My great concern is not whether you have failed, but whether you are content with your failure.
Today's weak payroll number is yet again another reminder that Fed stimulus this time around has failed to juice inflation expectations, economic activity, and demand pull pressure. I know, I know – it's all about the weather. Blame the polar vortex! The reality is that weather today has nothing to do with Treasuries maturing 30 years out. Indeed one can argue that weak payroll data means that the Fed will pause on tapering. The real focus should be, however, on whether or not QE is working at all. This relates very much to the "pushing on a string" argument, which is gaining more and more credibility. This late into the cycle, after trillions of dollars have been pumped into the system, things should not be this disappointing.
This is concerning on a number of levels, and with complacency still so high, one must wonder whether or not a real breakdown in stocks could occur. While not our base case, we must respect intermarket deterioration which began after the first week of January and has been justified by the reality on the ground. The Fed wants out of QE because, rather than helping to cut off tail risks, it may actually now be creating them without transfering rising assets down to the economy. My firm's alternative ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts continue to favor defensiveness, with long-duration Treasuries the most sensitive to the current deflation pulse.
Retailer weakness has been telegraphing this since the start of the year. Take a look below at the price ratio of the SPDR S&P Retail Index ETF
(NYSEARCA:XRT) relative to the S&P 500 ETF
(NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/XRT is outperforming (up more/down less) the denominator/SPY. Note the complete collapse in the relative performance, undoing nearly a year's worth of strength in one single round-trip.
Pausing QE? Increasing QE? After all of this -- after 30% gains in the S&P 500
(INDEXSP:.INX) last year, why is the consumer suddenly so weak, and why aren't jobs surprising positively? Something else is happening here that is negative and must be respected. Indeed everyone focuses on an emerging market crisis, but we may, with hindsight, look at the present situation in the US as the real problem for the global growth story.
No positions in stocks mentioned.
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