The rising stock market does not imply that the economy is recovering with real muscle

Outlook:

This week the big event is likely the Jackson Hoke central bankers meeting, electronic this time and absent the fly-fishing. Fed chief Powell speaks on Thursday. We also get the 4-day Republican party national convention with Trump hogging the spotlight and speaking every day. We need to expect some wild promises and a bagful of lies. One of the biggest lies is that the rising stock market means the economy is recovering with real muscle and Trump deserves the credit. The stock market is not the economy, the recovery does not and will not include employment, and we have yet to see some consequences, like those forecasted bankruptcies and evictions/foreclosures. We also get sentiment from Germany in the form of the IFO and Gfk surveys and the European Commission sentiment index on Friday. We get UK sentiment in the form of the CBI distributive trades. For the US, tomorrow brings new home sales, probably in line with existing sales (very, very good). We get US GDP on Thursday followed by income and spending on Friday along with consumer sentiment, plus the trade balance, not that anyone is watching that.

We seem to have a conflict between judging economic recovery as a function of Covid-19 management or on the basis of a longer-term outlook. In pandemic management, Europe wins but the US doesn't lose, judging from the S&P. European data has been coming in somewhat better than in the US, but as the FT reports, "Economists and manufacturers worry the honeymoon phase for factories will run out of steam." The PMIs on Friday showed recovery but at a slower pace, arousing fear of fading. "High-frequency data such as heavy goods traffic on German toll roads — which are more up-to-date than official economic indicators but are experimental and the extent to which they reflect subsequent trends in official data is variable — have returned close to pre-crisis levels."

It's not exactly high-end professional economist analysis, but it's possible the US has more promise, despite lousy Covid-19 management, because its citizens are less intelligent and realistic than Europeans. Or maybe it's the economists who differ between continents. The European business people and their economists see the imminent stall in the works, and speak in discouraged tones. In the US, we see less of a stall yet but more mismanagement, implying a stall is on its way. In other words, Europeans form expectations in a sensible, realistic way, while Americans refuse to look out very far and to price in the worse-case factors, let alone the worst-case factors. The Teflon dollar is at it again. We have been here before, too. The dollar is up not because of risk-off but rather because the US economy can shrug off all kinds of terrible, awful things, including Congress failing to pass a second recovery spending bill, the 30+ million unemployed and unemployment of at least half that persisting into next year, etc. Now we are getting a last-ditch pandemic response from the White House selling snakeoil—treatments, vaccines—to trick the US public into thinking we're all right, Jack. We can understand the uninformed and misinformed public buying it, but for business decision-makers and equity investors to buy it is downright strange.

The one risk-off factor in this mix is the US-China cold war, which is staggering along and everything wondering what attention-grabbing act Trump will pull next and whether China is ever going to respond in any meaningful way. China may be biding its time. To act now is to benefit Trump, so wait for the next administration. If it's Trump again, there's time to retaliate. If it's Biden, they have a case for having been unfairly persecuted, at least when it comes to attacks on private business (so un-American). One thing we can forecast with fair confidence—Trump's attacks on China are wildly popular and will form a key component of his campaign.

To get back to fundamentals, the Chicago Fed report today is a national report, not a regional one. It tends not to get as much attention as some of the regional Fed reports, but it may gather some real interest this time, if only because traders and analysts alike are on the prowl for data to support the recovery story. In June, the Chicago Activity Index rose to a record high of 4.11 from 3.5 in May (revised) and the record low of -18.09 in April. In June, production, employment and personal consumption (plus housing) all contributed to the gain, while sales, orders and inventories were negative. TradingEconomics.com reports the consensus forecast this time is for 2.73 (remember, from 4.11 last time) but its own forecast is for a lesser 2. Here we go again—a number under the consensus forecast "should" be discouraging as a fundamental factor and dent the stock market, but instead of farming the dollar, may be been as risk-off factor and thus favor some buying.

The dollar can't lose. Good data favors the dollar in the fundamentals competition with other economies, while bad data favors the dollar as a risk-off factor. That brings us down to positioning. Again, the market has been dumping overly long dollar positions built up since the March market crash. Whether it's time to change positions is not yet known, but as of today, we're not betting against the dollar.

Politics: The postmaster general defended his actions and swore he was not trying to sabotage the election. Removal of mailboxes and sorting machines began before his time, and that letter to a majority of states warning the votes mail-in votes could not be delivered had been sent out in 2016, too. Then we found out the chairman of the postal service board is Senate leader McConnell's campaign chairman and several states deny they ever got a mail warning in 2016 or any other time. So maybe this guy didn't do it, but the other top management did, so he is slippery, or a perjurer. The House passed a $25 billion bill to beef up the postal service. We shall see what the Senate does.

The presidential election is about ten weeks away and a lot can happen between now and then, including continuation of falling Covid cases, more decent data after the good PMI and housing stats, and relaxation that the mail-in voting process is going to be okay. We have until October for Trump to come up with the classic October surprise to bend the vote his way.

By then the universal condemnation of Trump by speakers at the Democratic convention will be at the bottom of the birdcage. He was depicted as unfit and unhinged, while the Dems are decent and civil. Those two sets of characteristics are not equivalent. Decent doesn't mean capable and civil doesn't mean sane.

Nobody paid any attention to Dem promises on economic recovery, not even their feasibility, let alone ideologically. We say this is not a good thing. Voters like promises, even if they are lies (Nixon: "I have a plan to end the war in Viet Nam." Trump: "I am going to build a wall on the Mexican border and Mexico will pay for it.") Where are the Biden promises to the Trump voters? They are, after all, the traditional core of the Democratic party (white non-college educated, aka blue collar) and neglecting them cost Clinton dearly. Granted, they are a declining percentage of the demographic, but still. The Atlantic magazine's Brownstein made a resonant point: the Dems are more comfortable with change. The Republican base sees change as meaning some kind of loss to them, and fear it.

It's mean to say so, but the most interesting face all week was John Kennedy's grandson. The liberal press is having a ball finding various things to like about the convention and the candidates, like Biden's showboating on stammering, without grasping they are preaching to the choir.

At a guess, not a single Republican changed parties because of anything done or said at the Dem convention. Trump still has an approval rating of over 40% and it has stayed remarkably steady all these years. As we already know, Trump's behavior can be grotesque and repulsive (Access Hollywood tape, McCain is not a hero, etc.) and it doesn't repel his base. What can the Dems do to recover these voters and herd them back into their camp? Acknowledge the single biggest reason they left in the first place and do something about it: income inequality, aka poverty. When you believe neither party is going to raise your take-home pay, you are willing to cling to the party that appeals to your worst instincts—close the border, ban Muslims, promote law-and-order that targets black and brown people.

 

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