Juggling Dynamite

This morning we have news that wholesale prices in the US deflated .4% in April–the 5th decrease in the past 6 months and–a  decline of 1.3% over the past 12 months; far short of the Fed’s stated inflation targets.  Bonds are rallying on the non-inflation news. So far the US dollar is weaker and US stocks are ripping out of the gate on the premise that deflation means no rate hikes any time soon and perhaps maybe even, another round of QE ahead from the Fed’s impotent basket of tricks.

Canadian stocks are not so sanguine.  If there is no growth and no inflation then there is also little reason to bid commodities.  There is also less hope for Canadian wage growth or even further home price inflation to keep the Canadian household credit bubble expanding.  There is also no reason for companies to expand, or borrow to invest in productivity gains.

All that seemed so right about Canada into the 2008 cycle peak, has turned against the Great White North.  Once praised as a commodity superstar with stable banks, Canada is now increasingly noted globally as an embarrassment of household improvidence, sorely under-diversified and dependent on the antiquated economy of fossil fuels.

In all that has happened over the past 7 years, in all the trillions that have been wasted to re-inflate asset bubbles worldwide, the Canadian stock market still remains below its June 2008 cyclical peak.  What’s more, with deflation spreading and demand slowing, TSX valuations remain bloated and face steep mean reversion from here.  A debt boom and global adoration were nice while they lasted, but the payback will be more dramatic still.

A helpful reminder of why the North American consumer is so key to global demand trends. When North American spending falls, the world economy catches the flu.

Middle class is a favorite term of politicians and economists alike, but there is no agreed upon definition of what it actually means. Bloomberg looks at three different explanations of who the nebulous label applies to.  Here is a direct video link.

This morning we learned that US consumer spending was flat in April and did not increase as the consensus had forecast.  There was a modest revision that bumped March retail sales up 1.1% (had been reported at .9%)–which made March the only spending increase in the past 5 months. Year over year since April 2014, overall sales were up just 0.9%–the lowest level since October 2009. See:  US consumers stick to cautious track, clouding outlook on broader economy.

According to A. Gary Shilling (see: US consumers save, don’t spend), since the government began collecting retail sales data in 1967, three months of waning sales (never mind 5) has only happened twice outside the context of US recession.

Instead of spending that windfall from lower fuel costs (as stock bulls had expected), households have been paying down debt and building up savings. At 5.3% in March, the personal saving rate in the first quarter of 2015 moved up from 4.4% in November–trends in the right direction at long last; for strengthening consumer balance sheets that is.

Not for sales and US GDP (70% of which is dependent on consumer spending).  See:  GDPNow Federal Reserve of Atlanta’s latest forecast for Q2 GDP now at .7% (seasonally adjusted annualized rate) and -1% for Q1 vs. the always optimistic sell-side consensus range of 2.6 to 4.25% (annualized forecast) for Q2 (marked by blue band at top of chart).

It’s also not supportive of the rally in oil prices and bond yields (expecting higher growth and rising rates) over the past 2 months. See Oil’s not coming back, here’s why:

Oil bulls who’ve cheered a rebound of 40 percent from a six-year low should take heed: Unless demand accelerates, the rally is in danger.

The omens aren’t good. The U.S. government expects global consumption to grow next year at less than half the rate of 2010, when the world was emerging from a previous recession. The growth is insufficient to close the gap with rising supply, according to Royal Dutch Shell Plc, Europe’s biggest energy producer.

The last time oil crashed, during the 2008 financial crisis, China’s appetite for commodities seemed insatiable, and powered prices higher. This time, Chinese fuel use is growing at half the rate of the past decade, and sliding U.S. shale output could reverse as prices rise, smothering the gains.

“The recent rally appears driven by investors looking at catching the bottom of the market and the expectation that U.S. oil production has reached a turning point,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy. “But fundamentals, notably in the U.S., have not changed much.”