Enzio's Clock

Background

1. The Economic Time® has not changed

Despite all of this "green shoots" euphoria, I remain decidedly colour-blind, or unwilling to accept that "things" - the Economic Time, in our jargon - are/is improving. 

In yesterday's educational Financial Times (FT), John Authers notes that if you remove recent "cash for clunkers" sales, retail sales remain in the doldrums: "...in the US, extra spending on upgrading cars seems to have come entirely at the expense of other items. Retail sales excluding autos, it was reveled yesterday, fell 0.6 per cent in July. Stripping out both cars and petrol, sales have dropped five months in a row."

Indeed, on top of tepid retail sales in July, according to yesterday's trenchant Wall Street Journal Asia, businesses reduced their inventories in June by a monthly 1.1%, to $1.4 trillion. What this means is that any business sales made at all were supplied from existing inventories, not from new production.

Back to the Economic Clock®.  Tepid retail sales in July and further de-stocking of inventories continue underlining America's "excess supply of goods" - one that, according to the Fed, won't go away for a long time. The flip side of this has to be ever-rising unemployment.  All the more so because sensible Americans are saving the money that they used to consume with: fear has overtaken greed amongst the American population at large. 

2. Market perceptions have not changed

Despite this clear excess supply of goods, markets keep wanting to feel that the green shoots of recovery are right in front of us. Indeed, the current rally in the US junk bond market suggests that punters' risk appetite remains strong: they keep buying junk grade debt so voraciously that, according to said FT, "The JPMorgan US High Yield Index, which traded at a spread of 1,929 basis points over Treasuries in mid-December, was trading at 863 basis points over Treasuries yesterday." One reason for increased risk appetite is that rating agencies are calling for fewer defaults, meaning that dicey companies can re-finance their debts and get away with it.  According to said FT, "...often a lower than expected default rate reflects the unwillingness of banks to press borrowers  who are violating the terms of agreements. That is because the banks themselves are reluctant to take write-downs because of their own weakness."

Moving back to the bigger picture of the Economic Time®, what the market's perceptions cannot change is that America's (and Europe's and Japan's and China's) excess supply of goods is here to stay - until job markets start recovering in line with credit markets. But that won't happen until around 2011, we keep reckoning. 

Nor can we say that banks are lending again: cash-starved businesses are  being driven to the wall,and at some point this is going to hit banks' earnings yet again, nailing yet another panic in the coffin of crash. Just read Gillian Tett's mesmerizing Fool's Gold to see how enmeshed we are in the greed of the few...

How to Save/Make Money Off This Idea

1. Always consult your financial adviser first.
2. Go short the US long-dated treasury bonds by buying the ETF, TBT:US.  It has risen by about 6% since this March, and by about 50% since we first recommended it on 22nd December 2008; this means that since then, it has outperformed the S&P500 by 100%!
3. Have another look at those sectors and bonds that we suggested shorting for the time being. 
4. Also have a look at those sectors and stocks which we think offer a little more hope at present.