Keep an Eye on the Bigger (Still Ugly) Picture

There are indicators that the general sentiment has turned bullish over the past two to three months. A quick search on Google Trends for “green shoots” reveals the search volume index (a measure used by Google to calculate the amount of people searching for a specific topic) has skyrocketed in recent weeks from near zero, to well over a hundred (on a 0 to 100 scale). For those that watch CNBC for more than just entertainment, you’ve probably noticed that the same experts who two months ago were heralding the impending economic apocalypse are now claiming they were the first ones to call the latest “recovery." Kind of ridiculous, if you ask me, considering the big picture has not improved one bit since the beginning of 09’. Sure things have been somewhat less bad than they were at the end of 08’, but they’re still pretty damn bad overall.

Investors all over Wall Street are clinging to just about any bit of positive news, in most cases completely disregarding the general context of the news. Take the latest readings on unemployment for example, released earlier this week: according to the Bureau of Labor Statistics the number of people employed in the US actually rose by 120,000 in April. However, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. Headline unemployment rose to 8.9%, the highest level since 1983. If you count those who are working part-time but want full-time work, as well as those who are “marginally attached” to the workforce (individuals who wanted and were available for work and had looked for a job sometime in the prior 12 months), the unemployment rate is a much higher (and much uglier) 15.8%.



The markets reacted positively to news that only 539,000 jobs were lost in April, down from a negatively revised 699,000 in March. To me it seems irrational that anyone would react positively to half a million lost jobs. The numbers might not be getting any worse, but they're still pretty ugly. To make matters worse, 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 266,000 jobs as a result of new business creation. This means that there will likely be a major revision downward at some point in the future.

Worldwide, there are signs that the economy has yet to put the worst behind it. Exports from mainland China dropped 22.6% in April from a year earlier, a larger drop than economists expected and a substantial decline from the 17.1% drop seen in March. In India, industrial output went down by 2.3% in March versus a year earlier, again worse than economists expected. Exports in the Philippines were down 30.9% (!!!) compared to last year.

In the US, the trade gap grew to $27.6 billion in March, the first time in eight months, as oil imports jumped and weak overseas demand took a toll on exports. It doesn’t take an expert to see that global trade is drying up. If a 23-year-old amateur analyst can pick up on this fact, then how exactly are the so-called expert bulls claiming a return to positive growth by the end of 09’?

Thankfully, there are still investors out there who do not have their heads up in the clouds (or up their asses, depending on how you look at it). In a recent Reuters interview, CEO of top bond fund Pimco, Mohamed El-Erian, said that higher unemployment and slow global growth will become the new norm as the result of a sluggish US economy. “Global growth will be lower and unemployment higher, notwithstanding the continued rotation of dynamism away from industrial countries and toward emerging economies.” The firm’s three- to five-year “baseline” investment strategy favors the front end of government yield curves in many countries, as central banks will opt to keep negative real interest rates. The firm favors international investments based on their view that the US dollar will fall in value in the long run. If you ask me, I think they're on the right track.

A recovery may well be in store by year-end, but it will be a slow and protracted recovery, with very limited (if at all positive) growth. All things considered, I really doubt that this rally is the turnaround the consensus is claiming. I think it’s unlikely there will be a retesting of the lows, but I do think this rally will falter sometime during the early summer months and we will see a muddle through of the markets before things start to (hopefully) pick back up again as the year comes to a close. Call me a pessimist, but I think the summer doldrums are going to be quite literal this year.

-Carlos J.

Disclosure: no positions