I see a suprise move ahead, triggered by the rate increase
Fed-laced Fairytales
Blinded by Fed-laced fairytales, Wall Street has been lulled to sleep by stories
of a Goldilocks economy.
The true tale is more akin to the Emperors New
Clothes as the Fed thinks it is wearing special cloth that “could distinguish
the clever from the stupid.â€
Problem is, there is no such cloth and someone
should tell them.
If a picture can tell a thousand words, the
University of Michigan Consumer Sentiment Survey is the perfect picture of the
economy.
We note that since the Fed began raising rates
last year the University of Michigan Consumer Sentiment Survey has been on the
decline. More importantly, last week’s plunge to 76.9 shows consumer confidence
has broken a thirty-year trend of rising sentiment — suggesting the consumer
retrenchment we all feared has just now arrived.
We don’t make a habit of crying wolf and have no
intention of playing Chicken Little, but the sky is going to fall on the
Goldilocks economists.
First note that the chart below simply reflects
the rising tide of optimism amongst consumers since the 1979 trough when roughly
50% of Americans were dissatisfied with the economy as oil prices had crimped
the economy and our confidence as a nation.
We recovered. Then, a decade later we saw another
recession and the first Iraq war that many feared would be as bad or worse than
the 1970’s crisis. But this didn’t register with the consumers who found a way
out of the jobless recovery and Iraq.
A decade later we had the Nasdaq crash and 9/11
attack, but the consumer (now used to quick recoveries) borrowed money on top of
borrowed money to front run the recovery. But new highs in home prices and small
cap stocks have not been enough to convince the consumer that the economy was on
the mend. This is why the stock market adjusted for gold shows the economy has
gone nowhere since low ebb back in March 2003 when sentiment last touched rising
trendline support. Last week’s breakdown below the 2003 lows is like a dark
cloud circling overhead and we will now walk with umbrellas on even the sunniest
of days.
If the Fed thinks it can raise rates another time
after this week we dare remind them that the consumer represents 2/3 of the
economy and is made of gingerbread. “ Oh dear!†the gingerbread boy said, “I’m
quarter gone!” And then, “Oh, I’m half gone!” And soon, “I’m three-quarters
gone!” And at last, “I’m all gone!” and never spoke again.
Regards,
Jes Black
FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.
Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.