With a view on credit and dollar markets, there is already the unsettling prospect of markets moving beyond unshakable belief in the efficacy of monetary intrusions. I cannot help but wonder if that is beginning to extend into the real economy as well. There can be little but retribution over the growing disaster that is the holiday sales season. Stock markets have seized on some statistically manipulated number as evidence that QE is doing what they expected, but increasingly that looks more like projection and rationalization than evidence; even if it does come down from the priests of the FOMC.
The theme in the middle of 2013 has been inventory and more inventory. Despite a lackluster back-to-school season, there was no stopping the optimistic views of US retailers. We know that they charged ahead in full, expecting a robust season, because they ordered product for it.
According the Wall Street Journal this morning, retailers, particularly in the clothing segment, are now awash in that inventory. Sales growth in many of these retailers is negative, but inventory is up significantly over 2012.
The worry is now is about demand falling, not going through the roof.
The only way retailers could have been caught so offguard by this “unexpected” headwind was if macro conditions suddenly and quickly decelerated in the past few months; or belief in last year’s QE was fully misplaced. In fact, those two possibilities are actually two sides of the same QE coin. If there was a sudden slowdown, its cause is very likely the summer’s credit market revulsion of QE and taper. We know that mortgage finance has been severely curtailed, and thus shutting down one avenue of monetary flow (trickle as it may have been).
It all sounded good in early September 2012. Chairman Bernanke, despite heavy doses of manipulation all through the intervening “recovery” years, promised to do whatever it took to bring about a full growth trajectory; the gold ol’ days of the housing bubble in 2005 were to be expected again. I suppose it would be easy for businesses to simply believe in the fairytale given that promise. After all, the media and political classes all belong to the orthodox set, so there was no obvious means of introducing skepticism (besides idiosyncratic intuition; i.e., common sense).
Like stock investors, businesses herded onboard the QE express, without carefully examining the track record (particularly longer-term) of orthodoxy in the first place. Credit markets and derivatives dealers did as well, as swap spreads turned negative and junk bonds became all the rage at 5.5% yields! When everyone else is doing it…
But none of that is the foundation of an economic renaissance, it’s all just delusion. It is nice, I suppose, that everyone was feeling good about the FOMC, but, like a magician, none of it actually solves the primary economic problems (which can be boiled down to structural issues left over from the last period of monetary intrusions). Worse, the persistence of manipulation is itself a negative factor in economic and financial function. And now we see the inevitable results of such misplaced faith.
As credit markets are beginning to shake off the euphoria, retailers are just now getting the bill for their inventory-driven exuberance. That will mean a serious adjustment to not only inventory and sales expectations for 2014, I believe it will also have the additional effect of significantly degrading faith in monetary solutions. In other words, the foundation of the monetary dream is being eroded as more and more former adherents feel the real cost of that devotion.
How long before the rest of the FOMC congregation sees the folly? Behind the exuberant rush to become true believers, in the financial sense, investors had to fully believe in the idea that tail risks have been banished by central banks. In other words, heavy losses were no longer a part of the financial equation. That is the central pivot upon which this whole ideological devotion turns. Credit markets have now seen behind the curtain, particularly derivatives dealers that are now in the tank over “trading” losses, and retailers are about to get theirs.
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