts are saying – but I also know that ‘pigs get fat and hogs get slaughtered.’ Should I really stick around for the last ten percent? Bob and Frank and Tom are loaded up on all the same names... what if they sell first?”
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Of Pigs and Lipstick
Another ominous sign, beside stirrings of life in the slab-bound Frankenstein dollar, was the turntail reaction to a supposedly strong GDP report.
The GDP report was meant to be a major green light for the bulls – an invitation to stampede wildly to new highs. At a reported 3.5% annualized rate of growth, the report was a signal that America is now in the clear... that the worst recession in generations is now over and done.
The thing is, investors didn’t react that way. The market rallied big on Thursday, but then gave it all back on Friday. Could it be that reality is starting to set in?
This chart from EconomPic Data tells the story. In a nutshell, the wonderful GDP number was a sham product of the U.S. government.
As the chart shows, motor vehicle output shot up 157.6% on an annualized basis in September. Motor vehicles alone made up a whopping forty-seven percent of the GDP tally – which in turn can be attributed to the Cash for Clunkers program.
What does a program like Cash for Clunkers do exactly? Basically it pulls sales forward from the future. Everyone who was going to buy a car, or who was thinking about buying a car in the near future, is enticed to buy with the help of a government handout here and now.
The program doesn’t stimulate very much; it mostly doles out cash to people who would have bought anyway. The same idea applies to the homebuyer tax credit on an even larger (and more expensive) scale. Study after study argues that large-scale stimulus efforts are by and large a waste of money, benefiting a connected few (with long-term negative impact on the many).
Not to put too fine a point on it, the U.S. economy is a giant pig. For months, Washington and Wall Street have been slathering lipstick on the pig.
Now investors are finally starting to see past the lipstick.
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No Magic Bullet
The central flaw in investors’ thinking is that the U.S. government knows how to fix the economy. This was really little more than a naïve hope – one that never made much sense in the first place.
How does one solve a 25-year debt and credit problem by piling on more debt? How does one fix a broken financial system by handing even more power, responsibility and money to those who broke it in the first place?
And why would anyone expect “change” when, if anything, the megabanks have been rewarded for their gross excesses (even as long-time savers get punished by near zero interest rates)?
Thus far, Washington has done a skillful job of propping up Wall Street. If the game is to continue, future confidence schemes will have to become less obvious. The market’s brutally frank assessment of a rigged GDP report is testament to just that.
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Couldn't we send these suckers to Sing Sing, or something? (Tar and Feather is always an option, far as I can tell.)