Time to Hunker Down?!

I consider myself an optimistic realist. The glass is always half full but if it is draining out of a hole in the bottom then it is damn well time to do something. So I guess I am a pragmatic optimist. If you read my blog you probably consider me a doom-and-gloomer, a chicken-little. And you would probably be right. That characterization, however, is not about outlook on life, in my opinion, it is about reality. And reality right now, by more and more folks input, seems to be in keeping with where I see it.

I posted on the new reality well over a year ago. The folks at PIMCO are now calling it the new Normal. Whatever you call it, it is the realization of a few facts of life that the government officials are now having to face as they are not going away with the stimulus for financial institutions. I will miss some, but here are the key points to keep in mind:

1. Let's start with the savings rate in the U.S. It has recovered nicely from negative rates a few years ago but still needs to get up several percentage points to resemble historic norms. Moreover, while private debt is slowly being paid off, it still has a long way to go to get back to historic norms in relation to national GDP. While a fair amount of progress has been made in this category the past couple of years, it can probably be mostly attributed to government stimulus, which is fading fast. I would not look for personal debt levels in the U.S. to get back to norms for several years to come, and some of this is due to my next point.
2. Unemployment is persistent and stats out today on it are not promising. I am not focused on week-to-week or even month-to-month stats but overall unemployment has been rather stagnant all year around the same levels. I do not see this changing in either direction significantly though there are folks forecasting it to get better and those, including Geitner, who expect it to get worse in the short term. Obviously, unemployment directly affects point 1 above.
3. The GDP growth in the first quarter fell drastically in the second and there is a good recognition that a lot of the GDP was due to inventory build-up, which is largely done at this point.

There are a lot more than these three points - like commercial real estate at historic lows, carry trade currency issues that are really disturbing:

http://www.nakedcapitalism.com/2010/08/summer-rerun-carry-trade-threatens-a-deflationary-global-collapsse.html

And foreclosure activity mounting in a serious way. Invest in this market at your own risk:

http://www.calculatedriskblog.com/2010/08/fannie-mae-reo-inventory-doubles.html

Disclosures: None.

Listen . . .

Do you hear that? I hear a few different things. First, I hear a rushing sound, like money rushing into the markets. It is a tidal wave and it has been waiting on the side-lines, just waiting, for the moment to rush in. And now the wave seems to be coming ashore big time. Markets were aflush with a rush of money today. A bit of good news on EU banks and the flood gates were opened to the money rushing into the markets. Now, I must admit, there is not a lot of difference in the sound between the money rushing in and it flushing out. One seems to follow the other. We will see.

The other thing I hear is silence. Silence in terms of anything positive happening in housing, foreclosures, commercial real estate, unemployment, inventories, exports, GDP growth, etc., etc. For this stage in a recovery the numbers on all these are still sucking wind and some are clearly signalling a double-dip. This is certainly not a consumer led recovery as they are still lacking confidence, lacking jobs and buried in debt. It is not a housing led recovery as many respected - and generally correct folks - are expecting prices to continue dropping this year with sales to be very poor. So what will lead this economy out of recession? China- well it did for a while and now is having its own problems with its economic indicators the worst in 17 months. EU ain't going there. Thus, I hear only silence in terms of positive news that may lead us out of this recession. If you hear something different, I am all ears.

Don't believe me as I am an attorney and we always lie, or at least most folks believe we do, here are some links supporting the above:

Residential real estate still sucking wind: http://www.calculatedriskblog.com/2010/08/private-construction-spending-declines.html

http://www.nakedcapitalism.com/2010/08/new-push-to-prop-up-housing-market-via-mass-refis.html

Commercial real estate ugly: http://www.nakedcapitalism.com/2010/08/getting-ugly-on-the-commercial-real-estate-front.html

Disclosures: None.

Stimulus Anyone?

The pressures are certainly mounting for more stimulus well beyond the just passed unemployment benefits extension. And here is where the immovable object runs up against the irresistible force; Obama and crowd certainly will be pushing for more stimulus, especially with a mid-term election in the offing and Republicans can be well expected to push for more austerity. Their line will be that government debt is too massive and we need to pull back spending. There are very plausible arguments for both sides of the spectrum and, personally, I am not convinced either is right or wrong.

Certainly, if you believe me or a growing majority of folks that we are teetering on the edge of a double-dip recession, then there is certainly a strong Keynesian push to print dollars and avoid this situation. Nonetheless, there is a plausible argument that doing so simply builds government debt to increasingly dangerous levels and only serve to kick the can down the road. With GDP adjustments announced this week it is pretty apparent that the trillions in stimulus to date has done nothing really to stimulate the economy and the supposed growth this year has all been stimulus dollars, so the latter argument - on the stimulus being a waste of time - built a bit of street cred this week.

This all goes back to what PIMCO calls the new normal and what I have for nearly two years been calling the new reality. It actually is not new at all. It has been around all the time. We have, however, as an economy been ignoring it and trying to avoid it. But it is there and not going away. It is simply an economy where people live within their means. Now, unfortunately, due to a decade or so of folks living well beyond their means, living within means no longer makes the cut. Now, due to excessive debt, homes under water, unemployment and the like, we are compelled to live below our means so we can save and pay off debt. And it appears - despite government pushes to the contrary, that this is happening - finally!

Obviously, this on the ground austerity is not good for the markets, company profits or the government as it will surely mean a new recession with a very slow long climb out. In other words, if this happens, we may actually be on the way to a sustainable recovery. Go figure.

Disclosures: None.

Brief Post

I was not planning on posting tonight. I am still recovering from vacation, had meetings all day and have not had time to do the level of reading I like to do before posting. Nonetheless, I saw this piece of data well worth passing on. This article notes that a projected 20% of households in this past recession lost 25% or more of their income. If this holds it is significant.


http://www.nytimes.com/2010/07/27/opinion/27herbert.html?_r=1

Not a promising stat.

Disclosures: None.

I Can Relax Now

I was a bit worried. A couple of months ago I predicted the second dip in this recession would come this fall. Then June happened. Markets were down substantially, worries arose about sovereigns in Europe, housing was facing head winds and so forth and so on. I feared that I predicted the second leg down as too late in the year. Then came July.

July has reinvigorated the markets. Don't ask me why but they are invigorated. Actually, go ahead and ask me why. It is relatively simple. There is a massive amount of money on the sidelines waiting to come into the markets, especially in institutions, like pension funds, mutual funds and the like. They need very little excuse to dive into the pool and they have raised their equity allocations several percent over the past couple of months, which is many billions of dollars flooding into equities. And so the July spike was, in retrospect, not that surprising. So we look to the fall . . .

I still stand by my dire fall prediction. Most stimulus is ending or has already ended here and in other countries, the political will to incur the cost of more stimulus is gone (here and in other countries), housing is still problematic, manufacturing is still problematic - and so forth and so on. I am really not seeing any significant bright spots in the data. Look at this link from Calculated Risk in case you disagree, it is not pretty:

http://www.calculatedriskblog.com/2010/07/2nd-half-slowdown-update.html

I suspect now that the S&P has crossed its 200 day moving average the spark is still there to carry us through August. It is traditionally a low volume month so I do not expect anything serious to happen, but watch out come September and/or October. I have been wrong many times but this is a prediction I feel a bit more confident about and I cannot fully explain why. Fundamentals have sucked wind for a long time so pointing to them does not explain it all. It is mostly the lost steam of government stimulus in conjunction with people coming into the new (old) reality, also referred to as back to normal by some commentators.

The point being quite simply that for a good decade or two we have lived rather substantially beyond our means, especially here in the U.S., but also in the UK and EU and other countries. We have been a consumpti0n machine, be it real estate, electronics, clothes or whatever, we have consumed it like there is no tomorrow. We have not said no to ourselves or our kids. Commercial retail space has exploded to where the U.S. has roughly 50% more than any other country. Real estate prices went through the roof due to speculation and anyone who could fog a mirror being able to finance a purchase. There was no end to our consumption orgy - that is until the recession of 2008.

Now lending standards are overly conservative (both for individuals and companies) , 95% of all mortgages end up with a GSE, consumers are starting to save despite a dismal job market, and the only good news for the economy this past year has come from government stimulus, which is ending. Let me add that foreclosures are on the rise and ARMs are resetting at an alarming pace this fall and next year. With over a hundred banks put down by the FDIC this year, it is clear the mortgage stats are not that great. In short, I am not popping any corks just yet.

I personally think this is leading to a new lower level of economic activity. A sustainable level of economic activity to which the markets have still not fully adjusted. And that is what I think will happen this fall. As government stimulus fades away and the fog clears, people will see where we are and what lies ahead more clearly. That, to me, is a good thing. Time to get real folks and the sooner the better. It will be painful but I am not sure there is any other better alternative.

Disclosures: None

Hold the Phone - WE BEAT EXPECTATIONS!!

The S&P "eclipsed" its 200 day moving average with today's advance. I quote "eclipsed" as that is the word ETrade used this afternoon after the market closed. And the market went up for good reason folks. As Bloomberg reports, the just reported new home sales topped the median economist forecast:

http://noir.bloomberg.com/apps/news?pid=20601109&sid=a2Z1DJWhAV1s&pos=14

Now I have admittedly not read all the details from Bloomberg on what the medium forecast was or how far we beat it but all that matters is that we beat it. UPS and AT&T also just happened to "forecast" increased profits. I am not sure what they know that the rest of us don't but they see rosier times ahead and, hey, the new housing sales beat expectations, so let's party!! (You see what's coming, don't you.)

The better than forecast new home sales for June, while apparently beating the median forecast, is notable for another reason; it was the lowest June new home sales figure ever recorded.

http://www.calculatedriskblog.com/2010/07/new-home-sales-worst-june-on-record.html

So, apparently, economists are getting more pessimistic - much more pessimistic. Indeed, individuals are also not too high on today's market, but as noted in the article first posted above, institutional investors are all giddy with the market. They have significantly increased their equity allocation, which one might suspect is spurring the recent market gains. Thus, I leave you with this, the market went up nicely today and according to Bloomberg it was due to a record low June new home sales number (with a painfully significant downward revision to the May numbers) and some companies providing optimistic profit forecasts. Warm and fuzzy, ain't it.

P.S. I just checked and Bloomberg is now attributing the better than expected new home sales numbers in the U.S. for Asian markets rising. Let me repeat, the June new home sales number was the lowest June new home sales number on record, which follows a record low May number after it was significantly revised lower. Now the linked article below suggests that it was the percentage increase from May that was unexpected, but that is largely due to the significant revision lower in May numbers that just took place. I feel like a robot in a B movie saying "This does not compute . . . this does not compute."

http://noir.bloomberg.com/apps/news?pid=20601087&sid=axeDbxWBhbkA&pos=2

And by the way, it will take a few months before price indices show it, but apparently housing prices have gone down a good bit after the expiration of the tax credit. Apparently people are unwilling to pay any more and are expecting the sellers to provide the $8000 credit now.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=axeDbxWBhbkA&pos=2

Yep, time to pop the cork.

Disclosures: None.

I'm Back

I am back from vacation and do not have a lot to say tonight. I did, however, just read a piece by a S&P 500 optimist complaining about all of us doom and gloomers.

http://seekingalpha.com/article/216369-s-p-500-the-optimist-s-argument-part-i-of-ii?source=dashboard_macro-view

I view myself as an optimist. Compared to a lot of people I know I am quite up-beat. You would not guess this from my blog, but I do view the glass as half full when it is half full. The problem is that I am not willing to ignore reality to support my optimism. If the glass is empty, I am unwilling to say it is half full. I have significantly more money in equities than I am betting against equities so I have no real stake in things going bad. Indeed, the economy doing poorly will negatively affect many of my close relatives and me, so I am not in any way wanting that to happen. Nonetheless, there is nothing in the freakin' glass folks! Ignoring reality will only make things worse.

The above linked post notes - based on math - that the market should climb 16% by year-end. This is based on historical PE norms. It is, however, based on consensus estimates of future earnings. The author does not say who comprises this consensus but one must suspect it is economists. While I consider myself an optimist, I cannot ever hope to compare myself to the optimism of economists. I recently read a post (that I wish I could find) showing economists over-predicting furture earnings on a consistent basis over the past couple of decades. Just go back three years to July of 2007 and see if the consensus on earnings then was correct. Indeed, earnings estimates have been coming down over the past few months, which is about the only reason some companies have been able to beat estimates. Accordingly, any analysis based on economist sentiment is not a reason for optimism from me.

I truly do want to find the silver lining in this economy. Certainly the news has a lot of tidbits that an optimist could latch on to as a promising developments. This past week has seen many, which has caused a spike in the markets. But I have not seen any reason to ignore the fundamentals, which diverge from historic norms in numerous respects. Debt - private and government - is still at historic extremes (private had come down a bit but only to be replaced by public) and this is the worst fundamental. The other, here in the U.S., is simply the fact that our economy has been super-charged for a couple of decades. Normal, sustainable activity, is where we are reverting and it is not what politicians or optimists are ready to accept. Yet, it is reality, so get used to it. I have no choice but to say the glass is empty, or nearly so. I do have hope for the future, but it will take years to put the past behind us.

Disclosures: None.