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Goldilocks Gets Eaten

Back on September 22, we asked: Whither Goldilocks? 

Yesterday, the WSJ's Marketbeat looked at a similar question, and concluded Goldilocks Gets Eaten:

"Just eight days ago, the 10-year Treasury note's yield closed at 4.83%, and investors were thinking that the economic slowing would be brief, that the Federal Reserve would remain on hold, and that the much-heralded Goldilocks scenario might come to fruition, as inflation wouldn't get out of control.

How things change. Since that day, a barrage of data has upended those expectations. Two reports on home sales suggested conditions in real estate are continuing to worsen. Another report suggested construction spending will decline next year for the first time since 1991. We saw a worse-than-expected GDP report that may end up revised downward, and today's lackluster reports on Chicago-area manufacturing conditions and consumer confidence have market participants now thinking harder about a sharper slowing over the next couple of quarters.

Consumer confidence fell surprisingly in October, the Conference Board reported, and some economists pointed out that falling gasoline prices and strong stock-market gains should have had a more-positive impact. But David Ader, fixed-income strategist at RBS Greenwich Capital, says the housing woes are an overriding factor in consumer attitudes. "There's a psychological element to the wealth effect…most Americans have the bulk of their wealth and liquidity tied up in their homes," he says.

The yield on the 10-year Treasury was lately at 4.63%, the lowest since the beginning of October, and the federal-funds futures on the Chicago Board of Trade now put 84% odds on a rate cut by May, compared with 11% just after the Fed's Oct. 25 meeting. "It's prodded [the market] further into saying a slowdown of some magnitude is coming," says Mr. Ader. "People are thinking about a harder landing than they thought about two weeks ago."

Good stuff . . .

>

Source:
Goldilocks Gets Eaten
David A. Gaffen
WSJ MarketBeat Tuesday, October 31, 2006  11:40 am   
http://online.wsj.com/article/SB116230036095308849.html

Wednesday, November 01, 2006 | 06:00 AM | Permalink | Comments (42) | TrackBack (1)
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Comments

"The Ogre's Last Chew"

The party's near over;
-Just one last to-do.
It's time for the Ogre
-To have his last chew.

But, cash in your pocket
-And calls-- they're so light!
It's really the reason
-You'll not have a fright.

So, heed old Eclectic,
-And give him his due,
Or the Ogre's last morsel;
-Well, it just might be you.

Posted by: Eclectic | Nov 1, 2006 7:28:20 AM

The Wall Street Journal is not known for being bearish, right?

If the WSJ is now turning bearish, we're probably in for a bumpy ride.

Posted by: OkieLawyer | Nov 1, 2006 7:40:51 AM

The 'soft landing' for the US economy is becoming less and less plausible. The US economy is in for a 'hard landing' as a recession is coming. Roubini is right!

Posted by: David | Nov 1, 2006 7:45:17 AM

Can someone tell the bullish crowd on Wall street about this? Oh, lemme guess, they already know, but in their perverted minds have already put a positive 'spin' on it! Right! Things can ONLY go up! I wish this market broke in half already. We're at the top of record profits, how can it get any better?

Posted by: Ricardo | Nov 1, 2006 8:10:07 AM

ADP just announced 128K jobs; So, we have a setup for Roubini to hit one out of the park Friday.

Let me guess... Kudlow takes the 'over.'

Leisman takes the under?

Kernen?... Insana?

Our lovable in-house curmugeon takes the under I suppose.

Well, for me... that's why they call me Eclectic. But, either under or over we're still seeing a ratcheting down in wages and benefits and that will continue for some time yet.

Posted by: Eclectic | Nov 1, 2006 8:26:10 AM

But the market keeps going higher ......

Posted by: mark | Nov 1, 2006 8:57:27 AM

Bullish sentiment readings from investment newsletter writers are at a 5 yr high. Earnings for the S&P 500 are at the top of the long-term 6% growth channel that connects prior earnings peaks going back decades.

Sure, the mkt may move a few % higher in the near future, but historically we are at the riskiest point and time to be in the stock market, IMO. The problem is that the mkt may slowly inch ahead from here, but when the end comes the downside momentum becomes violent and it's psychologically difficult to get out.

Sorry to be so pessimistic.

Posted by: Steve C | Nov 1, 2006 9:07:45 AM

Given these numbers, Barry, are you still concerned about inflation being understated, or do you think inflationary trends are being suppressed by the slowdown?

Posted by: david foster | Nov 1, 2006 9:21:04 AM

Inflation was VERY understated;

It is probably still being understated, but much less so --

Once any real contraction starts, inflation will drop precipitously.

Posted by: Barry Ritholtz | Nov 1, 2006 9:38:21 AM

"But the market keeps going higher ......"

Yes...but what about the risks?
What about market's behavior during this rise?
Is it broad-based with ample participation and outstanding volume?

Hmmm! Somehow, I'm not so sure.

Posted by: Francois | Nov 1, 2006 9:43:38 AM

This "...the market keeps going higher ......" thing reminds me of a farm turkey who keeps getting fatter and happier by the day. In November. Oblivious of a certain fine old American tradition.
Small Investor Chronicles

Posted by: Alex Khenkin | Nov 1, 2006 9:50:20 AM

5 trading days til Christmas, Nov 7. will the market get everything it wants, or a lump of coal? aside from the obvious Fed manipulation of futures, further question is how easy is it to manipulate elections in this country now? answer unfortunately, pretty easy. those looking for Democratic gains, like the American public, may be disappointed. polls today probly no more predictive than Kerry's 3-pt margin of victory based on much more reliable EXIT POLLS in 04. so that's your blow-off scenario, Rove and the machines either cut the Dems gains or keep both majorities.

Posted by: scorpio | Nov 1, 2006 9:51:01 AM

The soft landing may have had a chance before the "fast money" crowd started waving the pocket watch in front of the greedy speculators with short memories. The market has been storing energy like a spring for sometime, which is great when legitimately trying to break through to new highs, but when the fundamentals(you know the very things that bulls tend to ignore) are Jello, you are balancing an elephant on a unicycle....it doesn't take much of a bump....

Posted by: KP | Nov 1, 2006 10:00:51 AM

Actually, if there is much evidence the elections are manipulated, even if it is insufficient to prove anything in a legal sense, the stock market will probably fall. The only reason we didn't get riots in 2004 is that we have such a long history of democracy working that almost nobody is willing to believe the government is actually manipulating the elections. But more people are believing it every day, and if too many strange things happen this year it could lead to serious problems. We very much need this election to not have any appearances of manipulation (regardless of whether or not it is manipulated).

I'm not sure what the market will do based on who wins if everything looks like it was done correctly. You can argue for anything to happen depending on what you believe.

Posted by: jkw | Nov 1, 2006 10:04:30 AM

The colonists were a small merry band of tea-dumpers in comparison to the demographic behemoth America has become. Rousing THIS populace takes THAT much more effort.... If all (revolutionary) politics is local then the country is probably too damn diffuse anymore.
It has been a "dream" electorate for Republican misrule.

Posted by: brion | Nov 1, 2006 10:29:13 AM

"The market keeps going higher..."
See " That's a mighty mean reversion you're packin' there Mister"
http://guambatstew.blogspot.com/2006/11/
thats-mighty-mean-reversion-youre.html

Posted by: guambat stew | Nov 1, 2006 11:34:31 AM

Who cares? The 10:30am Buy Program run by (insert your favorite here) is still workin'! Buy this thing up!

Public Service Announcement: "Mark", keeper of the faith regarding "The Sweater" will heretofore be known as "MarkM", as he is or may be on other sites as well. Not as drastic as "B'" s change. No inscrutable series of numbers following my name. Nothing clever like some of the monikers here. Just "MarkM". Too many damn "Mark's" posting here. I can't keep straight what I've said and what I hadn't (not that I could the other way either.)

Posted by: MarkM | Nov 1, 2006 11:46:10 AM

Goldilocks is strictly a state of mind. It does not have to be based on real data.

There is currently a disconnect between real data and mindset. One day the two will get together again and that could end up being an ugly conversation.

Posted by: advsys | Nov 1, 2006 11:51:07 AM

Hey,
I have a porno flick by that name. I'm getting aroused just thinking about it. lol.

Posted by: BDG123 | Nov 1, 2006 12:17:55 PM

"Earnings for the S&P 500 are at the top of the long-term 6% growth channel that connects prior earnings peaks going back decades."

You must read John Hussman. His argument in this regard is very compelling.

Posted by: winjr | Nov 1, 2006 12:32:03 PM

Mr. R,
Do you have an alternative inflation measure you follow or are more comfortable with?

Posted by: Robert Cote | Nov 1, 2006 12:34:39 PM

I second R Cote's request. If not the official inflation rate then what?

Posted by: dry fly | Nov 1, 2006 12:44:53 PM

Speaking of this comment:

Goldilocks is strictly a state of mind. It does not have to be based on real data

I'm definitely marveling at the divergence between home building shares and the Mortgage Bankers Association's weekly purchase application index. The shares have been heading steadily higher from the July "bottom," while the MBA purchase index has been making a series of lower highs (despite falling mortgage rates) and just this past week, set a marginal new low for the cycle.

Talk about denial! Either purchases are going to surge soon, and that's what these stocks are pricing in (perhaps next week or the week thereafter when the very recent bond rally shows up in mortgage rates?) OR the stocks have things very, very wrong. I'm in the second camp, but I suppose only time will tell.

http://interestrateroundup.blogspot.com/

Posted by: Mike_in_Fl | Nov 1, 2006 12:53:58 PM

Barry,

You have posted about inflation and recession. Usually these two are inversly related except in stagflation.

So what is your view of what is coming:

Recession and mild inflation with rates coming down.
No Recession and inflation with rates going up.
Recession and inflation with rates going ?????

Just curious.

Posted by: Q-Ball | Nov 1, 2006 12:57:00 PM

Sorry Barry,

I missed your comment above (I did look for it but it was too quick a scan I guess).

It seems you see Recession with decreasing inflation probably leading to an eventual lowering of rates as recession hits.

Posted by: Q-Ball | Nov 1, 2006 12:58:47 PM

December 2008

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