Two weeks off...little has changed

I’m back! After ten much needed days of vacation (largely without internet) and a couple days feeling under the weather, Bubbles and Busts is back.

Catching up on the news feed was a bit tedious as it appears a lot has happened, yet made very little difference. The Euro Summit, as predicted, offered the impression that progress was being made and momentarily provided an all-clear for risk-on betting. However, similar to the other 20-something summits, once the details began to leak out it became widely recognized that minimal real progress had been made. The timetable and size of the Spanish bank bailout are both unrealistic. Meanwhile, the negative effects of further attempts at austerity (tax hikes and spending cuts) are only slightly offset by the upward revisions in allowable public deficits for this year and next (which Spain will still not meet).

Separately, data out of China continues to suggest that growth is slowing much quicker than many expected. Falling inflation allowed the Chinese central bank to cut rates, but that action will do little to spur consumer spending (or boost growth). The Chinese government is increasingly facing the tough decision of whether to promote structural rebalancing and allow growth to slow or to put of rebalancing and jump start growth with fiscal stimulus. This decision will likely have a large impact on markets in the short-run and it appears most US investors are betting on the latter outcome.

Lastly, US economic data has also been weakening, topped off by the poor employment report last Friday. Yes the warm winter pulled economic activity forward, but I’m also convinced that the timing of the 2008-2009 crisis has altered the seasonal adjustments in a manner that overstates fall/winter months and understates spring/summer months. Regardless, 2Q GDP growth is likely to be below the already meager 1.9% growth during the 1Q. Corporate profits are now feeling the effects and have already turned negative (q/q). Both full-year GDP and S&P earnings expectations remain overly optimistic and will likely be trimmed over the coming weeks.

On the whole, global growth is clearly slowing and politicians in all of the major regions appear to be merely reacting, belatedly, to problems that surface. US stock markets have now given back most of the initial gains from the EU summit and Treasury yields are holding at or near all-time lows across the curve. Peripheral sovereign yields in the Eurozone have received a bit of a bid the past couple days (from the ECB?) but remain at unsustainable levels. Given the recent actions, my bias remains pessimistic for the next 1-2 years. Now it’s time to get back to more in-depth blogging...