While the market suffers from Ben Bernanke's reality distortion field, "the situation on the ground is deteriorating quickly." Nearly 70% of all economic data points released over the past month have missed expectations, up from 53% two months ago. It appears the economy has succumbed to a new recession.
By Anthony Mirhaydari
April 24, 2013
I know it's not fashionable to care about hard fundamentals like corporate earnings or economic data these days. After all, the market only seems to care about cheap money stimulus from the Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank.
That, and ensuring that the Japanese yen continues to weaken against the dollar and the euro, protecting so-called "carry trades" using the yen as a funding currency to buy U.S. stocks and Spanish and Italian bonds.
But while the market suffers from Ben Bernanke's reality distortion field, the situation on the ground is deteriorating quickly. Nearly 70% of the economic data points released over the past month have missed expectations, up from 53% two months ago and 35% three months ago.
As a result, by some measures, the economy appears to have succumbed to a new recession -- invalidating the theory that cheap money solves all and casting a pall over the market's recent rise. Here's why.
Just consider the economic data we've received so far this week. The Chicago Fed regional manufacturing index disappointed. Existing home sales disappointed. The Flash PMI manufacturing activity index disappointed. The Richmond Fed regional manufacturing index disappointed. New homes sales disappointed.
On Wednesday, March durable goods orders suffered the second largest monthly drop since the 2008 financial crisis as new orders plunged 5.7%. Removing the volatile transportation component, orders still fell 1.4%, building on a 1.7% decline in February. The drop was widespread, hitting metals, machinery, and electrical equipment.
Michael Feroli at JPMorgan rates the report a "D+" noting it joins a long list of disappointing March data. According to Paul Ashworth, chief U.S. economist at Capital Economics, it's a sign the "recovery is losing momentum again." I'll go a step further, and say the recovery could very well be over.
It wasn't supposed to be this way. The fiscal cliff and sequestration battles are behind us. The Fed is pumping $85 billion a month into the bond market. The Bank of Japan just pledged to double its monetary base over the next two years. The Eurozone debt crisis is off the front pages.
But as I've been saying for months, none of this addressed the deeper, structural problems such as tapped out consumers pinched between a slowing job market, higher taxes, and lower savings. Or a slowdown in Asia, especially China. Or a deepening recession in Europe, which is now infecting Germany as illustrated by its abysmal Flash PMI manufacturing activity report on Tuesday. Or the fact Washington hasn't finished its budget battles, with another $2.5 trillion or so in additional budget austerity needed over the next 10 years to stabilize the national debt.
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