Better get used to the daily angst of living with the sword of Damocles swinging overhead.
The world's economic problems are structural in extent, systemic in breadth, and long term in nature.
There are no short term fixes for the imbalances and problems that have been brought to the surface by the financial crisis.
With the possibility of a bomb going off at anytime, the market will struggle for sustained confidence and likely vacillate in ranges.
Wednesday, March 3, 2010
Tuesday, March 2, 2010
Big bang vs slow drip
Big bang changes like 1.50% drops in Fed Funds rates, or $750 billion stimulus packages, or $700b TARP-type packages are only possible in crisis situations.
But once the panic is over, there is still a need for enacting good policy. And often, that policy change is more important for the long term health of the economy than the immediate response to the crisis.
But getting major policy change enacted becomes more and more difficult the further away from the crisis you get. It becomes like a slow drip to the electorate as they lose focus and move onto other things.
Death by a thousand cuts.
But once the panic is over, there is still a need for enacting good policy. And often, that policy change is more important for the long term health of the economy than the immediate response to the crisis.
But getting major policy change enacted becomes more and more difficult the further away from the crisis you get. It becomes like a slow drip to the electorate as they lose focus and move onto other things.
Death by a thousand cuts.
Friday, February 26, 2010
Short term could be positive, but if it is...
I think the positive case for the market in the relative short term is reasonable.
(1) We've had a nice correction - cleared technically overbought condition.
(2) The Fed has affirmed "exceptionally low rates for an extended period" - go for it, boys.
(3) The only thing we have an oversupply of right now is doom and gloom - great for climbing that wall of worry and catching people on the sidelines.
(4) Earnings and revenues have been solid leading to positive revisions - got 4Q09 earnings season out of the way, now let us party in the vacuum.
(5) Market valuation is looking very attractive in the context of recovery - come on in the waters fine.
(6) 1H10 GDP has a decent chance of surprising on the upside.
(7) ZIRP drives incentives and therefore market behavior - banks got to do something with that cash.
(8) At some point, the retailees who went to bonds and missed the move will convince themselves that it is safe to get back in - liquidity filip.
(9) EU won't let Greece spoil the party.
(10) Oh yeah. There is more fiscal stimulus from last year due to hit.
And so, although it grates against my bigger picture outlook, I think there is a decent chance we could get a pretty substantial rally. But if it does rally strongly, it sets up a good fade and short.
(1) We've had a nice correction - cleared technically overbought condition.
(2) The Fed has affirmed "exceptionally low rates for an extended period" - go for it, boys.
(3) The only thing we have an oversupply of right now is doom and gloom - great for climbing that wall of worry and catching people on the sidelines.
(4) Earnings and revenues have been solid leading to positive revisions - got 4Q09 earnings season out of the way, now let us party in the vacuum.
(5) Market valuation is looking very attractive in the context of recovery - come on in the waters fine.
(6) 1H10 GDP has a decent chance of surprising on the upside.
(7) ZIRP drives incentives and therefore market behavior - banks got to do something with that cash.
(8) At some point, the retailees who went to bonds and missed the move will convince themselves that it is safe to get back in - liquidity filip.
(9) EU won't let Greece spoil the party.
(10) Oh yeah. There is more fiscal stimulus from last year due to hit.
And so, although it grates against my bigger picture outlook, I think there is a decent chance we could get a pretty substantial rally. But if it does rally strongly, it sets up a good fade and short.
Strategas make some good points
In a piece entitled, "Bar bets for restless financial professionals," Jason Trennert offers several constructive observations.
I think he quite rightly points out that peak earnings this cycle are unlikely to surpass peak earnings from the prior cycle ($91.47). That, despite the fact that we have had a 600% rally in EPS from the pit (GAAP EPS fell 92% top to bottom in the financial crisis), and 2011 estimates are already above the prior peak at $96 EPS (bottom-up estimates are always greater than top down estimates...top down estimates pitch S&P 500 EPS at about $81). The reason is simple and reasonable (but does require buying into a reversion to the mean assumption). "At the peak, Financials accounted for almost 2/3rds of S&P earnings...it is difficult to see another industry that could make up the difference over the next few years." If you believe that we were in an earnings bubble brought on by an oversized Financial sector that also helped leverage Industrial earnings, then it is hard to believe, given the reversal of that trend, that we will be quickly surpassing those bloated earnings. [the only industries with sufficient size and operating leverage to do so would be Energy and Materials combined in a cyclical climax - which would likely weigh upon other sectors). The takeaway from this observation and the concomitant current expectation is that the market is likely to be disappointed.
A second point he makes is that he thinks it unlikely the US savings rate will eclipse 8% this decade. The main reason posited is a "subpar expansion and structurally high unemployment." An unemployed, tapped out consumer makes for someone just trying to hang on, rather than someone with the breathing room to squirrel away savings. And to support his contention, he points to the savings experience during the recession. He is also implicitly disavowing the potential for the current crisis to bring on "a true culture of austerity."
I think he quite rightly points out that peak earnings this cycle are unlikely to surpass peak earnings from the prior cycle ($91.47). That, despite the fact that we have had a 600% rally in EPS from the pit (GAAP EPS fell 92% top to bottom in the financial crisis), and 2011 estimates are already above the prior peak at $96 EPS (bottom-up estimates are always greater than top down estimates...top down estimates pitch S&P 500 EPS at about $81). The reason is simple and reasonable (but does require buying into a reversion to the mean assumption). "At the peak, Financials accounted for almost 2/3rds of S&P earnings...it is difficult to see another industry that could make up the difference over the next few years." If you believe that we were in an earnings bubble brought on by an oversized Financial sector that also helped leverage Industrial earnings, then it is hard to believe, given the reversal of that trend, that we will be quickly surpassing those bloated earnings. [the only industries with sufficient size and operating leverage to do so would be Energy and Materials combined in a cyclical climax - which would likely weigh upon other sectors). The takeaway from this observation and the concomitant current expectation is that the market is likely to be disappointed.
A second point he makes is that he thinks it unlikely the US savings rate will eclipse 8% this decade. The main reason posited is a "subpar expansion and structurally high unemployment." An unemployed, tapped out consumer makes for someone just trying to hang on, rather than someone with the breathing room to squirrel away savings. And to support his contention, he points to the savings experience during the recession. He is also implicitly disavowing the potential for the current crisis to bring on "a true culture of austerity."
Thursday, February 25, 2010
A risk you've got to take
Ever since the govt decided to be fully committed to "solving" the crisis, the key has been to re-boot growth. Failure to do so, means you end up in a worse position than when you started.
The paradox, or the dilemma, is that in order to re-boot the economy you must cover the growth shortfall by creating demand (in the hope that this artifical stimulus will get you across the growth divide). Unfortunately, given the weak starting position of the govt's balance sheet, options are limited and running out, and any failure to re-ignite growth poses serious risk to the economy and the financial system (again).
In other words, having already committed to the current course of action, the government has no choice, but to go for it (it is already "all in"). Conversely, if it fails and the markets lose faith, then we have a bigger problem on our hands.
With each lapse or fault in the market/economy, the government will continue to bail with all its might. It has no choice. But in so doing, it raises the chance of bringing about a collapse in the system (markets call their bluff...an emperor with no clothes). Confidence is a psychological phenomenon. It is transitory. The general stability of the markets/economy to which we are accustomed, mask a more fragile reality.
Sadly, the risk you've got to take increases the chance of failure.
The paradox, or the dilemma, is that in order to re-boot the economy you must cover the growth shortfall by creating demand (in the hope that this artifical stimulus will get you across the growth divide). Unfortunately, given the weak starting position of the govt's balance sheet, options are limited and running out, and any failure to re-ignite growth poses serious risk to the economy and the financial system (again).
In other words, having already committed to the current course of action, the government has no choice, but to go for it (it is already "all in"). Conversely, if it fails and the markets lose faith, then we have a bigger problem on our hands.
With each lapse or fault in the market/economy, the government will continue to bail with all its might. It has no choice. But in so doing, it raises the chance of bringing about a collapse in the system (markets call their bluff...an emperor with no clothes). Confidence is a psychological phenomenon. It is transitory. The general stability of the markets/economy to which we are accustomed, mask a more fragile reality.
Sadly, the risk you've got to take increases the chance of failure.
Wednesday, February 24, 2010
Eye of the hurricane
We are in the eye of the hurricane.
"the eye is characterized by light winds and clear skies, surrounded on all sides by a towering, symmetric eyewall."
The seas (economic data) are still choppy (mixed), because we have cross-currents coming from all directions (sovereign systemic risk concerns, stimulus withdrawal effects, state/local crisis, 2nd wave of mortgage defaults, high unemployment, China bubbling, commercial real estate teetering, Japan a mess).
This should be a time of preparation for the backend of the hurricane (more wind and rain). The consumer will continue to deleverage, while the govt will continue to bail. Should confidence in the govts ability to bail erode, then the system is at greater risk. It is going to be touch and go this time around, but if we do avoid another meltdown, then we have only deferred it for another day.
"the eye is characterized by light winds and clear skies, surrounded on all sides by a towering, symmetric eyewall."
The seas (economic data) are still choppy (mixed), because we have cross-currents coming from all directions (sovereign systemic risk concerns, stimulus withdrawal effects, state/local crisis, 2nd wave of mortgage defaults, high unemployment, China bubbling, commercial real estate teetering, Japan a mess).
This should be a time of preparation for the backend of the hurricane (more wind and rain). The consumer will continue to deleverage, while the govt will continue to bail. Should confidence in the govts ability to bail erode, then the system is at greater risk. It is going to be touch and go this time around, but if we do avoid another meltdown, then we have only deferred it for another day.
Thursday, February 18, 2010
When do structural problems weigh on real world results
Corporate profits and the market are saying sayonara to the recession (and the worry-warts), but I still see us facing many structural headwinds in the future. The problems are not insurmountable, but they are serious and require substantial change in order to address the issues.
The question that I am asking myself is, when will those problems reflect in real world results? When will they weigh on profits? For example, the Pew Trust came out with a study today indicating a $1 Trillion funding gap for State and local government pensions. At what point will that funding gap impact the real world and who within corporate America will be effected by that? Is it possible that most of the problems are isolated to government entities and, as such, will only effect the private sector indirectly? I find that hard to believe. The ultimate solution to government over-indebtedness is increasing revenues (taxes) and reduced consumption - or default. All of which impact the consumer and companies doing business with the government directly and indirectly.
Pension funding gaps are only the tip of the structural iceberg. We have significant Federal obligations from unfunded medicare and social security liabilities, structural funding gaps at both the Federal and State/Local government levels, over-indebted consumers, not to mention more rounds of default and delinquency in the residential and commercial mortgage markets. Where is the money going to come from to pay for all these things?
The market typically goes blithely along ignoring structural problems until it is forced to deal with a situation - usually in crisis mode. Is the market that dumb? and, Why does it do that? Are we simply playing a game of chicken, and that is the way the game has always been played?
The question that I am asking myself is, when will those problems reflect in real world results? When will they weigh on profits? For example, the Pew Trust came out with a study today indicating a $1 Trillion funding gap for State and local government pensions. At what point will that funding gap impact the real world and who within corporate America will be effected by that? Is it possible that most of the problems are isolated to government entities and, as such, will only effect the private sector indirectly? I find that hard to believe. The ultimate solution to government over-indebtedness is increasing revenues (taxes) and reduced consumption - or default. All of which impact the consumer and companies doing business with the government directly and indirectly.
Pension funding gaps are only the tip of the structural iceberg. We have significant Federal obligations from unfunded medicare and social security liabilities, structural funding gaps at both the Federal and State/Local government levels, over-indebted consumers, not to mention more rounds of default and delinquency in the residential and commercial mortgage markets. Where is the money going to come from to pay for all these things?
The market typically goes blithely along ignoring structural problems until it is forced to deal with a situation - usually in crisis mode. Is the market that dumb? and, Why does it do that? Are we simply playing a game of chicken, and that is the way the game has always been played?
Subscribe to:
Posts (Atom)