08/10/03
A new boom rarely starts with the past boom’s leaders.
We Daily Reckoneers have repeated the phrase so many times, it almost sounds like it might be true. Of course, that won’t stop us from saying it again: "a new boom rarely starts with the past boom’s leaders"…
Especially since, for a moment this week, the market actually appeared to confirm our suspicions: Gold, homebuilding, oil service, oil drilling were among the "real" asset sectors that helped drive the Dow if not up, then, at least, notably sideways. The harbinger of blue chips gained 37 for the week to 9191…
The Nasdaq, meanwhile, got dumped on its arse. For the week, "the Nas" was down -71 to 1644. Makers of semiconductor equipment, semiconductors, telecom equipment, wireless services, and biotech groups all took it on the chin.
But never fear, there’s still plenty of room for concern.
"Rather than exiting the equity market altogether," writes Brifing.com’s Patirck O’Hare, "it appeared as if tech investors simply rotated funds into blue chip names that have under-performed the highflying tech stocks on a relative basis year-to-date." In other words, we’re still on hold for the big shift out of US stocks altogether. For if the trend holds true within the stock market, why wouldn’t it hold for the global markets, too?
Can you really blame them though?
For their part, the lumpeninvestoriat were no-doubt reassured by another round of "solid economic news" released by government quants this week. Both consumer spending and non-residential fixed investment were notably up in the second quarter. And a sharp drop in inventories suggests we may see a boost in GDP in the quarters ahead.
According to mes potes over at Apogee Research, consumer spending increased 3.3% vs. a 2% decline in the first quarter, propelled by a 22.6% increase in durable goods purchases. Advance estimates showed second-quarter GDP growth of 2.4%, annualized, which was up from 1.4% in the previous two quarters. All good news to the inveterate Keynesian.
"But… before you break out the champagne," warns Apogees Andrew Kashdan, "hark back to the volatility of past growth statistics and the disappointments. And you’ll see that while this GDP report, and possibly the next few, will be welcomed by those who take comfort in a nice headline-making numbers, the long-awaited self-sustaining recovery has still not arrived.
"In 2002, for example, the first and third quarters registered growth of 5% and 4%, respectively, while the second and fourth periods mustered only 1.3% and 1.4%, respectively. In similar fashion, growth of private fixed investment soared at 4.4% in the 2002 fourth quarter, only to plummet to minus 0.1% in this year’s first quarter."
Instead of getting all giddy about rising GDP numbers, we might want to do something a little more practical and ask as my friend and colleague, John Mauldin does: "Where Are the Jobs?"
As those who toil behind the scenes in economics profession know, employment is the key to recovery. This so-called "recovery" has and is not doing the one thing recoveries are supposed to do: create jobs.
"Unemployment didn’t actually fall," Mauldin points out. "The authorities who count such things only count those who are actually seeking jobs as unemployed, which makes some kind of sense. But last month, they dropped around one half million of our fellow citizens from the unemployed ranks, not because they had found jobs, but because they had become so discouraged, they stopped looking."
Sure, the GDP figures suggest the economy may have grew at 2.4% in the second quarter… but we can’t overlook the fact one time spending by the government on the Iraqi war. Factoring in those expenses puts the real GDP at less than 1%. Unfortunately, "one-off" expenses don’t lend themselves easily to annualised figures.
"If the investment rebound is for real," writes Apogee’s Kashdan, "businesses will hire workers. In other words, while there may well be some encouraging signs, continued spending by consumers and the Pentagon will not be enough to ignite a full-fledged recovery, especially in this unique post-bubble climate."
What’s more, as we suspected would happen, the recently hailed, recently-quashed refi boom also appears to be a "one-off" for second-quarter GDP numbers, too. Again we turn to Mauldin: "While there will still be re-financing in the future (as long as rates stay where they are), it will not be the huge stimulus it is this second half. As an aside, I have seen estimates that a large drop-off in mortgage refinancing could result in the unemployment of tens of thousands of people who have been hired recently to process them. More unemployment pressure."
So, in light of this week’s rosy economic scenario, we’re back to the age-old question: Can consumers prop up the economy until the recovery takes hold? For example, do we expect the Bush team’s "can do" proposal for tax cuts and low interest rates to bolster the spend-thrift consumer until real investment picks up to work?
Casting aside our fall-back answer (ie. that Daily Reckoning readers ought to get used to the taste of raw fish) a new report by The Levy Economics Institute suggests a probable answer: no.
Even though home prices and frenzied mortgage-refinancing appear, at least for the time-being, to have offset losses in the stock market, the Levy Institute concludes simply that "the short-term outlook remains uncertain," while "the long-term one is bleak."
In a nutshell, the Levy report suggest that, despite a rise in real disposable income, consumers are still afraid of losing their jobs. Household balance sheets are already straining: debts are mounting; asset values (stocks, for sure, but homes possibly too) are falling. Thus, spending will remain weak.
Meanwhile, the corporate world is undergoing a similar crisis. Their balance sheets just have a lot more zeros tacked on the end. The Levy report makes the claim that even if monetary and fiscal policies create a cyclical upturn, the recovery will not be sustainable. Post-bubble imbalances… and the inevitable bursting of the next great bubble (real estate) are likely to doom it from the get-go.
Grim stuff, huh? Buy gold. And try to stay cool.
Cheers,
Addison Wiggin,
The Daily Reckoning
August 10, 2003
P.S. As I was finishing up this little bit of gloom and doom analysis, Dan Denning sauntered into the office and handed me a Wall Street Journal article with the headline: "August Wins Dubious Honor Of Worst Month For Stocks." The first line of the article encourages readers to "brace themselves for a potentially ugly couple of weeks on Wall Street."
Dan then made the gratuitous prediction that the Dow would finish the year at 7925… down 14% from where we sit right now. "In fact, we could probably see a big chunk of that here in the next month or so… " says Dan. "Puts, baby, buy puts".
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THIS WEEK in THE DAILY RECKONING
MARRIAGES OF CONVENIENCE (08/08/03)
by Bill Bonner
"… Convenient, calculated marriages have their drawbacks; when they become inconvenient, they fall apart. These are the thoughts that lurked in your editor’s head as he listened to his wife elaborate Alan Greenspan’s case: "Economies are always evolving… but not everyone has to make shoes. Look at the Swiss, they don’t have to manufacture shoes either. But they are still very wealthy. They offer services, like banking, to the rest of the world." But your editor had to win the argument… "
THE KINDLEBERGER TRICK (08/07/03)
by Dr. Steve Sjuggerud
"… Can deflation even be avoided? Interestingly enough, Charles Kindleberger suggested an answer back in 1978 – during the height of inflation. ‘A lender of last resort should exist, but his presence should be doubted,’ Kindleberger concluded. Whether you agree with him or not, Kindleberger’s Trick is exactly the policy the folks at the Federal Reserve are operating under… "
GAME OVER (08/06/03)
by Eric J. Fry
"In the Age of Greenspan, nobody builds anything unless they have to. ‘Financial services’ is where the modern-day rubber meets the road… And investors have celebrated the low-residue realities of this Brave New Economy by bestowing a massive market capitalization upon the financial services sector. That’s why the stock market is much more vulnerable to soaring interest rates than most folks realize… "
ATTORNEY-CLIENT PRIVILEGE UNDER SIEGE (08/05/03)
by Robert E. Bauman, JD
"… If the IRS position is upheld, the agency can simply speculate that certain groups of people are engaging in alleged illegal tax avoidance schemes and grab their lawyers’ files. A simple statement from the IRS that it believes a certain tax shelter or other plan to be ‘abusive’ will open the files of any client who may have discussed the plan with a lawyer, let alone adopted the plan as his own personal or business tax strategy… "
MONEY-GRUBBING AT THE CENTRAL BANK (08/04/03)
by The Mogambo Guru
"… ‘So why would governments, our own governments, do this to us – why would they sell gold and try to manipulate the price?’ you ask in that charming little way you have that just melts my heart. The reason, my nimble-minded reader, that European central banks would like to see their contract for gold selling renewed… even boosted up from 400 tonnes to 500 tonnes a year… is as old as the midas metal itself: good old-fashioned money-grubbing… "
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