My husband is a huge race (NASCAR) fan. He has traveled to see quite a few races. He and I went to Las Vegas with another couple to see that race. It was my first and last race. This weekend (as it is two weekends each year) the race is in Richmond, VA. He, along with two of his friends, have tickets in the newer section. So my son and husband went to the race. My daughter was out with BF. I was at home enjoying some wine and the company of my puppitos. Oh, and the TV which brings the title of this post into play.
HBO was showing Curb Your Enthusiasm in back to back episodes. I've not seen the show in a while. If you are not familiar with the show, the main character is Larry David (of Seinfeld producer/writer fame and played by himself). His character is basically an asshole--but I think a well meaning one, which I don't think provides absolution! If you remember any of the Seinfeld episodes where you cringed wondering how any sane person could say or do the things that those characters repeatedly did, then you get the gist of Curb You Enthusiasm.
Curb You Enthusiasm is precisely what happened in the market yesterday. You've heard the same Wall Street "experts" (I'm beginning to think that with the exception of a small handful they are idiot savants) as I telling us that the "economy is strong", "liquidity is high", and "the global growth story is intact"--and all of these things would be intact for as far as the eye can see.
Economy is strong: Yes, it has been. But the housing weakness could NEVER be contained for it is too much a part of our base economy. Lesson: Be patient (I know that I wasn't). Cause and effect is a universal principle, but the timing is what always gets you! You can have your thesis--just don't act on it so soon (you'll lose money!) and wait for the numbers to finally percolate through until you do act. You've seen me say in this space of my continual surprise how long it seemingly takes for the effects of whatever observation to finally take hold both in the economy as well as in the market psyche.
Liquidity is high: Yes, it has been stratospherically high. Again, you've seen all of the admonitions that I have in other blogs about the asset bubble that has been created. Lesson: Too much liquidity creates asset bubbles, and bubbles are not immune to the prick of reality. Reality is a prick, and the asset bubble always ends badly.
A corollary that you will hear about the current liquidity crisis is that the Central Banks around the world will turn on the liquidity hose and pump things up again. Well, they have and they will. But I think that this pumping will only cure the prior ill. To have continued asset price appreciation, they would have to kick it up a few notches more--and that would have disastrous results. The real remedy is for us to take our medicine. There's nothing wrong with recessions. They are endemic to the natural economic cycle. Without them, you end up with bad endings.
Global Economic Growth is High: Yes, but one has to make the nuanced distinction between emerging and developed nations. All of the developed nations are experiencing a slowdown. Japan has already reported weak numbers, and Germany recently reported a slowing of manufacturing. We know that the US is slowing. Europe, too, is downshifting. (The IMF warned yesterday of a global slowdown). These developed countries still account for quite a bit of consumption--so it is foolhardy to think that emerging markets can fill in the gap in the short term. Long term the story is intact. However, rather than spending their money on capital goods, I think food inflation, which emerging countries are struggling to deal with (also warned of yesterday), may end up diverting a few dollars from baubles to something more tangible to sating one's hunger.
So there's an interesting irony for you. All of our capitalistic economies looking for fresh producers (to make their goods cheaply) and fresh consumers (to sell their goods to) will likely create a class of people that will gobble up all of the world's food making food too expensive for all the world's people. The cardboard sign held up by the real or pseudo homeless of "Will work for food" may as well be plastered on a tee shirt for all of us to wear. I'm starting to open my eyes about sustainability issues, but what I've just written is as fully a formed thought as I have on the matter even that even marginally so.
All in all, the phrase of the day is "Curb Your Enthusiasm" for the market. Naturally the media will be consumed with the questions of "Will the Fed Cut and by how much?" from now until September 18 (though there will be endless speculation as to whether they will do it sooner. I don't share the enthusiasm that a Fed rate cut is good for stocks....it is if it engenders growth. Remember, companies are flush with cash---and the best deployment opportunity that many of them could find was to buy back stock (and if they had only waited a bit!). We've not had a consumer led recession in a while, so we may have to settle in for this one. I surely do not know; but I'm feeling a bit more confident in my recession call for next year.
I still have a goodly amount of cash. I did start a small position in FIG (Fortress Investment). I reinitiated a position in HERO, which seems to be holding a firm bottom (but always subject to change). I bought some MIND ahead of earnings, which seemed smart for all of two days. It is down about 11% from my purchase. But I'll hold it--they should benefit from decreasing rates. And, I have added to my UNG and SEED positions. EGO and WGDFF have revitalized. My E-trade portfolio (which I'll post later) has rebounded nicely largely due to gold prices resurging. I have my gold stocks in that portfolio. I purchased some DUG. If the economy is slowing down, oil prices (which are at a high) are going to come down--though the cross current with the USD will have to be navigated (oil price is denominated in USD--if the dollar falls oil and gold prices rise).
I hope that your portfolio is weathering the storm. My greatest hope is that in my worst moments I'm still a better person than Larry David's character in CYE.
HBO was showing Curb Your Enthusiasm in back to back episodes. I've not seen the show in a while. If you are not familiar with the show, the main character is Larry David (of Seinfeld producer/writer fame and played by himself). His character is basically an asshole--but I think a well meaning one, which I don't think provides absolution! If you remember any of the Seinfeld episodes where you cringed wondering how any sane person could say or do the things that those characters repeatedly did, then you get the gist of Curb You Enthusiasm.
Curb You Enthusiasm is precisely what happened in the market yesterday. You've heard the same Wall Street "experts" (I'm beginning to think that with the exception of a small handful they are idiot savants) as I telling us that the "economy is strong", "liquidity is high", and "the global growth story is intact"--and all of these things would be intact for as far as the eye can see.
Economy is strong: Yes, it has been. But the housing weakness could NEVER be contained for it is too much a part of our base economy. Lesson: Be patient (I know that I wasn't). Cause and effect is a universal principle, but the timing is what always gets you! You can have your thesis--just don't act on it so soon (you'll lose money!) and wait for the numbers to finally percolate through until you do act. You've seen me say in this space of my continual surprise how long it seemingly takes for the effects of whatever observation to finally take hold both in the economy as well as in the market psyche.
Liquidity is high: Yes, it has been stratospherically high. Again, you've seen all of the admonitions that I have in other blogs about the asset bubble that has been created. Lesson: Too much liquidity creates asset bubbles, and bubbles are not immune to the prick of reality. Reality is a prick, and the asset bubble always ends badly.
A corollary that you will hear about the current liquidity crisis is that the Central Banks around the world will turn on the liquidity hose and pump things up again. Well, they have and they will. But I think that this pumping will only cure the prior ill. To have continued asset price appreciation, they would have to kick it up a few notches more--and that would have disastrous results. The real remedy is for us to take our medicine. There's nothing wrong with recessions. They are endemic to the natural economic cycle. Without them, you end up with bad endings.
Global Economic Growth is High: Yes, but one has to make the nuanced distinction between emerging and developed nations. All of the developed nations are experiencing a slowdown. Japan has already reported weak numbers, and Germany recently reported a slowing of manufacturing. We know that the US is slowing. Europe, too, is downshifting. (The IMF warned yesterday of a global slowdown). These developed countries still account for quite a bit of consumption--so it is foolhardy to think that emerging markets can fill in the gap in the short term. Long term the story is intact. However, rather than spending their money on capital goods, I think food inflation, which emerging countries are struggling to deal with (also warned of yesterday), may end up diverting a few dollars from baubles to something more tangible to sating one's hunger.
So there's an interesting irony for you. All of our capitalistic economies looking for fresh producers (to make their goods cheaply) and fresh consumers (to sell their goods to) will likely create a class of people that will gobble up all of the world's food making food too expensive for all the world's people. The cardboard sign held up by the real or pseudo homeless of "Will work for food" may as well be plastered on a tee shirt for all of us to wear. I'm starting to open my eyes about sustainability issues, but what I've just written is as fully a formed thought as I have on the matter even that even marginally so.
All in all, the phrase of the day is "Curb Your Enthusiasm" for the market. Naturally the media will be consumed with the questions of "Will the Fed Cut and by how much?" from now until September 18 (though there will be endless speculation as to whether they will do it sooner. I don't share the enthusiasm that a Fed rate cut is good for stocks....it is if it engenders growth. Remember, companies are flush with cash---and the best deployment opportunity that many of them could find was to buy back stock (and if they had only waited a bit!). We've not had a consumer led recession in a while, so we may have to settle in for this one. I surely do not know; but I'm feeling a bit more confident in my recession call for next year.
I still have a goodly amount of cash. I did start a small position in FIG (Fortress Investment). I reinitiated a position in HERO, which seems to be holding a firm bottom (but always subject to change). I bought some MIND ahead of earnings, which seemed smart for all of two days. It is down about 11% from my purchase. But I'll hold it--they should benefit from decreasing rates. And, I have added to my UNG and SEED positions. EGO and WGDFF have revitalized. My E-trade portfolio (which I'll post later) has rebounded nicely largely due to gold prices resurging. I have my gold stocks in that portfolio. I purchased some DUG. If the economy is slowing down, oil prices (which are at a high) are going to come down--though the cross current with the USD will have to be navigated (oil price is denominated in USD--if the dollar falls oil and gold prices rise).
I hope that your portfolio is weathering the storm. My greatest hope is that in my worst moments I'm still a better person than Larry David's character in CYE.
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8 comments:
I think the Fed has no choice but to act. Whether the numbers are revised next month or not these were bad numbers and enough to worry anyone. I have expected the Fed to act for some time now, although I am not sure how much it will help initially. Good Post.
Still too many positives on the economic map to see a recession on the horizon. I agree with banker that a rate cut would be a positive reaction to the jobs number. GDP, consumption, income, corporate profits, are too strong to make the recession call at this time in my view. Maybe in a couple months we'll know better. If this turns out to be a blip, the market ought to launch vertically around early to mid October.
The data on the BLS website doesn't readily suggest that this jobs number is as bad as the talking heads make it out to be, but the overall tone of the report is certainly dim.
"There's nothing wrong with recessions. They are endemic to the natural economic cycle. Without them, you end up with bad endings."
If I understand my freshmen level economics class, a recession results in millions of people out of work, homes lost, families relocating to other areas of the country/world in search of a survivable lifestyle, untold heartache, and so forth. A recession IS the bad ending of an economic cycle. Without recessions you have steady prosperity and healthy economic growth.
Econ--in order to achieve "steady prosperity and healthy economic growth", you need to eliminate greed-induced excesses that create UN-healthy growth, causing recessions. It's part of the self-correcting mechanism. As an analogy, I could do without stock market corrections, but as long as the same human emotions are involved (where things get out of hand), it ain't gonna happen.
P.K.
P.K.
Excesses are not caused by greed, rather, they are the result of imbalances in monetary or fiscal policy. Hedge funds, for example, then take greedy advantage of the imbalances with highly margined positions.
There have been about a dozen imbalances between 1980 and 2007, three of which resulted in recessions.
We all hope that central bankers and others entrusted with making monetary decisions can avoid recessions. Call them "soft landings", "growth recessions", "slowdowns", or whatever you want, but these types of unwindings DO NOT have bad endings, which is the goal.
Econ402
Guys your conversation is quite contemporary. Rick Santelli (whom I adore on CNBC) argued that recessions were healthy and necessary and Steve Liesman (who I also have much respect for--he tempers much of the unbridled exuberance demonstrated on that channel)who argued in that they were not healthy.
If on has "above trend" growth and "below trend growth" (it's average of these two over time that defines "trend"), I would argue that going from above to below requires tightening up the belt (layoffs, etc). How much you have to tighten depends on how much above trend you were!
I would surmise that since so much of our recent above trend growth was in housing and financial services, then this is where one will see most of the pain. The $64K question, then, is how much that will spill over and affect other industries. The linchpin in all of this is employment. I've yet to see earnings growth that isn't but a pittance after inflation--and that isn't even the measured inflation.
Leisa,
Tell me if I am wrong, but the following table is summarized from the S&P website and lists annualized earnings growth for the past six quarters:
3/31/06 15.28%
6/30/06 13.03%
9/30/06 22.24%
12/31/06 8.92%
3/31/07 7.90%
6/30/07 10.75%
I am wondering where you got your data showing low earnings growth.
Can you also explain what is inflation vs. measured inflation?
Anon 9:50 p.m. Thanks for your table. My comment was related to employment and earnings growth related to workers, not earnings of companies. I should have stated income growth, and I regret causing the confusion.
Regarding inflation--core inflation, (ex-food, ex-energy)as it relates to income fails to capture much of the stuff that comes straight out of our wallets. I'm amazed and the increases in food. Milk, bacon, bread, meat--double digit %'s higher than a year ago. Milk, for example, is 50% higher. That's significant. Bacon is about 25% higher (and these are warehouse club prices--I'll presume that the % change full retail is the same).
The table will be handy as the balance of the year unfolds and we can see the trend.
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