Contrarian Use of Magazine CoversThe August 5th, 2009 issue of Newsweek featured what the majority of “experts” are now saying - the recession is over. While this might be true, I do not believe it to be. The past year has not been a business as usual recession and for this reason, the implied recovery will likely not follow the quick recovery course that so many are suggesting.
Experts Agree, the Recession is Over
Below are some of the recent headlines:
1) The recession is over - Edward Jones, August 11, 2009
2) 90% of economists believe the downturn has ended Q2 2009 - Blue Chip Economic Indicators survey, August 10, 2009
3) Krugman (Nobel Prize winner) says world avoided second Great Depression - AP, August 10, 2009
4) Goldman Sachs' Cohen: New bull market has begun - Reuters, August 6, 2009
5) Welcome to the bottom: Housing begins slow rebound - AP, August 2, 2009
6) Learn to love the recovery - Financial Times, July 29, 2009
7) Investors get second chance at a bull market - TheStreet.com, July 27, 2009
8) Economy will be stronger than before crisis - Ben Bernanke, July 27, 2009
9) Buffett to CNBC: Invest in stocks even at Dow 9,000 - AP, July 24, 2009
10) The economy has hit bottom - Wall Street Journal, July 23, 2009
11) Dow 15,000, Here we come - Yahoo Tech Ticker, July 23, 2009
12) World has avoided economic disaster - President Obama, July 10, 2009
We are safe now! (or are we?)
I feel warm and fuzzy with the knowledge shared above. In addition, recent polls by CNBC and Bloomberg reveal that 90% of Wall Street economists believe that the recession has ended and a “consensus” sees real U.S. GDP expanding at an annual rate of at least 2% for the next four quarters.
One problem though, I think I recognize these “knowledge imposters” from before.
These are the same economists, money managers, members of the media and Federal Reserve who failed to recognize the consequences of the bubble in credit, the ramifications of a derivative market gone wild, a bubble in stock and real estate prices, and the current recession we are now in. It is this same group that is now predicting a sustainable recovery that is incapable of succumbing to a “double-dip” (W) or “flat period” (U) vs. their projected “V” picture.
White House, Congress Projects Record Deficits
WASHINGTON (AP) 8/25/09 -- Citing worse than expected economy, the White House and Congress offer bleak budget outlooks.
The U.S. government faces exploding deficits and mounting debt over the next decade, White House and congressional budget officials projected today in competing but similar economic forecasts.
Both the White House Office of Management and Budget and the nonpartisan Congressional Budget Office predicted the budget deficit this year would swell to nearly $1.6 trillion, a record, and far above the then-record 2008 budget deficit of $455 billion.
The Quotes of Wise Men
The following quotes are instructive at this time:
“The United States remains the richest and most powerful country in the world. Its military spans the globe. But from the Spanish Empire of the 16th century to the British Empire in the 20th century, great global powers have always found that their fortunes begin to turn when they get overburdened with debt and stuck in a path of slow growth. These are early warnings. Unless the United States gets its act together, and fast, the ground will continue to shift beneath its feet, slowly but surely”.
Fareed Zakaria, Newsweek, 5/30/09
“Recessions triggered by a financial crisis are different than typical business cycle recessions. Unemployment goes up higher and does not improve for a longer period, they go deeper and they last longer”.
Mort Zuckerman, CNBC, 8/20/09
“Cost cuts and fiscal stimulus both have a defined and limited life. Cost cuts (plus wage deflation) pose an enduring threat to the consumer. The credit aftershock will continue to haunt the economy. The effect of Washington and the Fed's “experiment” and its impact on investing and spending still remain uncertain. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn. Municipalities have historically provided economic stability -- no more. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom”.
Doug Kass, The Street.com, 8/10/09
"Solving economic problems, to our Fed Chairman, is as easy as throwing money out of helicopters. Ben Bernanke (like Tim Geithner and his predecessor Hank Paulson), shows no hesitation in diverting the real resources of the American public to defend and compensate the bondholders of mismanaged financial companies who made reckless loans and who should have (and equally important, could have) been expected to write down principal or swap debt for equity as an alternative to receivership. This is not decisiveness. It is timidity and poor stewardship. Worse, the underlying problems are not healed - only band-aided temporarily by a flood of public money".
John Hussman, 8/24/09
Recent “Non-Wise” Quotes of a Normally Very Wise Man!
Below are quotes from Warren Buffett’s recent opinion column in the New York Times regarding the state of the economy and what he thinks will help. His statements borderline on being quite possibly the silliest things he has ever said and would cause one to question if he “took his meds” that day. My comments are listed under each quote and underlined.
“The United States economy is out of the emergency room and appears to be on a slow path to recovery”.
· Many patients often have to go back to the emergency room, especially when the full extent of their problems are not dealt with.
“The country will need to deal with the side effects of enormous dosages of monetary medicine that continue to be administered”.
· As with the drug adds on TV, the side effects that were listed off often sound worse that the cure. Bloating, nausea, suicidal thoughts-the list goes on. The “enormous dosage” may result in enormous side effects.
“The country's net debt (which he described as the amount held publicly) is mushrooming. In this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of GDP from 41 percent”.
"Our immediate problem is to get our country back on its feet and flourishing – whatever it takes still makes sense.”
· The words “whatever it takes” are frightening. There are very different versions of what might be prudent in the “whatever it takes” debate. You hear the competing ideas on the news daily.
“But once recovery is gained, Congress must end the rise in the debt-to-GDP ratio and keep its growth in obligations in line with its growth in resources”.
· Now Warren, awe shucks, come on now! When has the U.S. government EVER truly aligned its obligations with its resources? Name a government program that has actually been 100% dropped. Also remember that “cuts in government spending” are not cuts as normal humans define it. Government cuts are “reductions in the amount of increase” they were planning on spending.
Bill Gross’s Opinion Regarding Future Economy
There is no larger, more successful manager in the bond business than Bill Gross. His batting average at how to manage bonds is legendary. That said his attempts in the past to judge the stock market and overall economic picture has left a lot to be desired. Even with that he may be correct this time in his assessment listed below that was recently shared at the annual Morningstar investment conference in Chicago. The bond king said that PIMCO’s view, called the “new normal,” is that we are in a period marked by “slow growth, much higher NAIRU,” (a jobless rate called the non-accelerating inflation rate of unemployment) of 7% to 8%, and accelerating inflation in the later stages of the next three to five years. Gross presented his “seven commandments” of what will happen next:
1) The traditional balanced portfolio (60% stocks/40% bonds) is dead
2) “Get used to your 301(k),” pointing out that laborers, not employees and consumers will benefit in the new economy
3) Invest by looking for stable income, which can come from fixed income, but also from holding stocks like Coca Cola
4) “Shake hands with the government,” i.e., get used to having the government deeply involved in the economy and in specific companies
5) “One day”—perhaps sooner than we think—the dollar will lose its status as the reserve currency
6) Invest in the BRICs,” (Brazil, Russia, India and China) excluding Russia
7) Get used to investment bankers and investment management companies making less money
Pressure From China Not a Good Omen
The Chinese government has been putting pressure on the U.S. government to get our run away spending and trillion dollar deficits under control. This is because the Chinese own a huge amount of our country’s debt (this alone should scare the hell out of us). The U.S. dollar is on the probable verge of losing its status as the favored world reserve currency. This could result in a further decline in the U.S. dollar. Unfortunately, the likelihood is great that as in the past, our elected and appointed officials will address the problem in the “emergency room” vs. taking the “preventive steps” called for today to avoid/lessen this looming problem.
Unemployment, the Real Story
The news media in their infinite ability at providing minimal depth to what they report have been drinking the White House Kool-Aid that unemployment is getting ready to reverse its course. What they fail to report is that come December of this year 13 million will lose their unemployment benefits.
Unemployment for teenagers is at record highs. The reason for this is displaced adult workers are competing for the same jobs, squeezing out the teenagers.
The Earnings Shell Game
The news media has been reporting that many companies are “beating” their earnings estimates. Under the hood of this, the “corporation engine” has major problems. These “good” reported results are based upon:
1. Providing estimates that were to low to begin with
2. A huge amount of layoffs and cost cutting
The U.S. consumer is 70% of our Gross National Product (GDP). People without jobs don’t spend money; they run up their debts.
While reported “earnings” provide a short-term view of a company’s net profits, this does not reflect the top line gross sales/revenues. You can only lay off so many employees and reduce and delay expenses for so long. What will be needed as we enter 2010 is an increase in consumer spending that then result in increased sales, gross revenue and resulting in net income/earnings. No revenue growth equals no increase in hiring and true improvement in unemployment. I expect the upcoming Christmas holiday sales to be disappointing and a confirmation that a “sustained” economic recovery for the U.S. will be years (not months) in coming.
Bad Signs from Churches and Charities
Churches have historically been somewhat immune from the business cycle as members maintain contributions while cutting back other budgetary items. This is not happening in 2009. Contributions are down and churches are being forced to lay off staff and cut back.
Charities are in for one of the worst year over year contribution declines in memory.
Employee Wages
Many employers this year have halted raises and suspended profit sharing contributions. It is likely that employees will not see meaningful increases in compensation for years. Less income, combined with tighter lending standards and credit card payment increases will curtail a rebound at the retail level.
The HELOC Well is Now Dry
Much of the bubble that burst was due to consumers being offered Home Equity Lines of Credit (HELOC) for their homes. Home prices kept going up and homeowners keep taking on more debt and buying more things they could not afford. Then the game of musical chairs stopped, with the debt burdened consumer was left standing with their home equity having swung from positive to very negative. With no HELOC to support a wave of consumer spending, retail sales will linger.
American Consumer’s Balance Sheet Destruction
The mass destruction of the “balance sheet” for U.S. citizens has not been fully appreciated when “pundits” forecast that the recession is over. The typical American consumer now has less net income, higher debt service, reduced investments and a lower 401k to retire on. In addition, the debt/asset ratio has greatly worsened, with the real estate and investment decline not benefiting from any corresponding reduction in household debt. This has likely resulted in a secular change in the consumption patterns in the U.S. for years to come, not months. The economic bubble built on the “artificial values” it created for the net worth’s of Americans was built over several decades. Problems that take years to manifest do not then get corrected overnight. As a matter of fact, they often take longer to correct than they took to manifest, due to the slow process that politicians take to address them.
Commercial Real Estate
The national retail chains now have excess capacity. As a result of the impaired spending patterns of the U.S. consumer, they will be forced to follow up layoffs with reducing the number of locations they operate and further shift sales to the Internet. There are two bad implications for this:
1. More unemployed workers
2. Reduced rents for the REITs that typically own and lease to these retail giants
Government Stimulus
A recovery based upon government stimulus and keeping interest rates low is not only not sustainable, it is likely building another economic crisis by running up huge trillion dollar deficits, printing money and laying the potential seeds of future high inflation.
Rise of Emerging Markets Triggers Alarm
French bank Societe Generale’s emerging market valuation alarm has sounded for the second time in 15 years. The price to book value of emerging markets stocks is now higher than stocks in the developed world. The only other time this valuation measure was at a premium was mid 2006 to mid 2007, with emerging markets dropping 67% over the subsequent 12 months.
2007-208 Bear Decline and Current Rally in Stock Prices – What Next?
What may be allowing the S&P 500 to continue its advance towards 1100 is what happens when investors are feeling “left out” of a rally. Classically, many investors had succumbed to the emotions of fear and sold out at or near the March 2009 bottom. We are in a phase now after the 40-50% advance where there will be a few days of negative action, followed by a spike that recovers the whole loss, as speculators and short sellers fear missing out again. The same investors who bailed out are now succumbing to the “recession is over” mantra in the media and getting back in.
The blue line in the chart above juxtaposes the 3/24/2000 movement of the S&P 500 index to today, including the 2000-2002 tech stock bubble (-48% decline) followed by the 2003-2007 secular bull rebound, followed by the 2007-2008 financial bubble (-48%) followed by the current rebound from 3/09 – 8-09 of +44%. The blue S&P 500 line is overlaid with two other severe bear markets, the 1929 Great Depression and the Japan Nikkei stock market collapse in 1989. Take note of how the blue line has tracked closely in relations to the gray and red lines. The rally after the 2000-2002 tech bubble looks a lot like the rally we have seen since last March.
Note the potential picture for the blue S&P 500 line if it follows the poor subsequent performance that plagued the return after the 1929 crash (gray line). The red Japan line has NEVER regained a bull market trend a full 2o years after its collapse in 1989.
While I “hope” that this does not foretell the future performance of the U.S. stock market for the next decade, hope is not a reasonable foundation from which to manage one’s precious investment resources. Investors and their professional advisors must adopt a new styled investment philosophy. They need a plan that can potentially succeed if the headwinds of poor economic growth and recovery delay a turnaround for years to come.
The U.S. Government Runs a Ponzi Scheme(s)
It is a known fact, undisputed by ANY member of our government that the Social Security system is operated as a “Ponzi Scheme”. They may be unwilling to call it that, but indeed, that is what it is. A classic Ponzi scheme is characterized by not really having the money you owe to your members and by funding the required payments to current recipients with the contributions from the newer members, with nothing going to actually building principal in the account.
While we have run budget deficits before, the current state of affairs is unrivaled in U.S. history. Our mountains of growing debts and “obligations” are being funded by selling more U.S. debt to others (China) to keep the scheme going. This allows the U.S. government to make benefit payments and interest payments on debts that have an increasing risk of never being able to be paid off. In the ‘80s we did grow our way out of the mess. Our current situation is not the ‘80s. You cannot fix problems created by reckless excessive borrowing and spending with more reckless borrowing and spending.
The only long-term path for recovery for investors and our government is to pay down (not increase) debt and cut (vs. increase spending).
The best case scenario would be that our politicians work a miracle and find a way to stimulate the economy, dramatically reduce our national debt and side step huge inflation as a result.
A more likely scenario is several/multiple years of muddling along.
There is also a chance that the U.S. and/or other economies could suffer another significant collapse. Under this scenario, elected officials would be forced via crisis to take the steps necessary to get the ship headed in the right direction, with only then the potential for the beginning of an ‘80’s style bull market.
Investing lessons
So What Is An Investor To Do?
Always maintain a balanced approach to managing your wealth.
Retain a financial advisor that utilizes a value driven contrarian approach to investing.
Own individual stocks that produce products that will always be in demand. These companies should have a history of increasing their dividends over time.
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