A Recession In Pink
Here’s an interesting theory for you, dear reader. Could the color pink be signaling the imminent arrival of recession? As usual, John Mauldin backs up the fluff with some real sense.
Recessions and depressions are usually the result of a catastrophic event, either natural or man-made. Wars and droughts, plagues and governmental stupidity have all been a cause for economic hardship.
But sometimes it is simply the rise and fall of the economic tide, each wave either bringing us closer to the shore of prosperity or further away. Looking at long periods of economic history, we can see those waves. Especially since the industrialized period, those waves have become quite pronounced.
This weekend, I was with my 10-year-old son, sitting rather awkwardly on a surfboard at La Jolla Beach, listening to a young surfing god (Ralph West) teach my son about catching the wave. They come in sets, and it is important to wait for the right wave – to look out over the horizon and see what swells are coming.
The swell determines the nature of the waves. Is it a New Zealand or a Hawaiian swell? Will it break to the right or to the left? Do you need a long board or a short board? Do you need fins? Will the swells be 5 or 15 minutes apart? Will you be able to find the green room, that special place where the wave curls and you ride through the tube? Will you be stuck in the whitewash, a garbage day fighting the wind and weather?
Or will the surf be so small and timid that only the very good or the very light can catch a wave, and for only a few seconds? Such was the case last week, and thus I felt comfortable going into the surf with my son. Six-foot waves would have kept this old body on the shore. One must know one’s limitations.
Secular Bear Market: Finding Its Way Downward
And thus it is with economic patterns. Is it an inflationary or deflationary swell? Is it a secular bear or a secular bull wave? Knowing where you are in the cycles is important.
Taking a long-term view, we are in a secular bear cycle. The stock market will eventually, over the coming years, find its way to below-trend valuations (P/E ratios) probably somewhere in the low teens, if not lower.
On the intermediate term, we seem to be in a range-bound trading cycle. As Bill King noted today: "Most everyone realizes that stocks have traded sideways for 2004. The DJIA’s 8% range for the past seven months is a historically tight range. The venerable Richard Russell recently noted that the 8% range equates to the 1972 market. Mr. Russell adds that the historic bear market of 1973-74 ensued. The Amex, which then housed the speculative issues and small caps, lost 89% of its value.
"… Comstock Partners sees a similarity in some of the major indexes’ 2004 actions with their respective 2000 action. Comstock acknowledges that 2004’s range is tighter because it is a mini-bubble, compared to the 2000 grand bubble."
There has never been a true long-term bull market that started from the valuation levels at which we find ourselves today. You can get substantial bear market rallies, as we did in 2003. As I have noted before, the market goes up 50% of the years within a secular bear market.
As Russell noted, the nasty 1973-74 bear market followed that tight trading range-bound market of 1972. The trigger for that bear was an oil shock and a nasty recession.
Secular Bear Market: Recession Coming
We could, and probably will, see a range-bound market for some time. But the next major turn of the market will be down, pushed over the cliff by a slowing economy and/or a recession.
On average, the stock market drops 43% in a recession. That means a Dow in the 6,000 range. The Nasdaq will be ugly, as it is the most overvalued of the indexes.
In the "for what its worth" department, my friend Gary Scott sends me his daily letter, full of interesting ideas on investing and the occasional odd tidbit.
He likes looking for trends, so in yesterday’s letter, he reminded me of a very serious group called the Williams Inference Center, which sifts through mountains of reports and data looking for disparate anomalies that taken together may tell us of some new trend. They have a good track record of drawing attention to trends before they become mainstream.
He shared some of their current thoughts, like a slowdown in U.S. business around the world due to unfavorable world opinion and reaction to Iraq; that individuals will overtake corporations as the drivers of change; that there will be a surge in demand for genetically modified grain crops, especially in India and China, etc., where the middle class is rising and restrictions are few; and growth in low-cost sensor technology (such as radio tags).
They also mention that Saudi Arabia (the major source of U.S. imported oil) – not Iraq – will present the most problems in the Mideast: big debt…a handful of aged ruling families…a shrinking middle class and declining per-capita income. Any problems there could easily and drastically impact U.S. oil interests.
I find myself nodding with interest, as these all seem reasonable enough, and indeed, I also think they are true. Then we come to the last one: "The rise in the popularity of the color pink may foretell a harsh stock market reaction – pink (psychologically) symbolizes delusion and denial. Pink is the equivalent of rose-colored glasses."
Not remembering any pink shirts in my closet, I asked my daughter, who works across the hall, if pink was showing up any more than usual. "It’s really big now, especially overseas," Tiffani reported, just coming back from six months in Cypress and Eastern Europe.
Intrigued about this unusual inference from what is a rather scholarly, staid and usually skeptical outfit, I called James Williams and asked about the danger in the color pink.
Secular Bear Market: Pink is the Color of Denial
"Pink," he says, "is regarded in the psychiatric literature as the color of denial. And we have been seeing a rise in the use of pink in clothing for the past few years. People are buying pink clothes for their dogs. I even have a clipping where men are buying women’s shoes so they can wear pink shoes." So far, that latter trend has skipped Texas, but when I am in London and Paris next month, I will keep an eye out and report back to you.
(I just turned around and saw Jim Cramer on Kudlow & Cramer (CNBC) wearing a pink shirt – at least it was pink on my set. Yet another confirmation anomaly for Mr. Williams. Is Cramer in denial? Or maybe it’s his wardrobe manager? He did look good in it, though.)
Williams then drew my attention to three areas of denial: debt, age and law. People deny they are in debt, and add more. They deny they are getting older. And they deny the law, breaking it with no compunction. He has cabinets full of stories confirming the tsunami of denial breaking over our collective minds.
In the ’90s, people ignored risk. After the market crash and the recession, they now verbally acknowledge risk, but essentially deny it is there. They press forward as if the denial of a secular bear market will cause it to go away. The biggest trend in TV, Williams notes, is now reality TV. We seek our reality in our entertainment and deny the reality in our lives.
"It is all quite entertaining," says friend Bill Bonner, "watching the masses create another bubble, denying the risk, telling themselves they are getting rich as their paper wealth grows along with their debt."
But it will not be so amusing for those in denial come the next recession, whenever that takes place. It takes two, and sometimes three, bear markets to bring reality back to a bubble-intoxicated market. At least that’s what the psychologists who study such things tell us.
The next recession may bring the end of denial, at least for this cycle. It will also destroy a lot of paper wealth in the process.
Surf’s up…or is it down?
for The Daily Reckoning
August 17, 2004
Gold is over $400 again.
For months now, the yellow metal has been on a teeter- totter with $400 at the fulcrum. Meanwhile, the economy continues to stumble along, giving the impression that it might fall down at any time. The tax cuts have given whatever stimulus they were going to give. The Fed is increasing rates…but by such tiny "baby steps" it is getting nowhere. Employment numbers are uninspiring.
What’s ahead, no one knows. The clocks tick…and the stream of news carries us along, day after day, without revealing where we are going. Stocks rise; stocks fall. One sentiment indicator says this…another says that. Housing starts rise…then fall. Every day we read the news for some surprising new trend. Then, when there is no change…we are surprised that things continue as before!
Wherever we are going, most people are sure it will be a better place. They keep prices up on houses and stocks – confident that, wherever we go, financial assets and real estate will be worth more in the future than they are today.
We have no reason to think so. But markets make opinions. Stocks are still 10 times higher than they were a quarter century ago. Who can blame the poor lumps for expecting them to rise another 1,000% in the quarter century ahead?
It will be a first, of course. After a long upswell, typically the bullish tide ebbs away – returning to where it began. Investors, who waited years for their hour to finally come round, are surprised and delighted when it finally does. Then, years later, they are surprised again when their easy money disappears…and annoyed with themselves for not having stopped the clocks.
Here’s the news from the East Coast…
Tom Dyson, from British Columbia…
– "Should I sell my house, then?"
– Addison had just frightened another unsuspecting punter with his prognostications of doom and gloom.
– "That’s exactly the point I was just making," replied Addison. "We have become a nation of unwitting speculators. If you enjoy living in your house, why on earth would you sell it? The price appreciation should be irrelevant to you."
– There are lots of things we could base today’s edition of The Daily Reckoning upon…we could discuss the much- anticipated Google auction – "For $35 billion," quipped Chris Mayer, "you can design a damn fine search engine…and you’ll still have $34 billion left over!"
– Or we could discuss how the oil price topped $46 a barrel on Friday…
– Or we could discuss inflation…the latest CPI numbers come out today and are expected to show inflation receding – excluding energy and food of course. "Inflation," James Gray, editor of Contrarian Speculator, reminded us, borrowing a famous quote from a Dutch central banker, "is a little bit like wetting your pants. At first it feels warm and comfortable, but after a short while it becomes cold and regrettable."
– Or we could discuss the news of an unexpectedly wide trade deficit…it surged to a new all-time high of nearly $56 billion in June, absolutely confounding the consensus of opinion.
– Now the Commerce Department has to reduce its estimate for second-quarter growth…the math boffins included a lowball estimate of the trade balance in the calculation. "There is going to be a significant downward revision," said the chief economist at Societe Generale in New York. "We have a huge deficit that needs to be financed, and getting that financed could be a question." – But as interesting as these stories are, dear reader, today we would prefer to discuss one of the more salient points from one of last week’s more salient speeches. The speech was given by Dan Denning, one of the most brilliant big-picture thinkers and investment minds on the planet. Dan gave a masterful performance to boot.
– "We are not in a real estate bubble." Dan surprised the members of the audience who had assumed that Dan was a real estate bear. "No, we are in a massive mortgage debt bubble."
– "In the 1982-1998 period, stocks came to represent 60-70% of the household balance sheet," Dan explained. "Americans on paper were rich. But the dot-com crash took this wealth away. Now, it’s property that represents 60-70% of household net worth."
– "Low interest rates," argued Dan, "have enabled many people to get into the real estate market when, frankly, they are not wealthy enough to be there. The marginal buyers have bid up real estate prices and now they are vulnerable."
– Dan recommends that real estate speculators should look to profit from falls in the share prices of homebuilders and declines in the two "poster children" for the mortgage debt bubble, namely Freddie Mac and Fannie Mae. Furthermore, he thinks house prices are only vulnerable in certain areas of the country. If you don’t live in one of these locations, and if, as Addison remarked above, you enjoy living in your house, Dan sees no reason to sell. [Ed. Note: For a complete understanding of Dan’s predictions, we suggest you take a look at this report on the mortgage debt bubble:
Let’s Get Freddie to Rumble
– "So you wanna push the bet?" A colleague won a small wager with your editor on the Nasdaq’s ability to bounce last week and wanted to lighten your editor’s pockets some more. He wants us to reassess our short-term views and put $50 on the prediction.
– Only this time we have no idea if the market will be up or down next week. We had thought the market was looking soggy, but as stocks are wont to do, they confounded us again and rallied vigorously…the Dow gaining 129 points yesterday, reaching 9,956 by the bell. The S&P, in percentage terms, fared just as well; it rallied 1.4%, or 15 points, to 1,079. And the Nasdaq, leading the turnaround, boosted itself to 1,783 with a 25-point charge.
– Your recently humbled editor was tempted by his colleague’s offer, but rejected it…for now. His colleague, meanwhile, rejoiced in his newly acquired wealth and poked another bill into the closest lacy garter…
Bill Bonner, also in Vancouver…
*** Canada is different from the United States. When you cross the border, you barely notice. People still speak English; the accent changes only subtly. But something more has changed.
Vancouver is cleaner, neater and tidier than American cities. We saw no inner city ghettos, no trailers, no suburban squalor. There are more flowers, too.
Arriving in Vancouver, you get into town without driving by much trash. Then, once in the center of town, you think you are in Hong Kong. Half the population – probably the better half – seems to have come from China in the last 15 years.
"The old guys who ran the city prior to 1986 were of Scottish ancestry," a Vancouver friend explained. "But then China took over Hong Kong and the Hong Kong Chinese thought they should get a toehold in North America…just in case.
"The Chinese brought a lot of money and life to the city. Almost everything you see – all the bright, tall apartment buildings, offices and hotels – were built by the Asians with Asian money. The local guys have been left behind."
It is an old story…one familiar to Americans, both north and south of the 49th parallel. Vigorous immigrants arrive and push out, exterminate, or simply bypass the "natives." Then the settlers grow soft and lazy…and a new batch of invaders comes in. Each group brings new energy, ideas and traditions – and leaves the last natives in the dust.
Africa was once the "dark continent" – unknown, unexplored, benighted. Then came the Europeans…Asians…and Indians. For awhile, the lights went on…Africa really seemed to be making progress. But after WWII, jealous natives pushed the immigrants out. Now most of Africa is dark again.
In America, European immigrants moved in and practically annihilated the natives. Then, the Anglo-Saxons settled into the hollows of Appalachia and the tidewaters of Virginia and backwaters of New Hampshire and became almost as shiftless as the natives they had replaced. Fortunately, the original invaders were refreshed with new waves of immigrants – and still are. The cities of North America that seemed to us most alive and most interesting were those – such as Boston and Vancouver – where city life is dominated by new arrivals.
*** "You want to see somewhere where there’s a real bubble mentality, look at Southern California," said a woman at our conference in Vancouver. She handed me a copy of a magazine called Coast.
"People down there really do think that real estate only goes up. There are SUVs all over the place. And shopping malls.
What we noticed in our brief visit to Southern California was that there were a lot of ways to spend money – new houses, new shopping malls, golf courses, resorts – but very few ways to earn it. We did not see a single new factory under construction in our entire six-week stay in America.
Goods were shipped, stocks were sold – there are trucks on the road, retail stores and warehouses. But not once – not even on our train ride up the industrial corridor between Baltimore and New York – did we see anything new that looked like it was intended for making things. And many of the places that were once factories have fallen into disuse, or been converted from production to consumption.
Up and down the Eastern seaboard, old factories have been turned into "loft" apartments. Along the Amtrak line – factories are rusted out, windows are broken, and junked machinery sits in the rain.
We looked through Coast to see what was on offer. At the top of the line, we discovered something new: properties described as "personal resorts." One of them, in Laguna Beach, a "gate-guarded community," boasts a wine cellar, a saltwater pool, and a custom-built movie theatre. No price was quoted. But a similar property in the same area is listed at $19,950,000.
We stared at the photos in disbelief. Our jaws dropped. There was nothing particularly spectacular about the houses. What could make them worth so much money?
You could go upscale…or downscale, upmarket, or down- market. Wherever you go in the pages of Coast, you cannot find anything with much style or charm. Those at $2 million were as unprepossessing as those at $20 million. For $2.6 million, you get a common split level in Laguna Beach with "ocean views."
*** A reader’s comment on "global warming":
"THAT IS PROBABLY THE MOST ABSURD, IRRESPONSIBLE B.S. I’ve ever read in the DR – which I’ve been reading for well over five years now and have found on average to be of great value. I could write a BOOK on this subject, and I have a 30-year career as a professional meteorologist, including weather researcher. I could point to 100 articles, publications and studies for every one you can that clearly demonstrate that we are experiencing a GLOBAL WARMING event far more intense than anything in recorded history.
The greenhouse effect is a CONTRIBUTING factor – the only question left in the REAL scientific community is the percentage of the warming effect due to man and that of the normal shifts in the Earth’s climate. But there has been acceleration in the rate of Arctic ice melt in the last 3 years that is scaring the hell out of REAL scientists.
This will have an enormous impact on the world economies and could easily lead to wars as a result of the changes in rainfall patterns and overall growing seasons, etc. Running out of oil? Try running of FOOD!
If you want PROOF (when I’ve cooled off), let me know. Until then, watch what YOU SAY when it comes to scientific data – because you have no clue!"
*** Another dear reader, with a comment on Farmington, NM:
"Farmington is a wonderful town! I lived there for my summers at college – I worked for a mission. It was a big change from the Midwest. I climbed the lava wall at Tse’Bit’Ai’ (aka Shiprock) and watched the sun set, I sat and watched a Navajo woman weave, I visited the Aztec (Anasazi) museum, hiked along rivers, sat atop the bluff at night and marveled at the lights of the city, learned how to do beadwork, learned how to speak the language (somewhat, anyway)…I learned more in my three summers there than I thought was possible. I learned that my great- great-grandmother was, in fact, Navajo. I connected with the culture and found ‘home’ for the first time in my life. I long to go back there! What I would give to live in or near To-Tah (the Navajo name for Farmington) again! Yes, you certainly did miss its charm."
*** And another:
"Dear Bill: "I have been enjoying your trip report on New Mexico! "Since you are a world traveler, you probably hear the ‘locals’ talk about UFOs and aliens from time to time. "I believe that extraterrestrial beings have been slowly integrating into the world’s societies for some time now. "The New Mexico outback seems a perfect place for these aliens to gain an easy foothold in the human population. The hippie segment of the population would be easy prey for these aliens and their hidden agenda! "Did you notice anything unusual about the people and environment in the outlying areas of New Mexico? I believe that the aliens tend to abduct humans in remote areas more so than densely populated city areas. "You might want to keep this info in mind as you continue to travel around the world. Your view and sense of reality will change as you start to hear stories from the ‘locals’ about their unexplained experiences in the outback areas of the world!"