May 11 (Bloomberg) -- The yen was poised to break nine weeks of losses against the euro as a slump in global stocks spurred speculation traders will reduce investments in higher-yielding assets funded by borrowing in Japan.Oh, that'd be the "Yen Carry Trade". Yeap. One of the underpinnings of the liquidity that has been driving the market upward.
Of course we all know what happened yesterday in the markets.... surprisingly enough, it didn't trigger a HUGE selloff overseas, although to say that the overseas markets liked our market action would be a fat lie.
This morning we have the PPI number, which came in at up 0.7%, no food/energy unchanged. Retail sales out -0.2%, unchanged ex-autos, .vs. expected up 0.4%. One cautionary part of that - gasoline sales were very strong in dollar terms, adding about 0.2% to the number - without it, retail sales would have been even worse.
Instant reaction on the dollar was strongly negative; neither of the numbers did much to the futures. The 10year bond sold off slightly.
I expected no real reaction on the retail sales number as that was "baked in" yesterday with the chain store report. The PPI number "sounds" good ex-food and energy, but again, 0.7% is 0.7% in the real world, and with no end of expensive energy in sight that's a real PPI inflation number of eight point five percent annualized! Aieeee!
Take the last two months (to try to get rid of the Easter effect) and there's not much change in retail sales. That's not so good; no advance isn't a growing economy! The Fed is basically going nowhere on this data.
The "brave faces" were out basically cheering once again at all of this. Uh huh.
What does this all mean? If there is to be a bounce-back attempt from yesterday, it is going to have to get going by 11 or 12 today. Why? Because if we close down again today then you're going to see people get very, very nervous about being net long going into the weekend. That's a recipe for disaster if there's some sort of "event" overseas during the weekend, such as a surprise interest rate change from China!
We are going to open higher (so say the futures) but what happens from there is anyone's guess. The bottom line here is to consider that you've got the following basic economic picture:
- Gas prices way up (25% in the last few months)
- Housing prices down-to-flat
- Food prices up more than 8% year-on-year (and has been for the last four months.) Food prices, by the way, have a bigger impact on the consumer than energy is.
- Adjustable rate mortgages adjusting (up)
- Savings rate negative now for more than a year
- The HELOC/Home ATM machine is closed; consumers now shifted to plastic (bad)
This obviously can't go on forever - therefore, it won't! Consumer discretionary spending is going to be hit, and we're seeing the cracks in the dam. The credit report, remember, is historical - yet people can continue to blacken those cards for a little while. Eventually, however, the numbers get burned off and the card charred beyond recognition.
It appears to me that the consumer is basically counting on the re-opening of his own personal "Yen Carry Trade" - home equity. If I'm right about that we are in serious trouble - we're not going to see that "carry trade" come back any time soon - housing cycles are typically a decade long, and we've just started the downside. It'll be '09ish before we see the housing market recover in a meaningful fashion, although how long it continues down depends entirely on the depth of the plunge.
Joe Consumer doesn't have two years. He has more like two months.
While Greenspan now puts the risk of a recession at 2:1 against (one in three) I wouldn't take that bet right now. The simple fact of the matter is that the consumer has been holding up the economy like Atlas, which is fine, but unfortunately he's been doing so at an unsustainable level via the HELOC/Refi ATM. This simply must drop back and the odds are, in my view, better than 2:1 against it happening without a recession (that is, I put the risk of a recession at two in three, not one in three) and I suspect it is already here.
Of course a recession can only be called in retrospect. But to believe in "Goldilocks" you have to believe that the consumer can spend on his plastic forever, the negative savings rate can be maintained, and/or that housing will, within the next 2-3 months, start to rise in price again allowing the HELOC/Refi machine will switch back on.
I just don't see it, and I'd rather take our knocks now and get it over with (the economy can take a recessionary hit and recover within a year) rather than try to stretch this out and put even more air in the balloon. The risk here of attempting to "massage" reality with too-cheap-and-easy credit is that instead of letting the air out (and taking our "big correction" now in the markets, likely a 20% correction, right on the edge of a technical "bear market") we instead, later this year or going into next, get an explosion in the credit markets leading to a 50% reversal in equities and perhaps even a depression.
Speaking of which, the Chinese have said they're not done with liqudity changes. And, as noted last night, so did the EU. In fact, it is a near-certainty that China's inflation rate is above target, which is likely to spur further interest rate increases.
As I noted last night, we do not yet have a "short the market" signal. We may not get it today, or we might. The Nasdaq Composite posted a solid "exit longs" signal yesterday on all of the primary technical indicators, while both the Dow and S&P500 did not yet confirm although on Stochastics both posted SELLs.
As such today is going to be a veryinteresting "tell" on the market.
Oh, one final thing - KB Home got a bid for their French subsidiary, and they're being bid up strongly this morning. This is not, however, a bid for the company - just an overseas sub that happens to be doing pretty well. As such I expect that to remain localized rather than try to spread into the entire homebuilding sector.
One final piece of data - FootLocker has said they are having trouble - out today is news that they're having to take markdowns in order to move merchandise and see soft sales. This in the start of May - remember, people blamed the bad April sales numbers on weather. The weather this month so far, however, has been darn nice. Hmmmm.... weather eh? Me thinks not.
"May we live in interesting times."
