Okay, I’m not here to be Mr. Sunshine on the economy, because we’re up big on the year, Chinese stocks are rallying, and I personally hate many of you on a very intimate level for your cheerful attitude and can-do outlook on life. But, maybe it’s possible the Walmart buzz is overdoing it a little bit.

I’d like to see the earnings of higher end retail alongside WMT before I panic too much. Yes the Philly number was awful, yes people have swept a lot of problems under a rug, no question that I was expecting a slowdown all summer that may finally be coming front and center, certainly the financial savings and debt loads of US citizens looks horrible, and sure, I suppose, this could be the first indication we’ve had that everything is about to slow down.

But I would implore you to consider, on face value, that Walmart, Target and Macy’s are where people go to shop when they can’t afford to go anywhere else. Walmart ramped into the recession because their sales expanded. You have to suppose that the opposite effect is to be expected – playing in reverse – when the economic conditions switch up. There isn’t much straightforward about a vibrant economy. But the purchase habits of people as they come into more money may be one such thing.

I don’t know the answer. There’s more to consider here than just the straightforward answer that WMT is the single greatest thermometer our economy has.

Take treasuries: yields are expanding a great deal. However, in absolute terms our debt is still yielding payments that are almost not worth pursuing and, relative to the rest of the world, is almost undeservingly expensive. It was always going to selloff; it almost had to.

The operating results of low level retail and US treasuries could just as easily be a signal that we’re finally switching gear out of this quagmire we found ourselves holed up in. Taken on their own, they can be misleading. We need to put these datum against a more complete backdrop to figure out where everything fits in.

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For the moment, the Fed remains leading the charge to hold interest rates low, based on what I would say is a faulty premise that the US economy just needs more expensive homes and homeowner tax income to get out of the hole it finds itself in.

The primary advantages of low interest rates are:
1) Cheap borrowing/refinancing, taking pressure off consumers
2) Allegedly easier to acquire homes, raising tax receipts (except for banking restrictions on lending)
3) Increased home sales enable retirees to downsize without collapsing pricing/bankrupting themselves
4) Support prices of goods and services, avoiding debt spiral

Each of these virtues, however, comes at the assumption that the consumer had the leeway to borrow more, and would take the pause to put themselves on solid footing, paying down debt and restructuring. Cheap credit was (and is always) supposed to be a momentary stepping stone to a better tomorrow.

In reality, it always becomes a game a chicken.

Consumers haven’t repaired their savings accounts at all. Debt levels should be something like three quarters of what they are – we’ve had near zero interest rates for five years and banks have so many programs running to help consumers pay off loans, it’s ridiculous. But it hasn’t happened. Consumer finances remain horrible, the money has largely been spent in ways that haven’t strategically benefited the recipients, and the low interest rates have seeded a newer, more dangerous problem.

The nation’s retirement system is on the rocks.

Looking at the state of public pensions and private 401k’s, the baby boomer’s retirement is in peril. Misallocations into housing and malinvestment have taken their toll. This isn’t exactly breaking news.

However, heretofore the assumption has been that the Fed’s knee jerk reaction to keep rates low was the only pathway and that there would be no push to counter this until unemployment levels and economic prosperity returned.

I would suggest that within the next few years, as baby boomer retirement heats up and the ability to create a virtuous cycle built on higher home prices and cheap credit slips away, the pressure on the Fed to maintain low rates will actually begin to cave to a growing murmur from the crowd demanding higher rates to maintain retirement obligations.

While this move will be a death knell for economic growth, from the point of view of aging boomers (the reigning political powerhouse and largest voting segment) economic growth would be a hollow victory as their own retirement obligations come under pressure and we increasingly see benefit cuts, such as are being witnessed in Detroit or California. Maintaining the status quo at the expense of economic growth puts them ahead, as they have a larger share of current goods and services, whereas permitting growth would ultimately lead them personally to greater poverty.

High interest rates takes pressure off of pension systems, and enables savings accounts to grow rapidly (such as those of boomers who have taken the final steps of downsizing homesteads and transferred much of their wealth into fixed income investments). It also improves quality of life for those savers by putting pressure on pricing.

Within three to five years, I expect interest rates get pushed up above 6% annually, for the purpose of refinancing retirement accounts for the benefit of boomers, at the expense of the rest of the country (planet?). When this occurs, I don’t think it will be because the Fed has lost control of the bond market. I actually believe it will be done intentionally, driven from political expediency.

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Q1 GDP estimates were complete hocus, spurred by inappropriate inferences from seasonal adjustments and over-optimism that housing prices can ignite a positive feedback loop, at this point in time.

If it seems like there’s no way you could have known that…you’re wrong.

I told you explicitly that this would happen in January, while also reminding you to be stupid long in the teeth with equities. The entirety of this positioning was predicated on selling out into the spring strength and preparing for reality to set it during the summer; that same time reality always sets in.

How many of you listened?

I’m guessing not many, because in the spring, all of a sudden site traffic plummeted and I literally couldn’t give my posts away.

Incidentally, I also told you you’d be back.

Crawling…

We’re enjoying a relief rally at the moment from oversold conditions. Behind that, there’s at least one more leg lower waiting. We will retrace most of the last four months; first look comes at 1,540 SP for me.

At that point, I’ll make the judgement if we go lower still, or set up for a bottom.

In the meantime, please stop talking about the accelerating growth lines.

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This is not what the dip buyers expected, oh my no. The crowd that has been carrying around banners and blaring on trumpets, to inform you that the economy is growing and stocks are of great value here, did not anticipate that such a PMI number could ever be sold.

I watched them with particular ire this morning, as they skipped around Twitter like the blasted little bastards that they are, mocking anyone who was so “audacious” to question it.

“So US economic data just keeps beating, and people are scratching their heads that stocks aren’t going down? Lulz,” they said, perhaps exactly literally.

“Up next, everyone who said #GrowthSlowing yesterday will have to ignore today’s data,” they cried, perhaps being lifted verbatim from their handle.

I laid out on January 15th exactly how events would transpire, and you are beginning to watch them unfold, plus or minus a little time margin of error.

For the fourth year in a row, the mighty intelligentsia have managed to pull off a mind numbingly stunning failure, buying too much into some holiday numbers and a hundred-billion-dollar-a-month shower; then washing it all down with a UoM confidence report that I still can’t for the life of me figure out why we bother reading.

Watch oil, champs. The summer slowdown is here.

Off to count my stacks of cash…

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Durable goods bounced back in April, and it was a strong showing. But, I think in terms of relevance, the weak oil demand is going to trump it. Durable goods ordered in April were based on April perceptions and April numbers. We have million barrel inventory builds today.

We all knew that the beginning of the year was strong. Until I see something that more directly challenges my views, going forward, my opinion maintains that the economy is weakening going into the summer. This durable goods number was official realization of old news.

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My predilection is to remain on the sidelines. Even if we should have a little higher to go.

I bit into this rally in its infancy, back in October. Myself and a few others grabbed the entire length of it, and my accounts show that. There is zero reason to sit around, crying about a few percent missed out on.

Now, the jobs numbers looked good, and so did a host of other things that came out yesterday. But we are still running on Christmas, and this isn’t the first time we’ve had some good jobs numbers that got sold.

Meanwhile, I am watching an exact repeat of what happened last year. Horrible economic numbers that begin in Europe and spread across economic forecasts, causing panic. Eventually, something sets off the euro (bonds, elections, riots), and suddently, the dollar starts to get strong.

Right around the same time, manufacturing and industry reports start bleeding from their faces, and energy use plummets. I don’t know if the two (euro and manufacturing) are directly related, or if it’s just some sort of sick, divine joke. But the two factors intertwine into a web of chaos that bloodlets indices for a quick 10% washout. And by that, I mean, nobody owns the indices, so if you’re stuck with the wrong positions, you get creamed by 20-30%.

I’m staying off the field. I’ll let those of you who were short and doubting until mid January put your neck on the line here.

Positions: 30%+ cash, AEC, CLP, CCJ, BAS, RGR, physical silver

Hedges: EUO, SCO

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