While our focus is usually trained on markets, volatility as a concept can apply to much more than asset inflation extremities. The Japanese bond and stock markets are conforming to the QE script, as US markets begin to correlate (across the JPY-USD). What’s really interesting, however, is that despite now four years into a “recovery” a lot of economic data still doesn’t know which way to go.

Friday morning, the Chicago PMI went from its first contraction indication (49.0) in April to an absolutely soaring 58.7 in May. Asset markets were temporarily boosted and cheered the manufacturing renaissance. While this data point is perhaps not a mainline print, it is not insignificant or fully unloved.

The other side of the weekend, however, the mainstream ISM manufacturing falls back below 50, indicating a contraction in manufacturing, and completely contradicting the Chicago PMI. Worse, every single important subcomponent, with the exception of employment, fell by a rather large margin and most into contraction themselves: new orders -3.5 to 48.8; production -4.9 to 48.6; backlog of orders -5.0 to 48.0; exports -3.0 to 51.0.

The pattern here is, Chicago aside, quite familiar to anyone paying attention. There was a short-lived bounce as inventories re-adjusted after the initial “demand shock” in the middle of 2012. Economists are expecting a bounce higher in economic activity solely because of QE 3 & 4. But, as Joe described, QE doesn’t really work that way. It can, however, cause confusion in the real economy as the monetary illusion is desperately alluring.

This is not isolated in history, either. Reflations always look like this; and they always end in the same fashion.  Alexander Pope had it right in 1733.


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