Mort Zuckerman's editorial in yesterday's Wall Street Journal concerning the loss of optimism in America reinforced what, to me, is the overriding basis of differing views on the current state and near-term prospects for the US economy. That is, do you believe it's the same as it ever was, or, like David Rosenberg, do you believe things are very different this time?
Zuckerman made it clear that this unusually weak economic recovery is different.
This morning, on CNBC, one of the morning program's contributors from Chicago, Kevin Ferry, contended that so many corporations are tapping capital markets for low-priced debt that this simply must result in robust economic growth down the road a bit.
Really? How about the idea that these CFOs are simply lowering their long term total financing costs while they can. Period. Or that growth will occur in more robust markets, i.e., overseas? Including the concomitant job growth?
My business partner and I have been discussing for months the inevitable weakness of this economic so-called recovery. Thus, we've been amazed at the brief periods of equity market bullishness.
But the recent week's tumble of the S&P from 1127 down to 1079, and longer term drop from 1206 to the latter figure, have produced a high volatility which makes banking on a full-fledged recovery questionable.
Zuckerman's repetition of some frightful labor statistics reinforces my own belief that this time, it is different,
"1.4 million of them have been jobless for more than 99 weeks, 6.5 million have been jobless for over 27 weeks. This is a stunning reflection of the longer-term unemployment we are coping with."
Her also cites a similar statistic to one offered by Rosenberg which I mentioned in the prior, linked post,
"The relationship of household debt to income has proven unsustainable. The ratio is normally established somewhere below 100%, but in 2007, the debt ratio hit 131% of income. It has now fallen to 122%, but at this pace it would take another five years to bring it under 100%. The pre-bubble norm was 70%. To get to this ratio again, debt would have to be reduced by about $6 trillion."
Just so. Private sector deleveraging.
Rosenberg noticed it. So does Zuckerman. It's been a constant theme since late 2008. Despite Fed policies and ill-conceived stimulus spending which adds to the US deficit, deleveraging would seem to be a strong, undeniable force as it reverts to the mean.
Hardly a prescription for near-term healthy US economic growth, including jobs, is it?
Showing posts with label Deleveraging. Show all posts
Showing posts with label Deleveraging. Show all posts
Tuesday, August 17, 2010
Tuesday, June 29, 2010
Krugman's Global Depression Hysteria
I got around to reading liberal economist Paul Krugman's recent NY Times editorial of last Sunday. It's a real scary piece calculated to frighten anyone reading it into believing that only large-scale government spending can possibly save the world.
If only Krugman were more accepting of the facts of the world's first major Keynesian intervention in America in the 1930s. That is, the fact of the failure of FDR's massive borrowing and spending economic regime.
I've read Amity Schlaes' excellent work on the subject, The Forgotten Man. Not only does Schlaes use economic data to refute the commonly-held belief, obviously shared by Krugman, that FDR's massive spending did little, if anything, to facilitate new job growth. She also describes perhaps better than anyone else has how massive government spending, borrowing and money printing naturally accompanies a loss of individual freedoms and a gradual growth in power of the state. Power which never completely recedes.
But, back to Krugman. He contends,
"And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels."
Perhaps if this were 1930s, governments could fool capital markets. But, since this is 80 years later, and deficits have not really declined in that time, investors realize that governments don't really ever stop excessive spending. And programs, once in place, don't end.
Krugman seems to live in a fantasy world of theoretical economics, rather than the real one which, in Adam Smith's time, was more correctly named political economics.
Krugman never addresses what would occur if government simply cut taxes and let people choose to spend or invest. It's not as if money the government spends doesn't ever exist otherwise. Sure, some of the borrowing wouldn't. Certainly the purely printed money doesn't, although some would argue it doesn't truly exist, in that that manner of its creation reduces the value of existing money, thus making the sum remain equal in value.
But, more importantly, Krugman's assumption, going in, is that only government can remedy shortfalls of demand. And that economic cycles are to tamed, not accepted.
Well, we've been trying that recipe, with the exception of the Reagan years, for essentially the 80 years since FDR's massive, ineffective economic tonics.
Krugman ends with a notional nod to global investors,
"It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."
It's hard to understand the analytical basis for Krugman's contention in that first paragraph. It's as if he chooses to credit private sector markets when it suits him, i.e., that they appreciate long term fiscal rectitude, but currently punish 'bad policy.'
Could it be, instead, that investors are punishing the obvious fiscal messes that governments around the globe have created? Too much hard-to-service debt, the money from which went to pure consumption by early retirees, universal health care consumers, and so on?
Perhaps that, rather than discount Greece, Greece is the example investors now fear being a global reality?
Let's face it- Krugman simply refuses to acknowledge reality. Spending with borrowed and printed money by governments worldwide, not for lasting investments in infrastructure, but for social welfare consumptions, have hit a wall of unwilling investors. Debts are coming due without matching appetites, at acceptable interest rates, to simply roll those debts over.
The good news is that, ultimately, markets discipline governments. Regardless of Krugman's ignorance of that fact. And we are now seeing that dynamic in play in capital markets' responses to sovereign monetary and fiscal policies.
If only Krugman were more accepting of the facts of the world's first major Keynesian intervention in America in the 1930s. That is, the fact of the failure of FDR's massive borrowing and spending economic regime.
I've read Amity Schlaes' excellent work on the subject, The Forgotten Man. Not only does Schlaes use economic data to refute the commonly-held belief, obviously shared by Krugman, that FDR's massive spending did little, if anything, to facilitate new job growth. She also describes perhaps better than anyone else has how massive government spending, borrowing and money printing naturally accompanies a loss of individual freedoms and a gradual growth in power of the state. Power which never completely recedes.
But, back to Krugman. He contends,
"And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels."
Perhaps if this were 1930s, governments could fool capital markets. But, since this is 80 years later, and deficits have not really declined in that time, investors realize that governments don't really ever stop excessive spending. And programs, once in place, don't end.
Krugman seems to live in a fantasy world of theoretical economics, rather than the real one which, in Adam Smith's time, was more correctly named political economics.
Krugman never addresses what would occur if government simply cut taxes and let people choose to spend or invest. It's not as if money the government spends doesn't ever exist otherwise. Sure, some of the borrowing wouldn't. Certainly the purely printed money doesn't, although some would argue it doesn't truly exist, in that that manner of its creation reduces the value of existing money, thus making the sum remain equal in value.
But, more importantly, Krugman's assumption, going in, is that only government can remedy shortfalls of demand. And that economic cycles are to tamed, not accepted.
Well, we've been trying that recipe, with the exception of the Reagan years, for essentially the 80 years since FDR's massive, ineffective economic tonics.
Krugman ends with a notional nod to global investors,
"It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."
It's hard to understand the analytical basis for Krugman's contention in that first paragraph. It's as if he chooses to credit private sector markets when it suits him, i.e., that they appreciate long term fiscal rectitude, but currently punish 'bad policy.'
Could it be, instead, that investors are punishing the obvious fiscal messes that governments around the globe have created? Too much hard-to-service debt, the money from which went to pure consumption by early retirees, universal health care consumers, and so on?
Perhaps that, rather than discount Greece, Greece is the example investors now fear being a global reality?
Let's face it- Krugman simply refuses to acknowledge reality. Spending with borrowed and printed money by governments worldwide, not for lasting investments in infrastructure, but for social welfare consumptions, have hit a wall of unwilling investors. Debts are coming due without matching appetites, at acceptable interest rates, to simply roll those debts over.
The good news is that, ultimately, markets discipline governments. Regardless of Krugman's ignorance of that fact. And we are now seeing that dynamic in play in capital markets' responses to sovereign monetary and fiscal policies.
Thursday, June 10, 2010
Bob Doll Talks BlackRock's Book In The WSJ
Several days ago, BlackRock's chief equity strategist, the renowned Bob Doll, wrote an editorial in the Wall Street Journal entitled The Bullish Case for U.S. Equities.
It would have been more aptly entitled,
'Please Buy U.S. Equities and Help My Book.'
Doll's central point is that, compared to the rest of the globe, US equities look pretty good. So by all means, buy them!
Sounds enticing, doesn't it?
Only one thing- Doll forgot to speak to the continued deleveraging of global economies.
Is it really a good idea to go long, now, in US equities, if, as presaged by the recent Eurozone crisis, it seems that economies the world over are having to accept lower growth, higher taxes and less leverage than in decades past?
I would venture to guess that Doll wrote the piece not for retail investors, but for the lesser lights of institutional money management around the globe.
After all, if the equity CIO of esteemed BlackRock says buy US equities, can you later be blamed for following his advice?
In equity management, like it or not, gains result from being early and, at first, wrong, into equity positions into which more investors later stampede.
If you're Bob Doll, you can help trigger that stampede- in the direction of the equities already in your portfolios.
I think he just did.
It would have been more aptly entitled,
'Please Buy U.S. Equities and Help My Book.'
Doll's central point is that, compared to the rest of the globe, US equities look pretty good. So by all means, buy them!
Sounds enticing, doesn't it?
Only one thing- Doll forgot to speak to the continued deleveraging of global economies.
Is it really a good idea to go long, now, in US equities, if, as presaged by the recent Eurozone crisis, it seems that economies the world over are having to accept lower growth, higher taxes and less leverage than in decades past?
I would venture to guess that Doll wrote the piece not for retail investors, but for the lesser lights of institutional money management around the globe.
After all, if the equity CIO of esteemed BlackRock says buy US equities, can you later be blamed for following his advice?
In equity management, like it or not, gains result from being early and, at first, wrong, into equity positions into which more investors later stampede.
If you're Bob Doll, you can help trigger that stampede- in the direction of the equities already in your portfolios.
I think he just did.
Tuesday, December 01, 2009
GE After Shedding NBC/Universal
There's been a lot of news in the past few days regarding the GE deal to sell its NBC/Universal unit to Comcast. I last wrote about the deal's implications for GE here, early last month.
What interested me about CNBC's coverage of the GE deal in the last few days have been the nature of comments by guests on Squawkbox, the morning program, as distinct from those of the program's co-anchors.
AWithin the last few days, New York Times business columnist Andrew Ross Sorkin called GE after the deal 'another Tyco,' or some phrase very close to that. One of this morning's guests noted that GE ran with way too much short term debt and got caught last year in a refunding squeeze.
From that crisis, he asserted, came the idea to lighten the conglomerate's debt load by jettisoning the media unit. He then lamented that they did it at a time of such a low price for the unit. Finally, he noted, perhaps this would help remove "the conglomerate discount" in GE's price.
I've been writing about this for years. Immelt foolishly maintained the necessity of a value-destroying corporate structure decades after it has become obsolete.
Remember that only months before his people began to explore the sale of GE's media business, Immelt was publicly insisting it was a core business of the needlessly-diversified conglomerate.
Of course, CNBC staffers aren't going near these remarks because, well, they work for Immelt. In fact, co-anchor Joe Kernen regularly jokes about this, to the annoyance of the other on-air staffers.
Yesterday and today, the program brought in ex-anchor and resident CNBC egghead, David Faber, to 'analyze' the GE-Comcast deal situation.
As a news reporter, Faber seems quite proficient. With an apparently large contact list, he has broken some past stories on mergers and acquisitions. But the network overrates his analytic skills. Much as I like Faber, I don't believe I've ever learned anything from his insights that I hadn't already figured out on my own first.
It's the same in this case. People like Sorkin, the other guest this morning, or Holman Jenkins at the Wall Street Journal have all come up with more penetrating insights than Faber. In Faber's defense, on this subject, though, he seems limited, as all CNBC on-air staffers do, by the fact that they (still) work for Immelt's GE.
The interviews they do with their CEO are all puff-ball questions. The interviewer looks appropriately doting and thankful for Jeff's pearls of obfuscation. No tough followup questions to obvious lies or dodges are ever asked.
Thus, on the NBC/Universal deal, you have to look to the guests on CNBC for honest assessments. And their universal opinion, pun intended, is that GE got itself into a mess by mismanaging the duration and size of its debt, had to dump a large unit at the bottom of the market, but, if anything, will be on the way to becoming a more sensible, if still overly-diversified conglomerate in the wake of this sale.
Of course, GE still has the financial services unit to distract its management from the industrial units. And, despite Joe Kernen's quip about becoming like United Technologies, GE probably will never become that well-designed, as I noted in this post.
For me, Sorkin's remarks about this deal's effect on GE have been the most on target. However, he stopped short of simply asking why GE should even exist anymore, in the modern financial environment. The closest he came was to compare it to Tyco, leaving it to viewers to understand that he meant it to be a pointless aggregation of business units having no discernible connection.
Well, in the business media of the past few years, I guess that represents some progress. Analysts and observers are finally beginning to voice opinions about the lack of sense in GE's business composition, and the 'conglomerate discount' its shareholders suffer because of Immelt's ineptitude.
What interested me about CNBC's coverage of the GE deal in the last few days have been the nature of comments by guests on Squawkbox, the morning program, as distinct from those of the program's co-anchors.
AWithin the last few days, New York Times business columnist Andrew Ross Sorkin called GE after the deal 'another Tyco,' or some phrase very close to that. One of this morning's guests noted that GE ran with way too much short term debt and got caught last year in a refunding squeeze.
From that crisis, he asserted, came the idea to lighten the conglomerate's debt load by jettisoning the media unit. He then lamented that they did it at a time of such a low price for the unit. Finally, he noted, perhaps this would help remove "the conglomerate discount" in GE's price.
I've been writing about this for years. Immelt foolishly maintained the necessity of a value-destroying corporate structure decades after it has become obsolete.
Remember that only months before his people began to explore the sale of GE's media business, Immelt was publicly insisting it was a core business of the needlessly-diversified conglomerate.
Of course, CNBC staffers aren't going near these remarks because, well, they work for Immelt. In fact, co-anchor Joe Kernen regularly jokes about this, to the annoyance of the other on-air staffers.
Yesterday and today, the program brought in ex-anchor and resident CNBC egghead, David Faber, to 'analyze' the GE-Comcast deal situation.
As a news reporter, Faber seems quite proficient. With an apparently large contact list, he has broken some past stories on mergers and acquisitions. But the network overrates his analytic skills. Much as I like Faber, I don't believe I've ever learned anything from his insights that I hadn't already figured out on my own first.
It's the same in this case. People like Sorkin, the other guest this morning, or Holman Jenkins at the Wall Street Journal have all come up with more penetrating insights than Faber. In Faber's defense, on this subject, though, he seems limited, as all CNBC on-air staffers do, by the fact that they (still) work for Immelt's GE.
The interviews they do with their CEO are all puff-ball questions. The interviewer looks appropriately doting and thankful for Jeff's pearls of obfuscation. No tough followup questions to obvious lies or dodges are ever asked.
Thus, on the NBC/Universal deal, you have to look to the guests on CNBC for honest assessments. And their universal opinion, pun intended, is that GE got itself into a mess by mismanaging the duration and size of its debt, had to dump a large unit at the bottom of the market, but, if anything, will be on the way to becoming a more sensible, if still overly-diversified conglomerate in the wake of this sale.
Of course, GE still has the financial services unit to distract its management from the industrial units. And, despite Joe Kernen's quip about becoming like United Technologies, GE probably will never become that well-designed, as I noted in this post.
For me, Sorkin's remarks about this deal's effect on GE have been the most on target. However, he stopped short of simply asking why GE should even exist anymore, in the modern financial environment. The closest he came was to compare it to Tyco, leaving it to viewers to understand that he meant it to be a pointless aggregation of business units having no discernible connection.
Well, in the business media of the past few years, I guess that represents some progress. Analysts and observers are finally beginning to voice opinions about the lack of sense in GE's business composition, and the 'conglomerate discount' its shareholders suffer because of Immelt's ineptitude.
Monday, August 31, 2009
Cerberus Restructures
It took a few years, but private equity group Cerberus' investments in Chrysler and GMAC have finally come home to roost in a big way.
So big that the group was forced to offer its investors an option to exit the their Cerberus positions. According to the weekend edition of the Wall Street Journal, slightly over 70% of investor assets, some $5.5B, are being redeemed.
I wrote two posts, here and here, back in May of 2007 and January of 2008, concerning Cerberus' purchase of Chrysler, then some early performance signs after the buyout. Even that far back, I was sceptical that Cerberus could refine gold out of the dross that had and has become the third-ranked US-based car maker.
Looks like I was correct in my belief that Chrysler was just too far gone to be viable, even if my expectation that high interest rates would eventually be the firm's undoing. Cerberus didn't choke on high interest rates for its highly-leveraged play for Chrysler and GMAC but, instead, failed due to an inability to simply raise private capital for them.
As I mentioned in the May, 2007 post, there's something decidedly ironic and telling about the Schumpeterian aspect of Cerberus' failures. Just because something is cheap doesn't mean it's attractive.
The industry structure of automobile manufacturing has been problematic for at least a decade. Barriers to entry are low, wages in foreign countries require extremely productive US operations if those costs are to be offset, and increasing numbers of subsystems have become outsourced, making auto "manufacturing" more a case of auto "assembly."
Cerberus' senior managers do seem to have become overly-confident and foolishly optimistic. Now, they and their investors are paying a heavy price.
It's pretty eye-opening that more than 2/3 of their investors are going to beat a path out of Cerberus, assuming the private equity group goes ahead with its restructuring plans. That surely is a vote of no confidence whatsoever in the group's ability to both rescue its current slate of investments, and do a better job choosing future ones.
I can't say that I blame those investors. Cerberus has shown an appallingly-bad habit recently of buying mediocre, or worse, properties and being unable to handle them as market conditions deteriorated. This is supposed to be the strong suit of private equity, and, in that, Cerberus has failed.
So big that the group was forced to offer its investors an option to exit the their Cerberus positions. According to the weekend edition of the Wall Street Journal, slightly over 70% of investor assets, some $5.5B, are being redeemed.
I wrote two posts, here and here, back in May of 2007 and January of 2008, concerning Cerberus' purchase of Chrysler, then some early performance signs after the buyout. Even that far back, I was sceptical that Cerberus could refine gold out of the dross that had and has become the third-ranked US-based car maker.
As one would have guessed, Cerberus' investments in the two entities were zeroed out when the private equity group went to the federal government for a rescue.
Looks like I was correct in my belief that Chrysler was just too far gone to be viable, even if my expectation that high interest rates would eventually be the firm's undoing. Cerberus didn't choke on high interest rates for its highly-leveraged play for Chrysler and GMAC but, instead, failed due to an inability to simply raise private capital for them.
As I mentioned in the May, 2007 post, there's something decidedly ironic and telling about the Schumpeterian aspect of Cerberus' failures. Just because something is cheap doesn't mean it's attractive.
The industry structure of automobile manufacturing has been problematic for at least a decade. Barriers to entry are low, wages in foreign countries require extremely productive US operations if those costs are to be offset, and increasing numbers of subsystems have become outsourced, making auto "manufacturing" more a case of auto "assembly."
Cerberus' senior managers do seem to have become overly-confident and foolishly optimistic. Now, they and their investors are paying a heavy price.
It's pretty eye-opening that more than 2/3 of their investors are going to beat a path out of Cerberus, assuming the private equity group goes ahead with its restructuring plans. That surely is a vote of no confidence whatsoever in the group's ability to both rescue its current slate of investments, and do a better job choosing future ones.
I can't say that I blame those investors. Cerberus has shown an appallingly-bad habit recently of buying mediocre, or worse, properties and being unable to handle them as market conditions deteriorated. This is supposed to be the strong suit of private equity, and, in that, Cerberus has failed.
Monday, May 18, 2009
Reflections on This Recession, Deleveraging, and Media Pundits
My Sunday post featured a video clip, and accompanying text, on a Yahoo finance webpage. In the clip, retail consultant Howard Davidowitz gives a sort of unvarnished, 'no punches pulled' analysis of consumer behavior, government policy, and the banking sector. Despite his billing as a 'retail' sector guy, I fully agree with his take on the other topics.
As I wrote that post Sunday morning, a conversation I had with a friend on Thursday evening came back to me. The friend is a young man with no appreciable personal experience of severe recessions. Thus, when he asked my thoughts about recent equity market gains and the economy, I found myself focusing on the rarely-discussed effects of deleveraging.
The many bullish comments from guests and anchors on CNBC have become almost tiresome. As I viewed Davidowitz's clip, it dawned on me that he didn't seem to have a sense of context about his remarks. That is, he seemed to be speaking rather candidly, and only to the interviewer. In contrast, I realized, many pundits and on-air anchors on CNBC seem almost afraid to give anything but optimistic, or at least, non-negative comments about economic recovery.
And if this were a normal recession, in a normal context, we might, indeed, be seeing the early signs of a recovery.
But, as I explained to my young friend, this is no normal financial/economic situation. We are grappling with a capital deleveraging unseen since before WWII. Almost nobody who was an adult then is now alive, or, at least, going on the record about our current economic plight.
When I heard Larry Kudlow declaring the recession over earlier this month on CNBC, it seemed preposterous. That's because I think he is totally ignoring the context of a severely deleveraging global economic situation. The usual signals of economic renewal probably don't mean the same thing in the current context.
And when people like Kudlow are on a widely-watched medium, they seem to get, well, tepid and tentative about any negative remarks. Davidowitz's raw energy, attitude and humor contrasts so vividly with the rather stolid, self-important comments one hears on CNBC these days.
That's why I'm steadily losing respect for and faith in most of the editorializing I hear on major business media. Everybody seems to feel personally responsible to not be too negative, even if it's sustained by facts.
I remain unconvinced that a sustainable economic recovery has now begun, that deleveraging has ceased, or that the effects of both the recently-begun recession and damage to global capital markets have reached their worst, and are poised to imminently reverse. If nothing else, Howard Davidowitz's remarks provide some fairly specific reasons why I believe this to be true.
As I wrote that post Sunday morning, a conversation I had with a friend on Thursday evening came back to me. The friend is a young man with no appreciable personal experience of severe recessions. Thus, when he asked my thoughts about recent equity market gains and the economy, I found myself focusing on the rarely-discussed effects of deleveraging.
The many bullish comments from guests and anchors on CNBC have become almost tiresome. As I viewed Davidowitz's clip, it dawned on me that he didn't seem to have a sense of context about his remarks. That is, he seemed to be speaking rather candidly, and only to the interviewer. In contrast, I realized, many pundits and on-air anchors on CNBC seem almost afraid to give anything but optimistic, or at least, non-negative comments about economic recovery.
And if this were a normal recession, in a normal context, we might, indeed, be seeing the early signs of a recovery.
But, as I explained to my young friend, this is no normal financial/economic situation. We are grappling with a capital deleveraging unseen since before WWII. Almost nobody who was an adult then is now alive, or, at least, going on the record about our current economic plight.
When I heard Larry Kudlow declaring the recession over earlier this month on CNBC, it seemed preposterous. That's because I think he is totally ignoring the context of a severely deleveraging global economic situation. The usual signals of economic renewal probably don't mean the same thing in the current context.
And when people like Kudlow are on a widely-watched medium, they seem to get, well, tepid and tentative about any negative remarks. Davidowitz's raw energy, attitude and humor contrasts so vividly with the rather stolid, self-important comments one hears on CNBC these days.
That's why I'm steadily losing respect for and faith in most of the editorializing I hear on major business media. Everybody seems to feel personally responsible to not be too negative, even if it's sustained by facts.
I remain unconvinced that a sustainable economic recovery has now begun, that deleveraging has ceased, or that the effects of both the recently-begun recession and damage to global capital markets have reached their worst, and are poised to imminently reverse. If nothing else, Howard Davidowitz's remarks provide some fairly specific reasons why I believe this to be true.
Friday, May 08, 2009
The "Green Shoots" Thing
This morning, on CNBC, BofA CEO Ken Lewis gave an extended interview covering many topics.
Of particular interest was his contention that some sort of economic bottom has been reached, and that we can believe that the recession should be nearing an end.
If only.
This "green shoots" thing has been played up to nauseating levels by CNBC for a month or more. Larry Kudlow openly cried "the recession is over" yesterday.
Am I the only person who feels that Lewis has credibility issues? He's responsible for:
-buying a failed mortgage bank, Countrywide, at an inflated price;
-buying a failed broker, Merrill Lynch, at an inflated price; and
-being strong-armed by the Feds to complete the latter purchase and violate Sarbanes-Oxley, to the detriment of his own shareholders.
So why do we trust the economic judgement of a guy who thought he was getting a great deal on Countrywide, and then was totally blindsided by the financial meltdown?
Further, various economic pundits and administration spokespeople have been on all morning extolling the cessation of increasingly bad sales, unemployment and other economic indicators.
Fine. The pace of the recession's economic deterioration has declined. That is nothing remotely the same as saying we are in a recovery.
What we probably are in is a period of lower economic activity and continuing weakening, at a steady pace, due to the continuing effect of a massive financial deleveraging on top of a normal, but bad, economic recession.
Here's a series of S&P500 Index monthly returns from July 2001- April 2003. The green-highlighted values represent the positive return months which led to the early 2002 feeling of a recovery. The red-highlighted values represent the significantly negative monthly S&P returns following that false spring's 'green shoots' rally.
Jul-01 -0.010
Aug-01 -0.063
Sep-01 -0.081
Oct-01 0.019
Nov-01 0.077
Dec-01 0.009
Jan-02 -0.015
Feb-02 -0.019
Mar-02 0.038
Apr-02 -0.061
May-02 -0.001
Jun-02 -0.071
Jul-02 -0.078
Aug-02 0.007
Sep-02 -0.109
Oct-02 0.088
Nov-02 0.059
Dec-02 -0.059
Jan-03 -0.026
Feb-03 -0.015
Mar-03 0.010
Apr-03 0.081
On April 30th, I wrote in this post,
"Having patiently watched our recent put portfolios steadily decline in value, I reviewed equity market performance in the spring of 2002. By that season, the S&P had posted some good positive monthly returns, along with mild negative returns, resulting in my equity allocation signal indicating a re-entry into long positions. That only lasted for a month, though, as July and September saw the S&P post -8% and -11% returns, respectively.
It was not until spring of the next year that my signals correctly indicated the sustained recovery in the equity market. That spring, 2002 indication was a false positive.
Perhaps this recent 20+% rise in the S&P is another equity market head fake. The 2002 incident was accompanied by a decline in volatility to a point that corroborated a move to long allocations in equities, and puts in options."
It took another six months following September's -11% S&P return for a string of positive returns to signal the genuine end of the market decline.
The recent equity rally has now topped +30% since the March bottom. But based on what?
The retail spending rate of decline easing was primarily in discount stores- Wal-Mart and some drug chains. The Wall Street Journal article discussing the reports noted that mid-priced and high-end retailers are still mired in difficulty.
I just don't buy this cock-eyed optimism suddenly appearing everywhere.
Of particular interest was his contention that some sort of economic bottom has been reached, and that we can believe that the recession should be nearing an end.
If only.
This "green shoots" thing has been played up to nauseating levels by CNBC for a month or more. Larry Kudlow openly cried "the recession is over" yesterday.
Am I the only person who feels that Lewis has credibility issues? He's responsible for:
-buying a failed mortgage bank, Countrywide, at an inflated price;
-buying a failed broker, Merrill Lynch, at an inflated price; and
-being strong-armed by the Feds to complete the latter purchase and violate Sarbanes-Oxley, to the detriment of his own shareholders.
So why do we trust the economic judgement of a guy who thought he was getting a great deal on Countrywide, and then was totally blindsided by the financial meltdown?
Further, various economic pundits and administration spokespeople have been on all morning extolling the cessation of increasingly bad sales, unemployment and other economic indicators.
Fine. The pace of the recession's economic deterioration has declined. That is nothing remotely the same as saying we are in a recovery.
What we probably are in is a period of lower economic activity and continuing weakening, at a steady pace, due to the continuing effect of a massive financial deleveraging on top of a normal, but bad, economic recession.
Here's a series of S&P500 Index monthly returns from July 2001- April 2003. The green-highlighted values represent the positive return months which led to the early 2002 feeling of a recovery. The red-highlighted values represent the significantly negative monthly S&P returns following that false spring's 'green shoots' rally.
Jul-01 -0.010
Aug-01 -0.063
Sep-01 -0.081
Oct-01 0.019
Nov-01 0.077
Dec-01 0.009
Jan-02 -0.015
Feb-02 -0.019
Mar-02 0.038
Apr-02 -0.061
May-02 -0.001
Jun-02 -0.071
Jul-02 -0.078
Aug-02 0.007
Sep-02 -0.109
Oct-02 0.088
Nov-02 0.059
Dec-02 -0.059
Jan-03 -0.026
Feb-03 -0.015
Mar-03 0.010
Apr-03 0.081
On April 30th, I wrote in this post,
"Having patiently watched our recent put portfolios steadily decline in value, I reviewed equity market performance in the spring of 2002. By that season, the S&P had posted some good positive monthly returns, along with mild negative returns, resulting in my equity allocation signal indicating a re-entry into long positions. That only lasted for a month, though, as July and September saw the S&P post -8% and -11% returns, respectively.
It was not until spring of the next year that my signals correctly indicated the sustained recovery in the equity market. That spring, 2002 indication was a false positive.
Perhaps this recent 20+% rise in the S&P is another equity market head fake. The 2002 incident was accompanied by a decline in volatility to a point that corroborated a move to long allocations in equities, and puts in options."
It took another six months following September's -11% S&P return for a string of positive returns to signal the genuine end of the market decline.
The recent equity rally has now topped +30% since the March bottom. But based on what?
The retail spending rate of decline easing was primarily in discount stores- Wal-Mart and some drug chains. The Wall Street Journal article discussing the reports noted that mid-priced and high-end retailers are still mired in difficulty.
I just don't buy this cock-eyed optimism suddenly appearing everywhere.
Thursday, March 05, 2009
Where Will Sovereign Stimulus Funding Come From?
Yesterday's equity market rise was allegedly due, in part, to hopes of China's stimulus plan and news of possible economic near-expansion.
However, I find this confusing.
We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.
Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.
Who will buy this debt? Where is the money, given the significant capital losses of the past year?
Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.
China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.
It's the equivalent of these two nations telling the world,
'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'
Why would anyone in their right mind by this idea? Or the debt to fund it?
It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.
But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.
Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.
In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.
However, I find this confusing.
We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.
Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.
Who will buy this debt? Where is the money, given the significant capital losses of the past year?
Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.
China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.
It's the equivalent of these two nations telling the world,
'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'
Why would anyone in their right mind by this idea? Or the debt to fund it?
It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.
But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.
Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.
In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.
Tuesday, January 13, 2009
Deleveraging vs. Recession: Recognizing The Effects
I have noted with increasing concern a confusion in the general business media regarding what are the sources of our current economic difficulties. They are not just a bad recession. In fact, the recession, on its own, is probably simply of average depth and duration.
However, mixed in with the recession is a heretofore unseen deleveraging of the global economy. I first called attention to this phenomenon in this post in late November of last year. In it, I wrote,
"Since leverage, a function of debt, implies confidence in the future returns of loans placed with various enterprises, its unwinding corresponds to a loss of such confidence. The forced reduction in this leverage began, understandably, with the short-term borrowing instruments of both financial and non-financial instruments- commercial paper, most notably.
As this massive de-leveraging of fixed income instruments occurred, the simultaneous drop in real estate values and equity market values caused several consequences.
First, large-scale losses in US, and other nation's market, i.e., societal capital stocks, valued notionally, plunged. Those who previously owned the capital suffered large losses.
The second major consequence of the calamitous drop in price of many stores of value- real property, equity, debt- coupled with the deleveraging, was the cessation of bank lending. Thus, a financial crisis, partially unleashed by a narrowly-defined 'mark to market' rule in a single US law, Sarbanes-Oxley, led to the real effects on non-financial sectors of the US economy. As banks struggled to deleverage their assets in order to both conserve remaining equity from further losses, and abide by regulatory capital requirements, lending suffered. This became a self-fulfilling act, as, starved of normal, short-term operating liquidity, more and more businesses began to reduce operations and cut staff.
The third unforeseen consequence, then, to complete the circle, was the rising joblessness as the economy was already softening, of its own accord, by early 2008.
This last link in the circle of economic causes and effects has now driven a dramatic drop in consumer spending, due to: rising unemployment, lower home values as a source of personal household net worths, and lower financial asset portfolios as a source of personal household net worths."
However, mixed in with the recession is a heretofore unseen deleveraging of the global economy. I first called attention to this phenomenon in this post in late November of last year. In it, I wrote,
"Since leverage, a function of debt, implies confidence in the future returns of loans placed with various enterprises, its unwinding corresponds to a loss of such confidence. The forced reduction in this leverage began, understandably, with the short-term borrowing instruments of both financial and non-financial instruments- commercial paper, most notably.
As this massive de-leveraging of fixed income instruments occurred, the simultaneous drop in real estate values and equity market values caused several consequences.
First, large-scale losses in US, and other nation's market, i.e., societal capital stocks, valued notionally, plunged. Those who previously owned the capital suffered large losses.
The second major consequence of the calamitous drop in price of many stores of value- real property, equity, debt- coupled with the deleveraging, was the cessation of bank lending. Thus, a financial crisis, partially unleashed by a narrowly-defined 'mark to market' rule in a single US law, Sarbanes-Oxley, led to the real effects on non-financial sectors of the US economy. As banks struggled to deleverage their assets in order to both conserve remaining equity from further losses, and abide by regulatory capital requirements, lending suffered. This became a self-fulfilling act, as, starved of normal, short-term operating liquidity, more and more businesses began to reduce operations and cut staff.
The third unforeseen consequence, then, to complete the circle, was the rising joblessness as the economy was already softening, of its own accord, by early 2008.
This last link in the circle of economic causes and effects has now driven a dramatic drop in consumer spending, due to: rising unemployment, lower home values as a source of personal household net worths, and lower financial asset portfolios as a source of personal household net worths."
Probably not since the 1950s have we seen such a secular deleveraging of American capital. I vividly recall, while in graduate school, reading articles on the Treasury's attempts to tax gains of foreign bond holders in the 1960s, which led to the creation of the Eurobond market.
I discussed with my business partner recently the evolution of capital formation, beginning with our early ancestors storing extra wood or food in caves. Early barter systems represented market-clearing mechanisms for surplus food or other primitive goods, allowing specialization to develop. With specialization came production for others, rather than mere personal survival consumption. In time, one person's surplus became another's borrowed capital for further expansion of production.
Somehow, through the centuries, capital creation became increasingly dependent not upon hard assets or saved money, but some analyst's or banker's estimation of the forward earnings power of an entity issuing debt or offering equity subscriptions.
Culminating in events including the famed technology equity 'bubble' of the late 1990s and the recent real estate bubble of the late 2000s, the financial community's allowance of increased leverage, via lending on ever-smaller equity bases, resulted in economic expansion which has to have been secularly due to that higher leverage.
This is important right now, because many people, businessmen and politicians alike, are running around declaring the coming of a second Great Depression any moment.
The President-elect has been engaging in economic scare tactics and fear mongering since this past summer's election campaign. Thus his reason for requesting- no, demanding- a $1T stimulus package.
But, in reality, the economic difficulties we currently face are a combination of two very different phenomenon.
On one hand, there is, based upon the NBER's December statement based upon job losses, a US recession which began in late 2007.
However, within this recession is a secular trend of economic shrinkage that will not be reversed by anything but a return to higher leverage. Thus, no amount of unleveraged economic 'help' will reverse these losses and the accompanying fall in GDP growth.
Seen from this perspective, the only way in which a new, massive Federal stimulus package can provide 'recovery' is to substitute government-issued obligations to return US societal economic leverage back to the dangerous, unsustainable levels at which it was before the current crisis.
How is it that leverage undertaken by the private sector, and judged imprudent, can now be replaced with government-sourced leverage, in the form of either: 1) more printed money, or 2) increased sale of government debt, without creating even more risk by spending the money in less accountable, measurable ways through political channels?
The simple fact is that, for the US economy to lower its capital leverage, and adjust to that lower leverage level, some jobs and business activity will have to simply vanish and not return. Whatever economic level we enjoyed, from which our current recession guideposts are measured, it logically follows that we cannot return there anytime soon unless we collectively decide, as a society, to try to raise financial leverage back to what it was.
If we decide this is unwise, then we have to accept that unemployment will be higher, and business activity levels lower, as the marginal, leveraged activities have been eliminated with the fall in financial leverage.
There is no other way around this fact.
Thus, the component of the current US economic weakness which represents simple, normal cyclicality is smaller than the overall, measured recession which includes the results of this deleveraging process. Any Federal programs which seek to, in a carefully identified and measured way, "fix" the economy beyond this normal cyclical impact, will be a disguised attempt to reflate our economy with added leverage through public debt and spending, rather than private resources and channels.
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