• Clifford Bennett , Chief Economist at ACY


• 20.10.2021 03:00 pm
#stock

The same scenario saw worsening economic data, strong earnings and strong stock gains. The real world experience in the US right now is an entirely dysfunctional economy with a volatile labour market, supply chain disruption and extremely wary consumer behaviour.

US Housing Starts fell by 1.6%. 

We observed this several months ago  and the evidence only continues to build(not build) in the direction of a construction cooling.

Like all other economic data, everyone keeps coming up with excuses such as it is only due to supply chain disruption, it will not last. Question, how long do we keep leaning on the same old excuse to buy anyway? The data is never accurate in any economy. People forget these are always in the main simple sample surveys, and when it comes to government data, it often has ebbs and flows at the end/start of each month that corrupt a truly accurate reading of the on the ground situation in any case. What matters, is the general overall trend direction of the data.

For the US, this is down across the board, except earnings. Which could mean earnings themselves are in the final throes of a crescendo strengthening period. I have always forecast strong earnings. It is why I was also the first to be pointing out inflation was not transitory at all, and the Fed would be late in coming to realise this. As it is just beginning to do so now.

My thesis is that despite the separate life of tech from the real world, in the end it takes a strong general economy with high levels of employment to purchase enough streaming services for instance, to justify the immense capital investment to maintain everything from streaming to Tesla. The major risk to this scenario is that we are seeing, as I have written of before, an increasingly class structured two speed economy, where the upper tranche has the capacity to maintain enough consumer behaviour to justify overall corporate profits despite a struggling even declining Main Street.

Is such a situation good for the community or sustainable for the economy long term? Most certainly not. Could it sustain earnings beyond their normal growth path? Yes, especially with greatly delayed response via central banks to the accompanying inflation.

The real world experience in the US right now is an entirely dysfunctional economy. The big disappointment will be when the data just never comes back to what people are expecting. Stocks, despite strong rallies are living on borrowed time. There is no way of telling when buyer exhaustion will occur, but it is worth keeping an eye out for.

Weakening building permits come on top of the under-performing retail sales for the past six months, US consumer sentiment pluming new crisis lows and Industrial production in serious contraction territory.

Clifford Bennett