Let’s take a look at the UK.

An understanding of crowd behavior is a handy tool in delivering a leg up; this applies equally well in handling the analytical horde as the investment crowd. The following illustrates our point, and illustrates just why our clients had an advantage in understanding real-sector change in the UK, 2013 and Q1 2014.  We recommend the application of this technique.

From our Sep/2/2013 sketch: “In the Spring we isolated a flaw common to most UK economic models…”; well, common to most observers actually, “…almost all of whom were driving at 90, gazing in the rear view mirror; a perfect case of group-think in economics..” – holding hands, shouting out together in the dark. “Once we had that in hand we in effect had the financial headlines in hand.  And that is exactly how things worked out.”  

Naturally it was not a gangbusters UK economy; that was beside the point.

We predicted more of the same into 2014.  With a few exceptions, this too worked.  Thus the “triple dip” recession that so many economists had predicted Q1 ‘13 as a near certainty just ahead, was a no-show (if these guys were plumbers, they’d be out of a job). The Bank of England, the OECD and the IMF – all were cutting their forecasts as we grew more optimistic.

It was not all economics.  It was also our admiration for Osborne and his policies – why the economy would improve without an ease in the fiscal squeeze. We received hate mail when we called the administration’s economic policies “enlightened.” But we were right – thank you George.

Yet this satisfactory exercise did not come without disappointment. And that was the matter of translation. One would think that if one has the direction of miss, most key releases, one could do well in the matter of translation, intra or inter market. However, because FI price change in the UK and the US is now rigged, that part did not go as well.  In that sense we were ambushed by planners.

Now, after months of the economy “outperforming,” most analysts have caught on, or think they have.


What’s next?


Bank of England policy, H1, will be either a wash or a retardant; in other words, policy will get in the way.  Next, recent experience with “forward guidance” shows us exactly why King always thought the idea to be a foolish one. Carney will continue to switch targets and tools.

Administration policy (in direct contrast to its US counterpart) will continue to favor growth. This is not appreciated by some, especially the media and faculty-lounge types, and for that matter, perhaps over half of street economists who are still dusting off from their last encounter with reality.

Real sector activity will continue to outperform given consensus, but of course in semi-erratic fashion - not in a straight line. The major surprises are over for now; yet those along the way will be to the side of more, not less, or at least most of them will. Certainly services and manufacturing prints Q2 will tend to broach consensus. 

Finally and key remains the UK consumer. It is well known that now we have a record number of people in work, and of course we have the spark to consumption provided by the housing bonanza, and we have a shopper who will resort to increased leverage to linger in the mall. These things are known and priced in. It is ongoing attitude which is missing, most models.


Robert Craven

 

A Junkie

The Fed is a junkie. Like most junkies, this one tells us he is our friend, that he harbors only good intent and that he’s got the stuff to make us happy. This junkie explains his behavior through the exercise of “forward guidance.”

The Fed has made addicts out of banks, out of equity investors and of course, the US government-as-a-borrower; and while we’re at it, it’s made addicts out of S Africa, Brazil, India and other such credits.

This combination of dealer and addict can come to no good.

Background: The Founders understood the rule of law and how that concept should be imprinted over their Grand Document so that American citizens would freely function and prosper, without imperiling the rights of others. Everybody knows the rules. It worked. Now the world’s most powerful and most influential sovereign has ditched that same concept when applied to money and banking. No one knows what to expect next from government and Fed planners. There are no rules.

So the banks simply sit on their hands.  Why not? As addicts they rake in a nice spread playing couch potatoes, doing nothing because 0.25% on their excess reserves seems just dandy.

Others take the next step and reject caution entirely. That means buying stock for your 95 yr old grandmother when you know darn well, or should, that she has no business in anything but TBills.  But a 0.15% return does not excite, so discard discipline and look to the junkie.

And job creators? There has been no return to normal. My daughter’s family just moved to the South, so for fun we took a look at that market. The Atlanta Fed tells us that small-business job creation in its district is still 5% - 7% off the pre-recession level. Why? Uncertainty. Firms in that region reported there is more uncertainty now than when last canvassed in April, 2013.  As a result, their 1) hiring plans and 2) ability to make business decisions are both restricted.  And not just Fed-bred uncertainty we might add, but that spawned by our administration.

Now what for strategy?

In the broadest sense, look for “surprising” US weakness over the intermediate term, not surprising vigor. This will be within the US, and it will be vs other credits such as the UK and Germany.  We may have a bit of both, but “weakness” will trump.

This is a crude guide to be sure, but still useful. And why will this be so? Because most world observers, the majority of analysts still expect a conventional US recovery; they look for an acceleration ignoring those key factors that have so far prevented it.  “We’ll hit escape velocity pretty quickly now,” notes one analyst.  No we won’t. We could, but we won’t. The issue of substance abuse encouraged by the Fed is one reason why.

Those most handicapped in understanding US economic reality, whether on Wall Street or the corridors of Washington, are those who lack scholarship; those who ignore lessons of history and economics; those suffering of Hayek’s “fatal conceit” – the conviction that planners, the anointed, are capable of driving the US economic machine.  They are driving the machine alright, but it will be over a cliff.


Robert Craven