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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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Sorry Leo, I am being condescending and derogatory. You've been watching way too much MSM bullshit, and you're starting to believe it.
Maybe Leo was just spamming his bear friend's blog. Shit happens.
No doubt productivity is an important factor in the standard of living and the health of an economy, but certainly it is not so overriding as to trump all others. If it were, then why did we have the 2008 financial debacle? It wasn't the loss of productivity from the previous year, was it?
Your friend also addressed productivity, when he pointed out that it has very limited room to improve from here on, since corporations already have been working their employees like rented mules.
State and local governments are about to get more "productive", as they lay off personnel to meet their strained budgets. It's hard to see this kind of productivity adding to our GDP.
I'm not saying that you're full of crap, Leo, since you have been on the correct side of the market, and the feeble but discernible recovery. For the sake of 1/2 of my family and freinds, who are under or unemployed, I hope that you're right in your optimism.
This "recovery" is impossible to sustain.
1. The Fed balance sheet has ballooned 300%. Now around $3 trillion.
2. Deficit spending at 10% of GDP while manipulated GDP growth is a paultry 3% BEFORE ADJUSTING FOR INFLATION.
Don't fight the Fed was a meaningful saying when the USA was the world's largest creditor nation, now THE FED IS DEAD is more pertainent to the world's largest (and growing) debtor nation.
Bernanke achieved what he needed; he bought time for the criminals to bonus themselves an exit.
+1
With all due respect to you, Leo, but I have got to challenge you here. Weren't you propositioning that we will be having a monster job growth number starting early 2010. I think there are quite a few posts on this web site with that opinion of yours. And that job growth still eludes us, one and a half year later.
So, if you were wrong then, what makes you think that you are right now. Because the Fed and their infinite printing machine are backing your supposition? Honest question to you. Am not trying to be condescending or derogatory.
"The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery."
Leo -
At least you posted a bearish view . Thats a start . Next step , climb out from under the rock where you hide with your Lexus and Martinis .
Don't worry, the sashimi will eventually get to him.
Leo really needs to start hanging down at the track more..
Everything the bear said was true; in fact the housing crisis will take at least a generation to solve. BTW, America HAD the most productive economy until the FED, purposely fucked it up, enabled by corrupt politicians that put those in banana republics to shame. As an American, I remember fondly the Bill of Rights; the individual freedom that this country once had that that distinguished it from the "commies" and the fascists that my uncles and father fought. Somewhat naive, but still a source of pride. But all the rights that Americans once thought of as inalienable are now gone in a growing fascist template that will eventually swallow you too LEO. How about the secret North American Union talks, ex Congress or Parliament between Obama and Harper? Hmmm.
"Moreover, one crisis (either in America or elsewhere) could cause systemic tension to explode."
The MENA implosion was sparked by one youngster in Tunisia setting himself on fire. Yesterday a judge in Indiana ruled that police can now enter your private home without a warrant and without stating reason (what's the Constitution, you say?). One of these days we're going to have our own unexpected spark from left field that will set the powder keg ablaze.
This is the "Stamp Act" that started the Revolution with the Colonists against England. Soldiers could enter any residence and search for papers without stamps. They would claim food, drink, and household items as contraband and confiscate them. They would also rape the women and the troops may decide they liked it there so they would stay for a week or so. The Stamp Act, this is the modern day version, this is TYRANNY.
that's Govt in a nutshell... they turn a person taking drugs for their own enjoyment and pleasure, which is nobody on Earths fuking business but their own, into a farcical decades long failure called a 'Drugs War'
we go from a private leisure/pleasure activity to a multi-billion Dollar meddling fascist farce compliments of the biggest clown show and shit hole on Earth, Government
Here's a "spark".
http://stopthedrugwar.org/chronicle/2011/may/13/tucson_swat_team_kills_a...
In a mid-morning drug raid May 5, a Pima County SWAT team executing a search warrant shot and killed a 26-year-old Afghan and Iraq war veteran after he confronted the intruders with a weapon in his hand. Jose Guerena become the 27th person to die in US domestic drug law enforcement operations so far this year. (Actually, he was the 25th, but the Pima County Sheriff's office has been so dilatory in releasing information that we logged two more drug war deaths before we were able add this one to the list.)
According to the initial police account, when SWAT officers broke down the door of Guerena's home, which he shared with his wife and young child, he confronted them and opened fire. "The adult male had a long rifle, opened fire on the SWAT team. The SWAT team returned fire and the male is pronounced deceased. The woman and the child are unharmed," said Pima County Sheriff's Deputy Jason Ogan.
Six days later, police admitted that while Guerena, a former Marine, was holding an AR-15 assault rifle, the safety was on and he had not fired it.
MF's
*If you go out in the woods today
You’re sure of a big surprise.
If you go out in the woods today
You’d better go in disguise.
For every bear that ever there was
Will gather there for certain, because
Today’s the day the teddy bears have their picnic.
Picnic time for teddy bears
leo really you need to understand Austrian economics ,, debt and assorted reason why productivity is one dollar while debt is five dollars .. a minus 4,,
inflation in real time is closer to 11% unemployment in USA is closer to 22%
watch out for the great crack up debt implosion, and inflation cost push to expand ,
pensions in the usa are so underfunded qnd are setting on mountains of quadrillion derivative instruments of debt .
mises , et a have spelled it out for the dismal science ,
we continue to get it wrong All the time and insist on keep doing it . as if that will make a difference.
the Keynesian experience has produced war, poverty , unemployment, and death .
and until you have a good handle on economic reality you will get it wrong and time will make mince meat of your illusions
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.
@ Leo Kolivakis
Now Leo, I am not one of your knee- jerk critics, but I searched the list of productive economies and Norway + Republic of Singapore came ahead of the U.S. in 2010.
Ireland was way up there also. # 7, I think
Oooopsie Things can change so fast these days.
Oopsie, why don't you go back several decades...Duh!
Oopsie welcome to today (reality) Leo. . . the US economy is a house of (credit) cards, no different to Greece or Ireland. In fact that is the real problem because post-2007's credit crunch (ie. collapse of debt) the 'solution' chosen by the US Govt/Fed was to re-build the credit cards even higher
digging a hole deeper or a debt mountain higher, whichever way you look at it 2007-2009 was just the warm-up act for 2012-2016
the productive part of the economy cannot dig the unproductive part out of the hole, they are seperate entities... like all Empires Americas productive parts have passed the tipping point to be robbed enough to shore up the unproductive (Big State, Big Banksters, Big Monopolists), that disparity can be measured in the vast $Trillions added in the past 3 years to the national debt to keep the unproductive (parasites) afloat... Welcome to kicking the can and a slow, then sudden, meltdown
That hopey feeley American dream, our savior...only the Bankstas stripped it down and put it up on milk crates...
Hmmm. The Bear guy is telling you WHY. The BULL guy is talking about hope.
They call it "bull" for a reason, I guess.
Squeeky Fromm, Girl Reporter
http://www.noob.us/humor/the-most-generic-news-report-ever/
News at 6?