Wednesday, June 24, 2009

Economic Ping Pong

It is a well known psychological fact that we tend to read what supports our own belief and dismiss or ignore that which is counter to what we believe. I am guilty of it. I try to be balanced and at least read (though not generally link or talk about) pieces contrary to my slant, so tonight I will present a bit of both.

Let me begin by something that fits my own "present" slant. I say present because I like to think of myself as a realist first, optimist second and pessimist third, though I concede events of the last two years may have distorted my optics just a bit on the economic front. I started my blog in October of 2008 after months of emailing friends doom-and-gloom. One friend who called me Chicken Little initially finally caved (after losing some money) and suggested I start a blog. I thank him as this has been a fun adventure. In any event, I have been pretty consistently negative on what is happening since then. Whether I continue to be right is yet to be seen. I just do not see the stats that support a recovery, but then again, I do not see all the stats. Meanwhile, let me bounce you back and forth a bit from the good to the bad (with perhaps a bit of mixed messages in between). Keep your eye on the ball and see who wins.

Ping - Some More Bad Data

Credit card write-offs topped 10% and almost reached 11% in May. Moody's thinks they will top off next year around 12%, though since they went up over .6% between April and May alone, I am not sure the math works for me. Either way, a sign of our continuing woes on the individual level, including increasing unemployment.

Pong - Now for Some Good News!

Durable goods orders are up, unexpectedly. That I would agree is a good sign overall. Companies do not buy goods meant to last several years if they do not expect to be busy using them for several years. These tend to be pricey items, so this is a good indicator. It tends to run counter to what I have read about a lot of insiders selling into the recent rally, significantly, but at least those making durable goods order decisions see the worst as behind us. Perhaps they are seeing something we are not (or at least I am not).

Mixed (ball over the net) - Home Sales

Existing home sales were relatively positive this month - though one could argue that was seasonal (ask Barry Ritholtz). Still, any way you look at it new home sales (versus existing) are not doing so well. This does not bode well for builders, though homeowners trying to sell their homes may be a bit encouraged. In some markets homes are selling for less than builders can build them for and overall REO (which stands for Real Estate Owned, i.e. bank owned properties through foreclosures) sales are a significant portion of the sales, so I suspect this explains some of the growing lack of correlation between new and existing home sales. Make what you want of it but at very best it is mixed.

Ping - King of England (Bank of, that is) Not Seeing Green Shoots

Mervyn King, Governor of the Bank of England, is more uncertain than ever about the UK recovery. Now I read yesterday that some view the UK recovery as ahead of the US (which I considered odd as we solidly were ahead of them going into it and their real estate bubble was considered worse in some respects, but what do I know), but here the Governor of BofE is not exactly a cheerleader for better times to come. He just does not see the "evidence" to change his view of things. I agree totally. Show me the evidence. Show me the data!! Don't show me indicators.

Pong - FOMC Statement - Things Seem to be Stabilizing

The market apparently did not react well to the report, but the Fed report overall was not terrible news. Overall they saw things stabilizing. Yet some saw that as bad news as it caused the Fed to do not much of anything when many were hoping it would do more. Okay, if you want the Fed to take further action you must not see the economy as on the road to recovery. Still, given the environment I consider this a Pong as at least the Fed sees things as improving. I am not agreeing with the Fed (and rarely have for years), just saying their report was relatively upbeat or at least mixed.

The Competition is Close

But I have to confess I am running out of pongs (positives) and finding more pings (negatives), i.e. more support for my present slant. So what am I seeing? First - like him or not, he is good - and Warren Buffet is seeing no green shoots just yet. Now this is an individual that, as I recall, was talking a bit more optimistically a few months ago and most certainly started putting his sizeable cash holdings to work many months ago with Goldman Saks and other investments. Now these were more along the line of high rate loans with options for converting to equity holdings at good prices, so they were still smart moves (much smarter than our government did) but his mood seems to me a bit more reserved now than just a few short months ago. I disagreed with him when he seemed a bit more upbeat so am glad to see him returning to the fold. He certainly sees a load more data than me so he had me worried a bit when he got upbeat.

Ping Again - Investment Advisers Know How to Save for Retirement - Not?

A couple or weeks ago I noted that I went to a presentation by Merrill Lynch on how to save for retirement. I noted the irony of how a company that - allegedly - had to go through a forced sale to Bank of America to survive, was telling me what to do with my money. Now they, like every other retirement investment advisor I have been to, were referring me to an outfit that had a "program" or "model"that did the investing for me and that automatically adjusted investments to be appropriate for my age. They automatically created the ideal risk portfolio. I still had to ask myself (not the presenter as she was clearly clueless) how accurate are these programs or models? As the author of Black Swan, Nassim Taleb, will tell you, none of these "models" or "programs" predicted anything like the past two years as at all being possible. In a word, these models the financial advisors live by are "flawed."

The biggest problem with these models is they are totally tied to historic norms. They expect history to predict the future and ignore what is happening in the present. The also ignore fat tails, i.e. the very, very low probabilities that might happen (i.e. the past two years). Well, the present is not at all like the distant past and, in my opinion, the future is not going to resemble it either. So these models have a flawed premise. I am sure they are now being tweaked, but I am also sure they have no more crystal ball on the next 10-20 years in today's environment than anyone else.

Nassim Taleb made a fortune - enough not to worry about working again - on being prepared for an event the models would never predict back in the 1990s. Most investors lost significantly on the same event. Need I say more.

As an aside, I recommend Nassim's book Black Swan. I read it last year and it is worth the read. Another good read is Michael Panzner's Financial Armageddon. When I read it most of it was still yet to happen and it was like looking at a crystal ball. Today it could largely serve as a history book on what just happened. In other words, Panzner saw this mess coming with amazing clarity. He was one of my early mentors and my hat is off to him. I am proud to be a contributor to Seeking Alpha with him. Now, back to my point.

There are those that believe steadfastly that the market - equities - will in time always outperform other investments. I suppose you need to define "in time." According to this link, despite the time frame you look at, you can do better in fixed rate, short term CDs, than you would have done in the S&P over various time frames. That has to shake your faith in the market. It at least has to wake you up to the fact that you need to read up on what is happening and actively watch where your money is invested. It saved my arse in 2008. And if you are reading this, you probably understand. If you look at the Nikkei over the past 15 years or even the Nasdaq over the last decade you will get the picture. Gains in equities even over a fairly long term are not guaranteed, so keep yourself an informed investor. Do your best to understand what is happening. That is my goal.

Disclosures: None.

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