THE GREAT DISCONENCT

THE DOW vs REVENUE DISCONNECT

I have mentioned a few times the disconnect between the indices valuation vs revenue and earnings. With the Dow trending at record highs, here's a dose of the reality of what's happening (source: Wolfstreet).

This is despite all the billions of borrowed money spent on acquisitions and management's fantasy on prospects of greater revenue.

THE NON-FARM PAYROLL DISCONNECT

The market cheered when the non-farm payroll shot up to 227K jobs, way above the expected 175K jobs.

Two things stood out. Unemployment edged up to 4.8% from 4.7% earlier. If the jobs were so great why was unemployment edging up. Peter Schiff, well known economist and writer put it simply as there being more people re-entering the labour force.

The US has a peculiar way to classify unemployment. If you are not looking for a job, you are not part of the labour force. So this means that now more people are starting to look for jobs and with 95M Americans who can work but not working, the jobs have to grow greater than 227K jobs a month to bring the unemployment rate back down.

The other thing is the hourly wage which grew a measly 0.1% vs expected 0.3%. So with slower wage growth the Fed will have a tough time to convince the market that an interest rate hike is on the cards.

The Fed may not be able to hike interest rate as many times as it wants. In which case, why the euphoria that higher interest rate is good for the economy in the first place? Can anyone see the disconnect here? 

Truth is, that is how Wall Street rig the game. Good news is good news and bad news is also good news. To win the game, you have to go ahead of the curve.

Here are two charts (source Zerohedge) which I think reveal the current state of affairs. US productivity, which remains in decades low despite the uptick and the hourly wage which continues to remain in a multiyear low. That is why the Fed is faced with a daunting task ahead. To raise rate to 3%, productivity has to grow and wage earners must have the capacity to sustain in a higher interest rate environment.

THE 'ECONOMIC IS AWESOME' DISCONNECT

Oil price fell when the API released a report on continual buildup of gasoline over the week. What is surprising in this report is not the increase in supply but the FALL IN DEMAND. Look at the chart below (source: Zerohedge)

Demand falls because consumers are travelling less or shipment of goods via land is falling which according to Goldman Sachs only happens in a RECESSION.

And yet the major indices and crude oil continue to tread higher. This is beginning to look like a dotcom bubble where fundamentals take a back seat and greed takes over.

In the latest 12 month rolling period in tax collection, the Treasury Department reported that receipts fell 0.3% on an annual basis (see chart, source: Zerohedge).

As the chart shows, each time the receipts fell into negative territory, the US is on the cusp or already in a recession. The last time it turned negative was July, 2008.

So many indicators are pointing towards a softening economy where the 2016 GDP fell below 2015 GDP, and a rising inflation which have risen 2.6% in 2016 vs the Fed's 2.0% target. In all likelihood, we could be seeing the early signs of stagflation.