Earl Weaver
I must admit to "analysis fatigue" - the kind where if anybody mentions the LTRO, Greece or 'money on the sidelines' as arguments for how nice the world is working out I will do something drastic....like switching to supporting Arsenal or even worse, Manchester United. (For the record I support QPR - sad but true).
The role of an economist and analysis team like ours at Saxo Bank is not to be right about our predictions, it is simply to question the status quo to make people think outside the box however uncomfortable it is in light of the current market paradigm. Right now, the consensus is that momentum is unstoppable, what with all of the free money and extending-and-pretending as far as the eye can see. But I join the wise old baseball coach Earl Weaver in stating that momentum is only as good as the next day's starting pitcher - in other words, it only exists if it can keep on going tomorrow. Let me point out a few obvious concerns about the validity of the current "momentum":
Energy prices are high - higher than the high of the Arab Spring last winter in as measured by Brent crude, the benchmark for the majority of the world's oil supplies. Brent is at a record price in Euros and Sterling, in fact. And the average gasoline price in the US, which has a high weighting in the consumer sentiment index, has broken $4.00 per gallon in California while the front contract future as been below is again on a steep rise.
There are several ways the higher gasoline and energy prices impact the economy the quick-and-dirty version is through diminished spending power, higher inflation and sentiment. For a more elaborate take, the International Business Times have nice read: Soaring Gasoline Prices: Six things you should know.
The elevated energy prices have already led some of my colleagues to adjust down their full year US growth from in excess of 2.0% to 1.5%.
Right now, the Bloomberg consensus estimate among economists is for the US to grow +2.20% this year, and for Brent to average $118 and the main US benchmark, WTI, $108 through 2012. We are already exceeding the average price before the driving and A/C seasons start in earnest, raising concerns on the prospects for growth.
There is also some divergence from the much touted Citigroup Surprise Index (CESI) which most of the momentum people used to explain the "better than expected US economy" less than one month ago - Saxo Bank have called for a partly repeat of 2011 seasonal pattern in 2012 from the economic indicators - at least in terms of CESI we are on the right track.
CESI tends to mean-revert around zero - the high was three weeks ago, and it's now reversing down. We expect this move to continue down but less than last year as our prefered leading indicator: Consumer Metrics is predicting a much slower reversal this year than last.
In other words: Yes, it will be a bit like last year, but the average will be better, though tomorrow's starting pitcher may prove that there is no such thing as momentum in this economy, particularly given the drag from energy prices.
Geopolitical risk on the rise. Plenty of tail-risks to consider
The Peoples National Congress in China starts this week-end. Expect a lower GDP forecast, and focus on social "Harmony". The key date is Monday where the PM delivers his "state of the union" speech. It is still one of our key macro economic premises that where China goes, the world follows.
Russian Presidential election on Sunday - if Putin fails to secure his Presidency in the first round it will be seen as an extreme sign of weakness. Also watch the demonstrations called for the same night as the election ends. This could be a game-changer for Russia. On my recent trip to Moscow I got a feeling things are about to change towards openness, this time talk is not enough and Putin increasingly seems to acknowledge this. That could be the big catalyst for using a WTO entry and more open markets to fight the ultimate tax: corruption. Let's hope so.
Iran. The IAEA's report from its visit to Iran should be out soon. It was expected end of this week. There is increased strong talk and yesterday New York Times Op-Ed from Amos Yadlin: Israel's Last Chance to Strike Iran was clearly a leaked piece to warn Iran and to make President Obama aware that Israel feels pressured and that it is running out of time. We also have a so-called "election" in Iran this week-end, in which the true opposition has been barred from running. It's funny to read we already today know the voting turnout is going to be 64%, but the overall situation is grave, too grave for my liking as the world has less than 2% spare capacity in oil production.
Geopolitical risk is a "tail-risk" (low-odds, but with very high impact) and not a base case prediction. But it concerns me greatly that the "conflict zones" are increasing week by week while the economy increasingly faces the down-sizing of global public sectors combined with elevated energy prices. Let's hope tomorrow's starting pitcher shows up to pitch a heck of a game - but I'm concerned that momentum is more about herding behaviour in this market rather than a reflection of robust prospects.