The present path to normalization is, and has been, a long one compared to past recovery cycles.
Fundamentally it looks as though we are exiting recovery and on our way to normalization. Confidence is the key to continuation. I suspect the economy (along with the market which seems to have got ahead of things a bit) will go through a choppy transition period before it comes out the other side to normalization.
How long the transition period lasts is anyone's guess. Given that it has taken extraordinary stimulus (both monetary and fiscal) to get us to this point, it is not unreasonable to assume that the transition will be more painful and volatile than normal.
The trajectory of the market has been significantly different from the trajectory of the economy. The likely tightening of fiscal and monetary policy will throw a spanner in the works for both market and economy.
Showing posts with label recovery. Show all posts
Showing posts with label recovery. Show all posts
Wednesday, February 26, 2014
Monday, October 7, 2013
Notes From November 19, 2009
Here are some notes I made toward the end of 2009.
Why is everything right again?*
The belief that we are past the worst. We are.
The belief that better days are ahead. Unclear.
The belief that the "crisis" was more a psychological phenomenon than something real. Who knows, but it has had real effects.
The belief that it is reasonable to take risk(s) again. Seems to be the case.
The belief that Fed tightening is still a long way off. Stokes the bullish fires.
Evidence that the economy is moving forward again. Confirmation.
Evidence that profits are better than expected. Positive impetus.
The strength in the market provides courage and confidence. Reflexivity.
Momentum trumps fundamentals. The same old game.
So what has been the trade?
Long equities, bonds, commodities, energy, and precious metals. Short the dollar.
Believe we need a super-squeeze in order clear the market.
Why did everything fall last year?
Financial crisis of confidence predicated on a financial system collapsing under a burden of bad debts feeding into a large recession.
The fear that everything was just a con game, a house of cards.
Why is everything right again?*
The belief that we are past the worst. We are.
The belief that better days are ahead. Unclear.
The belief that the "crisis" was more a psychological phenomenon than something real. Who knows, but it has had real effects.
The belief that it is reasonable to take risk(s) again. Seems to be the case.
The belief that Fed tightening is still a long way off. Stokes the bullish fires.
Evidence that the economy is moving forward again. Confirmation.
Evidence that profits are better than expected. Positive impetus.
The strength in the market provides courage and confidence. Reflexivity.
Momentum trumps fundamentals. The same old game.
So what has been the trade?
Long equities, bonds, commodities, energy, and precious metals. Short the dollar.
Believe we need a super-squeeze in order clear the market.
Why did everything fall last year?
Financial crisis of confidence predicated on a financial system collapsing under a burden of bad debts feeding into a large recession.
The fear that everything was just a con game, a house of cards.
Thursday, July 19, 2012
The Next Inflection Point
Getting the big picture right is one of the most important things an investment manager/strategist can do. Anticipating and timing an inflection point, a move from one regime to another, is where reputations are made and the greatest value addition can be achieved.
Post global financial crisis (GFC), the world has been mired in a debt enduced deleveraging. This has undermined confidence, weighed upon the economic fabric, and forced governments to lever-up to make up for private sector slack. Fiscal sector tailwinds are coming to an end. Financial markets are hanging on continuing monetary stimulus to prop up markets. Confidence is in short supply. The hope is that the monetary authorities, in conjunction with sufficient deferment, obfuscation, and can kicking from their fiscal partners, will get us through to the other side. With potholes everywhere (cue Europe, China, US problems), the future is still highly uncertain.
One scenario that could play out is a recovery in credit. US bank balance sheets have largely been rebuilt (the same is not necessarily true of their European counterparts). At some point they will be tempted to take advantage of the competitive opportunities, and in classic follow the herd fashion look to put money out the door. A devolution of reserves and rapid credit creation by financial entities could well be the catalyst that helps turn the corner. With confidence being the most lacking ingredient, wealth and prosperity illusions created by money creation could be just what the doctor ordered.
Will this scenario transpire? Possibly. When is it likely to happen? In 2013 if we continue on our current economic trajectory (many commentators have pegged 2013 as an inflection point of a negative kind). How long will it last? If it happens, I suspect 2-4 years. Will a renewal in growth trend be sufficient to overcome secular headwinds further out (rising interest rates, deteriorating fiscal profile, higher taxes)? It'll be a battle.
As yet, I don't think we have solved our fundamental structural problems within the global financial system. That having been said, if a blast of confidence comes flowing through the system on the back of banks being more willing to take a risk, there is a chance we experience a positive feedback loop that translates to real growth, and the possibility of getting out ahead of our problems. A major catalyst for that scenario is resolution of the developed world's fiscal financial path. Not only does it require confidence, but it also requires real leadership. Two traits in fairly short supply at present.
No signs of it yet. But keep an eye out for a change in conditions.
Post global financial crisis (GFC), the world has been mired in a debt enduced deleveraging. This has undermined confidence, weighed upon the economic fabric, and forced governments to lever-up to make up for private sector slack. Fiscal sector tailwinds are coming to an end. Financial markets are hanging on continuing monetary stimulus to prop up markets. Confidence is in short supply. The hope is that the monetary authorities, in conjunction with sufficient deferment, obfuscation, and can kicking from their fiscal partners, will get us through to the other side. With potholes everywhere (cue Europe, China, US problems), the future is still highly uncertain.
One scenario that could play out is a recovery in credit. US bank balance sheets have largely been rebuilt (the same is not necessarily true of their European counterparts). At some point they will be tempted to take advantage of the competitive opportunities, and in classic follow the herd fashion look to put money out the door. A devolution of reserves and rapid credit creation by financial entities could well be the catalyst that helps turn the corner. With confidence being the most lacking ingredient, wealth and prosperity illusions created by money creation could be just what the doctor ordered.
Will this scenario transpire? Possibly. When is it likely to happen? In 2013 if we continue on our current economic trajectory (many commentators have pegged 2013 as an inflection point of a negative kind). How long will it last? If it happens, I suspect 2-4 years. Will a renewal in growth trend be sufficient to overcome secular headwinds further out (rising interest rates, deteriorating fiscal profile, higher taxes)? It'll be a battle.
As yet, I don't think we have solved our fundamental structural problems within the global financial system. That having been said, if a blast of confidence comes flowing through the system on the back of banks being more willing to take a risk, there is a chance we experience a positive feedback loop that translates to real growth, and the possibility of getting out ahead of our problems. A major catalyst for that scenario is resolution of the developed world's fiscal financial path. Not only does it require confidence, but it also requires real leadership. Two traits in fairly short supply at present.
No signs of it yet. But keep an eye out for a change in conditions.
Wednesday, March 3, 2010
Let the Good Times Roll
Sort of as a contra-note to the previous post*, I want to remind myself of recovery mathematics.
The economy is bottoming and beginning the process of healing.
There are two points to make. First, the damage inflicted by the severity of the recession means it will take a long time to regain previous economic highs. Second, the YOY and MOM change numbers will look real good going forward.
The great thing (if you can call it that) is that asset prices were re-set when the economy imploded. As such, expected returns going forward will probably mirror the rate and extent of recovery.
In an environment where systemic risk factors and secular headwinds are in play, however, it is hard to see equity markets getting too exuberant, even as positive economic numbers come in. There again, that might be ascribing a level of rationality to the market that it does not warrant.
Depending upon how you look at it, it will be both a lost decade and a growth decade.
*The post was really about risk factors. Always got to keep an eye on the downside.
The economy is bottoming and beginning the process of healing.
There are two points to make. First, the damage inflicted by the severity of the recession means it will take a long time to regain previous economic highs. Second, the YOY and MOM change numbers will look real good going forward.
The great thing (if you can call it that) is that asset prices were re-set when the economy imploded. As such, expected returns going forward will probably mirror the rate and extent of recovery.
In an environment where systemic risk factors and secular headwinds are in play, however, it is hard to see equity markets getting too exuberant, even as positive economic numbers come in. There again, that might be ascribing a level of rationality to the market that it does not warrant.
Depending upon how you look at it, it will be both a lost decade and a growth decade.
*The post was really about risk factors. Always got to keep an eye on the downside.
Thursday, February 4, 2010
Disconnect
We're seeing signs of a disconnect.
General economic trends are moving in the right direction, earnings are coming through better than expected.
And yet, the market is getting sold!
Welcome to a balance sheet recession.
We have hollowed out core economic institutions (bankrupt state governments, overleveraged consumer, increasing financial risk on the sovereign) which mean bombs can go off anytime (after all it is a confidence game) and there is less margin for error.
Greater market volatility likely to ensue.
General economic trends are moving in the right direction, earnings are coming through better than expected.
And yet, the market is getting sold!
Welcome to a balance sheet recession.
We have hollowed out core economic institutions (bankrupt state governments, overleveraged consumer, increasing financial risk on the sovereign) which mean bombs can go off anytime (after all it is a confidence game) and there is less margin for error.
Greater market volatility likely to ensue.
Monday, November 30, 2009
The future hinges on...
To a relatively large extent, the future hinges on whether banks return to a more normal lending environment.
If they fail to do so, then deleveraging and deflation will weigh down the growth outlook. If they do come through, then the recovery will receive a much needed capital underpinning.
Supporting the "yes, they will return to normal" camp are improving balance sheets, strong operating profits, a supportive fiscal and monetary environment, cyclical tailwinds, growing investor confidence, and the present low cost of funds.
On the "no they won't" side are an already overly indebted consumer, high unemployment levels, tightening lending standards, secular headwinds, and vestigial bank fears of another run.
If they fail to do so, then deleveraging and deflation will weigh down the growth outlook. If they do come through, then the recovery will receive a much needed capital underpinning.
Supporting the "yes, they will return to normal" camp are improving balance sheets, strong operating profits, a supportive fiscal and monetary environment, cyclical tailwinds, growing investor confidence, and the present low cost of funds.
On the "no they won't" side are an already overly indebted consumer, high unemployment levels, tightening lending standards, secular headwinds, and vestigial bank fears of another run.
Thursday, August 20, 2009
Look on the bright side
Okay. I feel like a real scrooge. After talking about revolutions, red flags, and policy mistakes, how about something a little more positive.
The economic data is almost unambiguously pointing to a recovery. Historically, this indicates it is time to loosen up and hit for the fences. I'm a little more circumspect than that, but at least I know I'm running uphill.
That having been said. Whatever way you look at it, the numbers have stabilized and in many cases are turning positive. Whether it is...
Leading Economic Indicators (0.7%),
Philly Fed (4.2),
ISM (48.8),
Existing/New Homes Sales (3.6% &11%),
Initial Claims (< 600K),
Consumer Confidence (46.6 and rising),
Industrial Production (0.5%),
Empire Manufacturing (12.08),
Mortgage Apps (5.6%),
House Price Index (0.9%),
NAHB Housing Market Index (18),
Personal Spending (0.4%),
Unemployment Rate (9.4%),
Domestic Vehicle Sales (8.4m),
Nonfarm Productivity (6.4%),
Factory Orders (0.4%),
Avg. Hourly Earnings (0.2%),
...the numbers are generally moving in the right direction (retail sales, durable goods, consumer credit, chain store sales, personal consumption are still stuck in neutral).
And it is not just here in the States. Germany and France produced shockingly positive economic growth, house prices in England have turned the corner (can't quite work that one out), China appears to be going gang-busters (with an emphasis on busters), and South America seems to be doing well.
A recovery would be good for everyone. Economic dislocation brings pain and suffering. It isn't just numbers, real lives are effected.
I'm just not sure we have purged our excesses from the system.
The economic data is almost unambiguously pointing to a recovery. Historically, this indicates it is time to loosen up and hit for the fences. I'm a little more circumspect than that, but at least I know I'm running uphill.
That having been said. Whatever way you look at it, the numbers have stabilized and in many cases are turning positive. Whether it is...
Leading Economic Indicators (0.7%),
Philly Fed (4.2),
ISM (48.8),
Existing/New Homes Sales (3.6% &11%),
Initial Claims (< 600K),
Consumer Confidence (46.6 and rising),
Industrial Production (0.5%),
Empire Manufacturing (12.08),
Mortgage Apps (5.6%),
House Price Index (0.9%),
NAHB Housing Market Index (18),
Personal Spending (0.4%),
Unemployment Rate (9.4%),
Domestic Vehicle Sales (8.4m),
Nonfarm Productivity (6.4%),
Factory Orders (0.4%),
Avg. Hourly Earnings (0.2%),
...the numbers are generally moving in the right direction (retail sales, durable goods, consumer credit, chain store sales, personal consumption are still stuck in neutral).
And it is not just here in the States. Germany and France produced shockingly positive economic growth, house prices in England have turned the corner (can't quite work that one out), China appears to be going gang-busters (with an emphasis on busters), and South America seems to be doing well.
A recovery would be good for everyone. Economic dislocation brings pain and suffering. It isn't just numbers, real lives are effected.
I'm just not sure we have purged our excesses from the system.
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