EDITOR'S NOTE
You guys, I am torn. My heart is saying yes, the economy is still booming!!! But my head is saying no.
I so badly want MKM's Michael Darda to be right--that this is not a growth scare. That the economy is so strong that actually, the risk of overheating is rising because the Fed is not tightening policy enough. I totally agree that the dynamics are completely different today than they were after the great financial crisis and its painfully slow recovery, when the Fed kept tightening too quickly and had to keep reversing course. And come on, as he notes, broad money is more than 20% above its pre-crisis trend growth path! Where is that $3.5 trillion going to go?
But I look at these markets today...and I find myself reading Dave Rosenberg's morning note. As I'm reading it, the yield curve is flattening like our backyard bouncy house when you switch the power off. The two-year/ten-year Treasury yield differential is at a four-month low; the ten-year/thirty-year is at a fourteen-month-low going back to the depths of the pandemic. And it's that thirty-year long bond where we've seen yields slip the most lately; not a great sign for a robust economic outlook.
What does Rosenberg say? "How to Plan for the Return to Asset and Price Deflation." Ugh. Here's how he sees things: absent all the Fed and fiscal stimulus, the level of GDP would be 6% lower, the S&P 500 would be 20% lower, and high-yield credit spreads would be 2.5 points higher. The S&P 500, he notes, is 25% above its pre-pandemic peak, while the economy with all this support is only the same size. Corporate profits are 2% lower today, he argues, than they were in 2018 but the broadest market index, the Wilshire 5000, is up more than 60%.
"And then we move to the housing market," he writes, and mean reversion in home prices relative to rents and incomes would imply a drop of 20-30%. In other words, he's saying that the Fed is being far too sensitive to today's "inflation"--the kinds of price spikes that can actually slow the economy--while ignoring the much bigger deflationary pull that's still out there. It's like Steve Grasso said about the falling 10-year yield earlier this week: "That is the scariest thing to me. That means we entered the pandemic in a deflationary environment."
So basically, if the Fed talks hawkish--like James Bullard did on Squawk Box earlier today--markets freak out, but even if they talk dovish, Rosenberg is cautioning that the real economy will never catch up to where asset prices are. I don't know. David Tepper says the stock market "is still fine for now" and is bullish on the economy, but Michael Darda, who is also a macro bull, warns that swaths of the market are overvalued and at risk to higher rates. Brian Reynolds says it's a bull market driven by retail buyers, short covering, and debt-fueled buybacks, and he'd be a buyer of any dips. This is why my head hurts. If we somehow muddle through all this, it will be no small feat.
See you at 1 p.m!
Kelly KEY STORIES
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Jumat, 18 Juni 2021
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