Partying Like 1992...or 2002?
This morning I am hearing, (as I did yesterday PM from folks on the Street and various trading desks) that the massive decline in the treasury market could be having a substantial negative impact on financial intermediaries (banks) and customers (hedge funds, pensions, insurance companies, mutual funds, etc.) alike. John Succo's post yesterday AM was a play on this very trend: buying cheap volatility in advance of some sort of blow-up on the heels of the extraordinary (for its quickness) back-up in rates.
What I am not hearing much of, however, is how the back-up in rates might impact the real economy. Some folks are quick to point out that we're still at relatively low absolute rate levels, and that the fiscal stimulus (tax checks), monetary stimulus (the Fed), and the mortgage refi benefit that lags 3-6 months, should help keep the consumer spending.
Though yesterday's claims data suggests that August could - could - see some actual job growth, as Brian pointed out this AM, the hours worked figure fell to a new cyclical low, which is a leading indicator for employment (it also has negative implication for industrial production and capacity utilization, both of which are already at cyclical lows). The other important leading indicator for future employment, the temporary workers figure, increased 42K and is up 112K in the last three months series. So these two data series are saying, for now, different things. We'll have to see how they resolve themselves over time. But know this: historically, hours worked increases, companies add permanent workers and then add temporary workers. Perhaps this time is different, but we'll have to wait and see.
Why all the focus on employment? Because jobs, having one, feeling like you could get one, etc. is the single most important factor in consumer disposable income and spending trends. Other things like confidence, the stock market, mortgage refis, tax refunds, etc. matter on the margin. Employment is significant.
I'm speculating here, of course, but I think it's helpful to at least think about the following. Is the stock market, which discounts the near (6 months+) future, saying that the back-up in rates, the eventual loss of mortgage refi and tax refund stimulus by the end of the year, combined with the thoroughly lackluster employment numbers, telling us something about 2004? Is this the start of the consumer coming unglued from the mortgage-led and tax credit-induced spending they have done? That, despite the uptick in some capex that we are seeing, the capex figures might just not be strong enough to give the Fed the window it needs to get businesses to take over where the consumer is leaving off?
Remember, the latest recession was unique for many reasons, not least of which was that it was the first in which consumer spending (personal consumption expenditures) never went into negative territory. 1991's recession and subsequent recovery saw the classic consumer pent-up demand unleashed. Now, there is no pent-up demand to unleash: the negative aspects of a recession were never reflected in the consumer pocketbook: the Fed and the administration saw to that. That is the elephant in the room that cannot be ignored: there is no consumer demand to unleash this time around. And efforts to stimulate it will be met with decreasing returns. If the consumer falters, even a little bit, business spending needs to be far better than it currently is to make up for that.
That, of course, isn't the only reason to see this current expansion phase as different than 1991-1994. The parallels to 1H:2002 seem much more apt: 9/11 rebound vs Iraq war rebound, new ands aggressive Fed easings then and now, tax cuts then and now, NDX/SOX massive outperformance then and now, big and rapid increase in bond yields then and now. There are differences in the high yield market between then and now, of course, as Brian Reynolds has astutely pointed out. But if there is a song to be played, it carries a tune closer to 2002 than 1993.
With the benefit from mortgages declining after 2H:03, with the one-time nature of the tax rebates ending before year end 2003, and with the business side not expanding fast enough to cover that slowdown, we may be at an important juncture for the stock market.
As Tony suggests in his posts below, the breakout has yet to occur. But should it be to the downside, there is fundamental reason to think the stock market might be telling us something important. Maybe we're at a point more similar to 2002 than 1992.
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