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Lunch With A Bear
Earlier this week, I had lunch with a friend of mine. He was kind enough to articulate his thoughts in his blog, Frozen in the North:
Over
lunch yesterday with a friend we discussed the direction of the
American economy. I am naturally bearish and he is naturally bullish.
So this lead to an interesting lunch. He asked me to articulate my
thoughts and here they are:
I
believe that the American economy faces heavy headwinds and that
“business as usual” is just not on the cards. Moreover, the American
economy’s make up, imposes some real limits to future growth.
Over
the past two decades, personal consumption as a percentage of GDP has
trended upwards. Looking back to the 80s and 90s personal consumption
hovered around 60%. In 2010 it reached 70% – it is much higher in the
U.S. than in the rest of the OECD. Secondly, more than half of all
adult Americans have FICO score of less than 600, prohibiting them from
obtaining a mortgage. Third, in some of America’s largest cities 8%
of all homes are in default, where the home owners are channeling all
expenditure away from mortgage payment to consumption.
What does this mean?
First,
there is little scope for personal consumption to rise organically
since it is already such a large percentage of GDP. Second, over the
next two years many Americans that today “consume” their mortgage
payments will begin to pay rent – reducing their ability to consume. The
housing overhang will last for another 24 to 36 months, and it is
unclear how it will clear since so many Americans are no longer credit
worthy. Between 2002 and 2007 Americans have accessed their “home ATM”
to meet their standard of living expectations. While 8% of mortgages
are in foreclosure, about 25% are “underwater” where the value of the
outstanding mortgage either equal or exceeds the value of the home. The
home ATM source of disposable income for consumption has disappeared
for good. Therefore, business as usual for the consumer is just not on
the cards
The
other part of the equation is government spending, which is set to
fall. Federal, State and local governments account for about 25% of
total GDP; whereas the Federal government is only now beginning to look
at expenditure reduction, state and local governments have already
facing to large budget deficits, and they are cutting. BTW state
governments account for about 2/3rd of all government
expenses. It is also important to note that several state have resorted
to increase in taxes, further reducing disposable income.
Finally,
and despite what the GOP is preaching, there is no way to balance the
Federal budget without some revenue generation strategies. The GOP may
oppose increase in income tax, but the reality is that sales taxes are
almost certain to be needed to bridge the gap, moreover, it is a more
”egalitarian” form of taxation. This will further reducing available
income for consumption. Yes Americans are inventive, but it remains
that a federal government that has a deficit equal to 10% of the GDP
will have to take action soon, rather than later.
I
am reluctant to get into the argument for growth in the private
sector, but one aspect resonate across many sectors, while net profits
continue to improve top line revenues remain sluggish. American
corporations have become master at the art of cutting costs, but
there’s a limit to this strategy (although Q1/2011 performance has been
spectacular). Most American companies have indicated a reluctance to
increase employment, until they see an upward sign in sales activities.
For
all these reasons, headwinds for the American economy remain heavy.
Moreover, one crisis (either in America or elsewhere) could cause
systemic tension to explode.
He followed up with a comment on Friday the 13th curse:
Markets
are tanking today! Numbers were not that bad, Greece is at the same
place it was! Suddenly investors care. Aside from that Bloomberg
released an analysis of the world's strongest banks -- In the top 15, 5
were Canadian, three from Singapore and two from Switzerland. None of
the Canadian banks are rated AAA by Moody's (or S&P) in fact,
National Bank of Canada (#3 in the world) is actually rated the weakest
(in rating terms).I
point this out to make this story funnier, it turns out that Cyprus
only two commercial banks have an exposure to Greece of about $30
billion, or about 170% of Cyprus' GDP. Today, everyone is talking
write-downs on Greek debt (Duh!) with hair cuts of 40% to 75%. In this
instance, a poor country that has not too much sovereign debt could
find itself as the world's most bankrupt country in about 5 minutes.I wonder what rating Moody's and S&P assigned to these two banks???
My
friend makes several interesting observations but I don't share his
bearish views. I reminded him that the US economy is the most productive
economy in the world, and that productivity ultimately determines the
wealth of a nation. I mention this because everyone is still focusing on
the dismal US labor market (which is finally showing signs of a
rebound) and not focusing on the true successes of American enterprise
in both the old and new economy.
Another portfolio manager I know told me he attended a recent conference hosted by Steve Drobny of Drobny Global Advisors.
He told me: "All the young hedge fund managers were bearish, waiting to
make another killing like some managers did in 2008. The older guys
were more sanguine, and more bullish. They were long homebuilders
because they think that housing woes are concentrated in a few states
but that inventories run the risk of being low in the future."
Like
I said, I know it's fashionable to be short US, but I'm bullish on both
the US economy and the US stock market (keep buying the dips!). On
Sunday, I'll follow-up on last week's piece introducing secrets of elite funds.
»
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Good morning to you friend, many thanks for sharing this posting (it is one of my favourites on the site thus far). All the best to you. My web: Landlord Insurance and Fleet Insurance
Kolivakis' argument is weak. Just claiming "most productive nation" does not guarantee anything, for otherwise we wouldn't have brought the entire world down a few years' back.
May 12 ~
'Despite the DOW/SP500/FTSE/DAX sideways chop, daily charts continue to give bearish signals and the next sell off approaches.
I wish it was early 2003 when my indicators would have been extremely bullish but unfortunately it’s the exact opposite'
http://stockmarket618.wordpress.com
Unfortunately we can have the positives Leo states and they just don't come close to offsetting all of the built up debt that needs to be liquidated. Wall Street types (where I once hung out) place way too much value on what the US stock market is doing. That's of some value but is clearly being manipulated by massive goverment intervention. I've been glad to pick up some spare change trading the market the last two years but would have done far better just sticking with gold and silver. Fooling around in the general US stock market at this stage is just like picking up nickels in front of a steamroller.
Did you learn anything, Leo?
Leo
Maybe he bought your solar stocks.
Signs of a rebound in employment? Please.
There is no driver for an uptick in empployment sufficient to overcome the current inertia.
a companion article to Leo's published at about the same time
Lunch with a 'permabear'http://www.nationalpost.com/todays-paper/Lunch+with+permabear/4782708/st...
To be fair, Leo has been consistently correct on equities while many who post and contribute here have been dead wrong.
anynonmous
To be fair, Leo has been consistently correct on equities while many who post and contribute here have been dead wrong.
I am wading in treacherous waters, indeed, by trying to come to a consensus as to what counter points to Leos Pollyanish postions have been.
1. Most have agreed that the paper markets- stocks, bonds, exchange-traded commodities would rise so long as the Fed continued to pump money into Wall Street. Nothing new here.
2. Most of Leos nay-sayers simply point out that it is robbing future real growth, saddling our children with monstrous debts (for which they have had no say), and rewarding the very criminal activity that brought the country down in 2008.
So, to some extent you and Leo get the gold star. Ben has stopped the bleeding in the paper world; the price sadly is now the patient has terminal cancer.
Leo:
This bull-bear stuff is crap. You give me a good value factoring in future prospects, I am long. You give me something priced outrageous rich to future prospects, then I consider shorting it.
Each to his own. US stocks are going staight-up from here after unprecendented monetary and heavy-duty fiscal stimulus fades out is unlikely.
I believe your real point is that there is opportunity everywhere. I agree. To deny this only means you aren't working hard enough.
There is too much white collar overhead, including government and corporate employment. The supposed "productivity" of moving money around is bogus productivity. The FIRE economy is dead: lagging Shiller index (if you hadn't notived) had its 3rd monthly decline dipping (again) to levels as extreme as 2008. The supposed "employment" numbers as cooked worse than a mafia shell company's books. The US$ is in a bear channel. Energy prices are diverting money away from consumption of goods and services.
And when you care more about what some assholes in a hedge fund conference think vs what is happening on main st, then you truly have your head up your own ass. There are medical procedures which MAY help, but they are rather gruesome.
I'm sure Leo still has an income stream that keeps him in the lifestyle to which he has become accustomed, and hence has no clue what the rest of Americans are experiencing. The fuckers at the FED and Treasury are dishing out delicious portions of fresh, hot fiat which are swishing around the financial sector, and whose tasty treats are feeding the hungry such as Mr. K and his ilk, however the only thing it is doing for Mr and Mrs JQPublic is destroying the little remaining purchasing power they have left (after the layoffs, RE foreclosures, etc).
You all make me laugh, you're so bearish you probably can't see the sun rises every single day! YES, I am bullish on the US stock market (and there won't be any QE3) and the US economy. It is still a jobless recovery but what you all do not see -- or more precisely, do not want to see -- is that the worst is behind us, not ahead of us like all you doomsayers are constantly warning. That's it from me on this topic, will work on my elite fund piece today and enjoy myself.
Leo, actually agree with you for the first time in two years for different reasons, namely debt default deflation starting in EurAsia and heading here, with a global flight into safe harbor equities, but still curious who picked up the tab for that lunch, what and where you ate, drank, smoked and where you worked
Your friend appears not to be taxation cognescienti
Does he have a pulse?
Both Aristotle and Adam Smith knew cutting tax rates increases tax revenues, as JFK, Clinton and Reagan demonstrated, Reagan with 28% marginal income taxes and a 9% annual GDP growth peak that still towers over those who raised tax rates
Reagan had a 1932 degree in classical economics, some might say Austrian, from Eureka College, where Newt Gingrich just gave the commencement address
An additional sales tax could kill the consumer economy further, more than the 11% 1980 measured inflation, the invisible tax, did
As John Keynes and James Tobin famously said some time ago, the best tax to get rid of the hopelessly complicated political unproductive income tax and Wall Street casino criminality is the fair constitutional simple transparent uniform .0028 Automatic Payment Transaction tax:
http://en.wikipedia.org/wiki/Automated_payment_transaction_tax
Being from a country with 48.22% marginal income tax rates, that might not have immediately occurred to the two of you over lunch
Hope you make more money soon
No fun being out of work
You were right on the market direction for two years, longer than many
Cheers Leo
http://nationaljournal.com/economy/geithner-predicts-double-dip-if-congr...
http://www.jubileeprosperity.com/
http://www.martinarmstrong.org/files/So%20You%20Thought%20the%20Sovereig...
Dear Leo:
It is possible to be pessimistic short term and optimistic long term.
In general, I find your positions founded solidly in rhetoric and shallow on analysis.
The Fed is Dead. They have killed savers and enriched the profligate, dooming the country with unpayable interest from ill-gotten investments. Flipping and Skimming does not an economy make.
YOU Leo are the one seeing what you want to see, believing what you want to believe.
I am bullish on the US stock market ...
Yes, it's rising steadily. But it's rising on money created out of thin air, diluting the dollar, silently stealing wealth from the American people ...not that you care.
... and there won't be any QE3 ...
Yes there will. One way or another. It may not be called QE3. I may be called something else. But one way or another the Fed is going to keep running the presses, keep creating money out of thin air, keep diluting the dollar, silently stealing wealth from the American people, to buy up new govt debt so the federal govt can keep functioning, and buy up more worthless paper from zombie wall street banks so they can keep functioning and keep pumping stocks up and keep those bonuses flowing.
You support the status quo, business as usual, that caused the '08 crash and is preventing real economic recovery.
You support endless money printing, diluting the dollar, silently stealing wealth from the American people, slowly destroying the middle class.
You support taxing everyone to death to fund your beloved public pension funds, make sure those public leeches get their checks.
It appears you support everything that's destroying the American economy.
You're a filthy gutless wall street prostitute. You deserve to be hung on a lamppost just like your wall street masters.
I could not have said it better myself! Thanks COG.
Leo typifies EVERYTHING wrong with the short-term, venal, blinkered, cowardly pro-Establishment mentality destroying the Western world today. Leo, you are toxic.
Leo, read the news at the state level and rethink your position. 800 sheriffs will be laid off in riverside county.........thats one country in one state..........teachers, cops, nurse's and firefighters............massive layoffs are coming as federal stimulus dollars are GONE........
everyone tends to look at the national picture but all the action is at the state and city level....i've 350 stories about the horror facing the states....
http://nakedempire2.blogspot.com/
Go enjoy yourself
But how was the Salmon & Asparagus?
Leo isn't the problem. He's just another Wall Street / big govt prostitute.
TD is the problem. He allows Leo to continue as a contributor.
Now, now Cranky
Leo is Tyler's whipping boy- some combination of masochism and arrogance.
So long as the Fed can expand its balance sheet to infinity (it can"t) and can finance U.S. government deficits (cash losses, really) by illegally monitizing the debt, then Leo will be a hero.
Making society's parasites larger, while squeezing the last juice out of the host(s) is exactly the opposite of what a healthy economy requires.
Would you prefer an eco-chamber? To be fair the post above is somewhat pointless as this is effectively 'my mate down the pub said' xyz, but its interesting to see the rational behind the bull argument.
USA needs to clean the house b4 changing to "bull" on economy.
Leo - You make your points. "The US economy is the most productive economy in the world, and that productivity ultimately determines the wealth of a nation. I mention this because everyone is still focusing on the dismal US labor market (which is finally showing signs of a rebound) and not focusing on the true successes of American enterprise in both the old and new economy."
Let's say this has been true historically. The market however is forward looking. The policies being pursued by the Fed (ZIRP and QE), Treasury (bailouts, stimulus (full accounting of recipients please?)
are not consistent with economic outcomes described in your quote highlighted above, indeed it is opposite to what made the US a relatively successful socio-economic country.
Pain is coming whichever way one turns. Let's hope it is immediate and we reconstruct from there. This maybe wishful thinking with the present Administrations policies and quasi socialist dogma.
If productivity is measured by (generally) output per dollar, and the dollar is debased, then by definition, productivity increases in international terms, no? At least until wages and other input factors catch up.
The US economy is an amazing thing. And it is true that there are many pitfalls that could harm it further, but it is also possible that it recovers too.
I suspect that people (the 80% who are working and the wealthy who never felt hardship) will start spending and hiring simply due to the fact that people's attention spans are so much shorter today. Perhaps the "paper over" strategy will work?
To buttress my point, I'm typing this on my IPad. ; )
Last time around we thought we would be eclipsed by Japan Inc and there were a number of very strong factors that worked in our favor.
Unfortunately, those forces of creative destruction have been seriously debilitated
Instead of attracting top notch human capital we have a brain drain.
Our capital markets are no longer the most vibrant and desirable in the world for start ups and medium sized enterprises.
Venture capital has turned into a get rich quick game.
Our government does not understand what infrastructure modernization means. They still think it means highways and long haul RRs.
The list goes on and on.
The long or short of it is, structurally we are at a competitive disadvantage and cheerleading without substance does a disservice to the country.
"Our government does not understand what infrastructure modernization means. They still think it means highways and long haul RRs."
That explains why Cisco is doing so well. In fact, it's rumored that they won't be needing the help of 3000 of their servants...
"... because everyone is still focusing on the dismal US labor market (which is finally showing signs of a rebound) ..." Showing a rebound? WTF! Since when do the bogus BLS labor statistics actually show a real rebound? The only thing that might be showing up is some manipulated improvement in body count, but the new jobs aren't paying anywhere near the same as the lost jobs, to wit, 65,000 burger slinging jobs at Micky D's doesn't mean a labor rebound. What it means is a lot less real demand for other goods and services. Until both the number of jobs and real wages rise together, there isn't any "rebound".
man fix problem eat hungry dinasour dumb
Well Leo, I agree with both of you.
I am bullish on the stock market, at least in nominal terms, and QE3 is a given.
I am bearish on the real US economy and believe we are in an ongoing depression for sure, maybe it's a great depression.
this thing in japan has not hit home yet in so many terms. but it will. i was listening to the radio last weekend i believe, and they were talking about how used japanese cars are increasing in price. it appears that all japanese parts and equipment that are shipped out of country, will have to be carefully screened and all shipping containers will have to be washed off while at sea, off of the coast near the docks, of the importer, by people with hazmat suits on.....during the manufacture of parts, etc for cars etc, they are going to have to take extra precautions to prevent any radiation particles from getting on shipments etc.......this is going to cause delays and problems. the 3rd largest economy on earth is in trouble. this does not cause me to feel bullish on anything. this black swan event cannot be underestimated....
"this black swan event cannot be underestimated...."
Everyone seems to be whistling...
Agree- Japan is the elephant in the room . 3rd Q will be a disaster , electronics prices rising . Appliances with electronics up 25-30% at BEST BUY over 6 month ago prices - I.E. a SAMSUNG front load washer - all the tech behind the blue lights on your fridge , nuker, stove and dishwasher compliments of Japan . Supply chain will be in ruins for a year of more . WAKE UP
Samsung is Korean and about to get slapped for dumping.
by anynonmous
Samsung is Korean and about to get slapped for dumping.
Uhhh.... Samsung is a Korean company but most consumer products with the Samsung name are MADE IN CHINA.
High Plains, you obviously see well over long distances.
This black swan event you mention could turn into a whole flock of them bad birds pouring out of an encased plutonium cage.
We all wish it were true, but reality gets you every time.
When 2Q earnings come out, the bearish view will be vindicated - it's not going to be pretty.
Leo, if I told you what I really thought about your opinions I would be banned from Zero Hedge.
Go for it! Tyler is not one for silencing free speech, it is the best part about ZH.
He could not say anything worse than what I have said about Leo many times in this forum already.
If Leo is serious, and not merely posting his shallow, laughable, mindlessly pro-Establishment, pro-central banking, pro-fiat, pro-corruption, pro-Ponzi, pro-sociopathic elite power abuse bullshit merely to goad everyone who has a tenth of a brain or a nanogram of justice and justified outrage, then I say that Leo is one of the most pathetic, venal, short-sighted, contemptible, self-declared Quislings and collaborators with evil with whom I have ever personally interacted, and fully deserves to be hanging on the end of a rope from a lightpost along with his pathologically evil heroes Ben Bernanke, Timmy Geithner, Jamie Dimon, Lloyd Blankfein, and a host of others as well.
akaka,
Leo, how's your Greek bond position working for 'ya? Fucktard.
probably as totally fuked as his renewables/green energy positions/pension
Good one Leo. Proved his akak's point of view for him.
Also *quite* childish.
You've now ruined any remaining credibility that you may have had.
There .. that wasn't so hard , was it?
you forgot the third option..he's retarded...
Gosh Leo, I guess I just don't see it. EVERYWHERE I look I see massive debt- personal, pensions, state, muni, and sovereign. It's just a matter of time before the ponzi scheme collapses. I don't see the debts ever getting paid, regardless of tax increases or budget cuts. I think the can keeps getting kicked down the road until it falls down the sewer grate- then game over.
sod
put on your rose colored glasses, there sodbuster. you are being too negative.....