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Rosie Debunks Jim Grant Rosyness
Much has been made of Jim Grant's piece in the WSJ over the weekend in which he implicitly professes his conversion from a bear to a bull. Some have already voiced their argument for why Grant, usually a very in depth analyst of historical and prevailing themes, may have otherwise cut some corners in his explanation of the ongoing seemingly unstoppable 6 month long market move. In his Breakfast with Dave, Rosenberg shares his two cents on why Jim's evaluation is not quite up to snuff. One hopes that Grant's Interest Rate Observer subscriptions do not suffer as a result of what could become a bear war (or alternatively, that a subscription "issue" was not one that caused the rather dramatic shift in perception).
IS JIM GRANT THE LATEST TO BE DRINKING THE KOOL-AID?
The Weekend Journal ran with an article by James Grant, which admittedly took us by surprise (he is a true giant in the industry, as an aside) — From Bear to Bull and in the article, he relies mostly on the thought process from two economic think-tanks — Michael Darda from MKM Partners and the folks over at the Economic Cycle Research Institute.
We highly recommend this article for everyone to read to understand the other side of the debate. But we have some major problems with the points being made.
1. Mr. Grant starts off by saying that “as if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless.” Well, frankly, it doesn’t really matter what “leading economists” are saying because Mr. Market has already moved to the bullish side of the debate having expanded valuation metrics to a point that is consistent with 4% real GDP growth and a doubling in earnings, to $83 EPS, which even the consensus does not expect to see until we are into 2012. We are more than fully priced as it is for mid-cycle earnings.
2. Nowhere in Mr. Grant’s synopsis do the words “deleveraging” or “credit contraction” show up. Yet, this is the cornerstone of the bearish viewpoint. Attitudes towards homeownership, discretionary spending and credit have changed, and the change is secular, not merely cyclical. After all, didn’t consumers just see a record $20 billion of outstanding credit evaporate in August?
3. Mr. Grant emphasizes (the Darda argument) how we had a huge bounce in the economy after the worst point of the Great Depression (in fact, the subtitle of the article contains: “The deeper the slump, the zippier the recovery”). Well, we didn’t have the Great Depression this time around — real GDP did not contract 25% but rather by 3.7%. We probably have to go now and redefine what a massive slump is. But all we had in the mid-part of the 1930s — between the worst point in 1932 to the 1937-38 relapse — was a statistical recovery, and nothing more than that. Nobody from that era will recall that any year was particularly good — each one was just different shades of pain and sacrifice. By the end of the decade, the unemployment rate was still 15%, the CPI was deflating at a 2% annual rate and the level of nominal GDP, as well as industrial production, still had yet to re-attain its 1929 peak. The equity market in 1941 was no higher than it was in 1933 (and long bond yields were heading below 2%) and even a child knows that it was WWII that brought the economy out of its malaise, not the seven years of New Deal stimulus.
So, to concentrate on the wiggles in the GDP data in the 1930s, no matter how large, totally misses the point about what the decade was really about, which was social change, a focus on family, less discretionary spending, and a trend towards frugality that few market pundits seem to comprehend. But the 1930s were the antithesis of the 1920s — not unlike what we are witnessing today.
4. The very sexy argument about how all the government stimulus is going to give the economy a really big lift — combined monetary and fiscal measures are worth 19.5% of GDP. This is viewed as a good thing, of course, but nowhere in the analysis is there a comment about how this “stimulus” is just there to cushion the blow and smooth the transition as wide swaths of private sector credit vanish. We are at the point where 85% of housing activity is still being supported by government interventions. Is this really desirable? According to BusinessWeek, it’s not just the FHA financing 40% of new mortgage originations but the USDA is also allowing builders and lenders to take advantage of rural mortgages that require no-money down and with 100% financing through “a little-known loan program”.
Well, as with most bulls, this new era of state capitalism is a reason to rejoice. But from our lens, what would be more noteworthy would be an article explaining that the massive government incursion with all this “stimulus” is actually more a reason to be concerned than be jubilant — what it really symbolizes is an economy that is so sick that it continues to require massive doses of medication.
It’s not what all the stimulus does that matters — of course, it is there to act as a cushion — but it is what all the stimulus has come to symbolize. A fundamentally weak economic backdrop and a precarious banking system that has government guarantees to thank for its survival.
We noted last week that the Nikkei posted six 20%+ rallies since its bubble burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count 423,000 rally points from all the up-days since the secular bear market began in 1990 and yet the index is down 74% since that time. So actually, there is nothing in this flashy move off the lows in the S&P 500 that is inconsistent with a pattern of a bear market rally — this is not the onset of a whole new sustainable bull market. These are rallies than can only be rented, not owned, and are purely technically-motivated and momentum-driven. They are not premised on improved fundamentals, despite data that are skewed to the upside by rampant government intervention. Just remember, nobody ever built more bridges or paved more river beds to skew the economic data than the Liberal Democratic Party (LDP) did in Japan for much of the 1990s.
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Well if Grant is an equity and economy bull, does that make him a bond bear?
yes
Grant fails to recognize that banks are behaving completely differently than they did in GD1. Banks didn't change accounting laws, abandon mark-to-market, or squirrel away toxic assets in off-balance-sheet accounts in GD1.
In fact, Grant looks solely at GDP -- but makes a massive (really massive) mathematical error by pretending that the letters "GDP" mean the same thing today as they did in the 1930's. Of course, they do not.
While there is indeed commonality between the overleveraged states of the 1930's and 2009 economies, our paper-it-over approach (which consists of changing the underpinnings of accounting rules and economic indicators) destroys any meaningful comparison based upon metrics.
Grant is an extremely smart man. It's too bad he's relying on charts and metrics that became meaningless long ago.
First one has to reliably deflate GDP with accurate cost of living figures which do not exist.
Failing that that, GDP needs to be deflated by either gold, or DXY. If you use gold, we have had about a 25% decrease in GDP since 2007. If you use the DXY, somewhere around 15%.
On top of that, GDP needs to reflect the portion of the economy that is not producing, the P part of GDP.
Another measure might be to deflate by the total amount of debt issuance, since debt is not current production, but a borrowing from future production. A corporate balance sheet would show an increase in liabilities that would net against current cash flow.
thanks for stating the gold deflator....i think
that is the most solid methodology if one
accounts for the fact that it is heavily suppressed
and manipulated downward....
the corect deflator is essential for recasting
nominal gdp and for that purpose i rely
heavily on john williams....
according to his calculations gdp has been
shrinking steadily since 2000 except for a couple
of quarters of miniscule growth....
the fire economy so dominates that our productive
sector is shriveling before our eyes....significant
tax overhaul will be required to rebalance the
economy but the firemen are so powerful that it
may never happen...
Real interest rates adjusted for deflation year
over year are more than the 16.5% collapse in GDP or 33%
collapse in durable good imports or real estate when we
add nominal rates. In other words, the faster and harder we work to pay off our credit, the more behind we get because debt servitude is compounding faster than the economy....
Thus the appropriate question - comment may well be
"Nominal bond bear and nominal stock bull - So what?"
We have a Maximum LT Buy on LT Bonds and Maximum LT
Sell on Big Stocks now which reflects this simple deflationary reality.
Re "WWII brought the economy out of its malaise,"
those who survived the hardships and aftermath of WWII may beg to differ.
72 million people died in WWII. The cost of WWII in
today's dollars was $5 Trillion. It took decades to
rebuild Germany and Japan. Some say the United Kingdom never recovered.
The US stock market did not begin to recover until 1949. INDU did not reach parity in nominal terms until 1954, or in real terms until 1966 when Mr Dow peaked yet again and went sideways for 16 years.
What brought the post-WWII economy out of its malaise
was at least two things:
A)Forced Perspective:
'Been down so long it looks like up' and
B)Forced Savings:
by Rosie Riveters whose husbands and sisters were away in war and could not find credit, cars, gasoline, houses, luxuries, meat or nylons to buy until war ended.
Big D Boarding House Hobo Rules:
Use up, wear out, beg, borrow or steal to survive.
85 million households bought $185 Billion
non-negotiable Baby, Defense and War Bonds, FDR Series E, F or G bonds for as little as ten cent stamps with $18.75 book bonds maturing in ten years at $25 ten year returns, or in other denominations with 3% nominal returns that did not keep up with baby boomer inflation or cover the costs of war taken out of the economy by force majeure.
Selling the Liberty and War bonds in both world wars required intense propaganda from Hollywood, Madison Avenue, Government, Al Jolson, Charlie Chaplin, Douglas Fairbanks, Mary Pickford, Norman Rockwell, Scouts and others. Flags of Our Fathers showed the cost in human suffering.
Series E Freedom Savings Bonds yield stop earning at
maturity. Series Patriot EE bonds earn 1.64%. Series I bonds earn 0.10%. The principal of TIPS decreases with deflation, another reason people who blindly trust government finance are in trouble.
After WWII survivors and the unbombed American infrastructure had savings and capital for family formation and single income households. (Revolutionary Road suggests
the Fifties were not nirvana either.)
Post WWII babyboomer consumers really do not have the foggiest clue about what is going down now, one of the reasons we may only be at the beginning of the breakdown in the money mirage.
The last three Presidencies committed over three times
what we spent on WWII to wage wars on Education, Health,
Poverty and Third World Economies. Despite mandatory regressive and triplicate taxation, the Feds still did not manage to fully fund Medicare, Prescription and Social Security Trust which contain intergovernmental IOUs counted by the Treasury as assets.
AgencyBank bailouts, CapTrade, CashClunkers, HealthScare, MortgageMods, PPPIP, TARP and TELF created more debts
and are not working, except to rob what's left of
this economy.
It becomes a matter of answering the simple question:
"Who are you going to believe,
Green Government Monopoly Media Headline Propaganda or
unemployed empty pocketbook and credit defaults and foreclosures coming soon to homes near you?
Mr Dow could rise to 14,198 in real terms, or soar up 4.3888 times to 42,949 in nominal terms. Real estate
could do similar as it did from 2001 to 2006.
We would still be in the secular bear market which began in 2000 (see the LT Dow:Gold chart on the link).
Such is the inflationary money mirage behind US, not ahead of US. Most people who were not adults in 1929 do not comprehend this simple truth. There is no more credit left. Even 0 said we are out of money.
It is beginning to look like more people are figuring
financial reality out with the help of free communication on the internet and websites like 0Hedge.
Reading Joseph and The Pharoah might give more light.
How long do we allow our freedoms compromised by the
moneychangers behind the curtain of OZ?
To paraphrase family members who survived both World Wars:
"Get out of debt, and stay out."...
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
http://www.jubileeprosperity.com/
Darda is a hack. I don't have it handy but you should've seen the crap he was spewing in late 2007 just before the drop. Totally oblivious! Kudlow loves him if that tells you anything.
It's always nice to see Rosenberg as a voice of reason.
By the way, looking over at the RANSquawk News ticker, it can't be THAT obvious, can it? The market spikes like mad at virtually the same time as the Fed announces another $4 Billion POMO?
Listen, I don't things are super rosy but the reality is that part of the contraction last year was caused by fear and severe underspending by those who could, which in turn made things worst than they should have been. I run several businesses across different lines and I can tell you that things are not as great as they were two years ago but definitely stable and above where they were last summer. Our efficiency has gone through the roof and we are now back to spending on capital equipment. I see this same change at home, where I cut expenses dramatically and are now spending once again since I feel like my income is a little more stable.
The thing is that while the economy is much more muted than it was and will most likely will be that way for the next 5 years +, 0%-1% GDP growth is still growth and not the total destruction that many predicted; so as long as things are stable, things will continue to progress. Maybe the market goes down, maybe it keeps on going up, people will keep trading and suckers will invest, just like always.
The only real problem will be energy and that is real so we better pray that things stay muted long enough for us to come up with better energy solutions. If something does us in it will be that, not CRE or extended defaults. Money is imaginary people, food and getting food to people is not.
The problem with really low GDP growth is that debt levels are expanding at a much faster rate which is unsustainable. You need at least 4-5%. 0-1, won't cut it. 2.5% is needed to maintain the unemployment rate.
thanks for sharing your anecdotal stories. do you
mind stating what lines of business you are in? i
think these insights are excellent complements to
the statistical story....they may in fact be
leading indicators....
on the other hand gdp has been contracting THIS
year at rates not seen since the 1930s so at a
macro level there are profound problems....
regarding growth, the marginal productivity of
debt is negative; thus there will be no real
growth.....people fail to understand that
debt is at least a logarithmic (maybe exponential)
function which moves implaccably regardless of
the s-curve of the real economy....we have reached
a tipping point where structural debt is unsustainable...
as a consequence i see continued contraction -
which we have had since 2000 except for 2-3
quarters....this problem has been building
for 10 years but reached critical mass last year
and the government and fed keep intervening
to prevent workout forces to resolve the damage...
We do a few different things; we are commercial real estate investors, affordable housing developers, we own a modular housing manufacturer, a large commercial contracting business (window treatments and low voltage wiring), we also just started selling an environmental product I can not mention to the armed forces and are getting into bio-retention as well; we run a small quant hedge fund and have investments in small industrial type businesses.
From what we are seeing, unemployment could continue to go down for another few quarters but companies seem to be adjusting and becoming healthier. For example, our contracting business is doing great because our main competitor went bankrupt due to mismanagement. The modular housing business is doing great as more people are building that way in order to be more efficient and save money. The economy is a fluid, non stable entity that is constantly changing regardless of what the government does as humans adjust to try to survive.
What I am not seeing is the manic and the freezing that happened last summer and I do believe that we seem to be stabilizing and that is a good thing because if we are not going down then we are probably going up. I dont think that the economy is going to be gangbuster but I do expect us to overshoot unemployment and then get a nice pick-up that people will mistake for a trend probably in the next few months, maybe by next spring or summer.
Dont get me wrong, I agree with most everything on the site here and I think things are way messed up but we can not predict and if you think things are going in the crapper, chances are that you are wrong.
My patients are being tested. Rally's on POMO's, 40% of volume on government owned stocks, USDA mortgages? when is enough enough?....
"My patients are being tested."
Are you a doctor?
IS JIM GRANT THE LATEST TO BE DRINKING THE KOOL-AID?
I think he's gone back for seconds. Thirsty boy.
My patients are being tested. Rally's on POMO's, 40% of volume on government owned stocks, USDA mortgages? when is enough enough?....
the reality is rosenburg is right
stop the 0% rates , stop all the training wheel programs and fake stimulus BS and let's see where the economy and stocks really stand
until then the bulls need to STFU
exactly. x-mas will be the real litmus test; anything less than exceptional will create a retail stampede through the doors of bankruptcy courts.
I agree.
Low rates are a big part of the problem even now. A decent hurdle would filter out a lot of crackpot investment ideas. They would have to pass a serious business case, instead of being funded because there is no cost. Raise rates to 5% or 7%, and we would have a sustainable recovery, instead of a fake one.
Funny how he turns bullish after over a 50% rally in stocks. What would his stance be if the S&P was between 700-800 keeping everything else equal? Using the stock market as a barometer for economic recovery and health is asinine when trillions of printed money is being pumped into speculative assets. The Fed is simply blowing another bubble and each time the duration is shortened and the crash from the peak more severe.
My friends 19 year old daughter was hired by a company to shop at a very large local mall in her city. She works on Saturday and Sundays and is paid $8 per hour(not including bonus plan) to slowly work her way through the mall.
She is issued a credit card with $250 dollars on it and cannot spend more then $35 per item. The bonus plan: she gets a bonus if she ends the day with more than 6 shopping bags from different store. The bonus is $0.50(cents) per/hr per unique bag over 6 and capped at 12. So if she has 12 bags she gets $11/ hour for the day of shopping. Starts at 11am and quits at 6pm, meets her manager and surrenders all the bags.
What a country we live in.
what kind of company hires her to do that, and why?
Secret shopper?
The Mall itself, to fake out the Mall's lenders?
I didn't see that disclosure item in the CMBS
Offering Statement. Talk about the velocity of money...BWWWAAAHHhahahaha
So in seven hours, the firm pays out $77 dollars taxable; it is a business expense to the firm, so net less cost. The state gets its Sales tax and the goods get recycled, mall traffic apears properly inflated like filling seats at an empty restaurant serving fake food or award shows filled with extras looking full..in short the Potemkin village is here.
Pericotal, LLC is the name of the company. I tried to do some research and found nothing on the company. The Secretary of State lists the managing partners of Pericotal as members of a law firm.
We think it's the mall but when I talked to my friends daughter she said that she was in a training class with about 200 other teenagers bussed in from multi-states. The training class was held on a Sunday night from 9 - 12 pm at a mall that had closed their doors but left all the stores open for the training class. The kids learned how to shop, literally. They we taught things like how to focus on products to avoid getting unwanted attention from the opposite sex, "Slow Motion Shopping", and how to be conspicuous in the food court. I shit you not, I was amazed.
It's a fucking shame.
I would do that job. I love the mall.
If you read Grant's letter it is hardly nuanced. He may make out a rosy picture, but if you follow the facts he truly lays out, he is uberbearish. He knows this thing is in bad, bad shape. A super credit contraction and an avalanche of unstoppable defaults, insolvencies, bankruptcies, national budget blowouts.
Perhaps he took the opposite tack in order to get wide viewership. Read close and it is apparent that his demeanor is nothing like the title.
He is extraordinarily knowledgeable and backs the wisdom with unshakeable mathematics. While his heart HOPES for nearterm sharp growth, his HEAD knows that is impossible.
The next twenty years will be nothing like the past 20. We have the makings of a French or even Russian revolution beyond the financial collapse and currency crisis forthcoming.
I think in times like this it is reasonable for bears to take a bull stance if only to see what's going on. Likewise, it will be a reasonable thing for bulls to think like a bear to see what sticks.
Viagra—it does wonders.
Since it wasn't that long ago he was pounding the table in favor of holding gold and selling/shorting bonds I'm actually mystified.
Separate his factual statements from his emotional appeals like a logician. It will lay bare his case that the economy has been driven into a deep ditch.
What is definitely different is the massive monetary prop job. While most of us here predict a tearful end, it remains a great fiscal and monetary experiment in progress.
You call it a "monetary experiment".
I call it a "game of chicken".
Either way, the stakes are very high.
Rosenberg - struggling to remain relevant.
Your Japan/LDP comment brought back fond memories of road work in front of my Roppongi house in the early/mid 1990's. Every morning for the better part of a year and a half a work crew removed some steel plates from the street and dug out dirt surrounding some sewer pipes. Late in the work day---every day---they would take the time to put all the dirt back in the hole. The next morning, the same crew re-dug the hole, worked on the pipes, then filled it in again. No fewer than 200 times did they remove the same dirt, Cool Hand Luke style, and put it back in, all in the name of public works. I guess at least a few folks got a paycheck, and the LDP's favorite constituency (construction industry) was kept loyal and happy.
Odd thing was that since Japan is Japan, each morning the foreman instructed the same backhoe operator regarding the morning's requirements, and the backhoe operator nodded as if he was hearing the instructions for the very first time.
And some people call it a lost decade.
While this claim is not necessarily incorrect, let me point out:
I know exactly that construction project that you mention, as I lived in Roppongi in 1995-1997, and returned many times later, the last time in 2007.
This excavation was related to the brand new Roppongi-Ichome subway station, part of the extension of the new Namboku subway line which was going on at the time.
At the same time, there may have been work related to the new highrise development, which was built on the land occupied by the old Ministry of Self-Defense, which now sits directly adjacent (less than 100 feet away) from that excavation project you mention.
Not the same project, though I am quite familiar with the one you mention. I was on the other side of Roppongi Dori, on a side street near the infamous Cassanova Club. The time period for the work was, if I remember correctly, 93-95.
We'd call that Groundhog Day here in the US.
LOL-Did you know that the title of Mr. Grant's most recent book is"Mr. Market Miscalculates"?
Although credit contraction is in full force, I am baffled by contraction of spread between Moody’s BAA and AAA down to the level of normal economy. It has contracted from 3 to 1.2 since March 2009.
It is not possible to have credit contraction and narrowing of spreads at the same time. Something has to give.
"Market considered stronger technically from recent period of consolidation, move upward on higher volume; declines of June and early August are seen as having shaken out weak hands, as indicated by shrinkage in brokers' loans. Recent economic news has also been encouraging, including steel production, retail and mail order sales. Roger Babson's switch to bullish stance has also attracted attention. All indications point to good sized gains in stocks in the near future, though third-quarter earnings reports in a few weeks may change the trend."
Jim Grant will be the Roger Babson of our era - but he's right for now courtesy of the Fed.
Here are some assumptions:
1. The FED (and every other CB in the world) has a vested interested in having asset values rise in order to affect the consumer metality.
2. There is no transmission mechanism for these price increases to reach and affect the consumer directly. True supply and demand works there (i.e. Housing, food, water, clothing etc)
3. It should be no surprise that asset prices are rising, given all the liquidity flowing into the financial systems around the world - at almost Zero cost to the institutions
4. Therefore, the world's markets do not reflect views on the economy 6 months ahead, but rather today's knowlege about how much risk-free money is available to throw at risky assets.
The rise in equity prices has nothing to do with the economy or individual businesses - for the most part - and everything to do with Banks borrowing from CBs at zero and lending to Finance/Treasury ministries at 3 - 5%, using the difference to leverage speculation - for which they will not be punished if it fails.
http://seekingalpha.com/article/50173-michael-darda-framing-the-economic...
Darda said there would be no recession
http://online.wsj.com/article/SB117375326105635045.html
More Darda '07. No sub-prime risk.
Thanks for the link. Here is a good clip from it:
"Some argue that the problems in the sub-prime mortgage market and manufacturing are only the beginning of a much broader and more intense slowdown that is likely to undermine the labor market and stifle consumption. While the problems in the sub-prime mortgage market shouldn't be taken lightly, mortgage resets are estimated at $10 billion to $15 billion during the next two years -- about 0.1% of nominal GDP and 0.02% of aggregate household net worth. Sub-prime borrowers are mostly households in the bottom 20% of the income distribution, which accounts for only about 8% of total consumption spending.
With broad measures of commercial bank credit and household deposits expanding at a 9.8% and 10.3% annual pace, respectively, and global foreign exchange reserves expanding at a 17% year-to-year pace, it hardly seems that a broad-based liquidity squeeze or credit crunch is on the horizon."
Hard to believe that of the several million Americans who have joined the ranks of the unemployed, Michael Darda is NOT among them.
economists & weathermen...an uncanny ability to be wrong & stay employed
the dismal science...dismal indeed
Oh my dear lord...
Paid to shop... The frickin end is near! LOL
That is so crazy I don't even know what to say!
Et tu, Jim?
as for Darda - cocksure and wrong
Having read the Grant article, front to end, I am amazed that he agreed to do it. I have seen Jim give interviews and they are erudite. This piece is/was a bit recondite. It stated that the Fed has to be careful not to re-bubble, that the bounce will be bigger than expected and that the melt down is later than tomorrow. The question, "Why now?" is valid as are the aforementioned objections. Peculiar, superficial and not like him at all.
here is another reasoned voice which supports the grant thesis....
the argument is that the weekly leading economic indicators index is sharply up meaning that we can expect growth in the reasonably near future...
http://www.kitco.com/ind/nichols/sep212009.html
i see too many structural problems to fully buy it but it makes a strong prima facie case that growth is in the cards...
i would also want to know how distorted the index is due to stimulus and articial manipulations...
that index is up sharply because the stock market is up sharply
talk to people who own real businesses large and small
there is no recovery at this point
to put it more clearly, there is no fucking recovery
pure bullshit. don't eat it.
my understanding is that the ecri weekly index
does not include stock market indices....if you
know otherwise please post support....the
conference board's lei includes stock market
indices and perhaps you are confusing that
index with ecri's weekly wli.
secondly, no one said that there is a recovery
at the moment...perhaps you would do well to
understand the distinctions between leading,
coincident, and lagging indicators...
Here's the same guy's commentary from April 16, 2008:
http://www.kitco.com/ind/nichols/apr162008.html
“Recessions rarely happen when everybody is expecting them. Yet this seems to be the situation now, as the current slowdown is the most-predicted in history.
But almost by definition a widely-anticipated recession will be short and shallow, and over soon after it starts.”
“In the short-term, a rally up to SPX 1440 can be expected. Once the SPX breaks over 1440, it should start a self-reinforcing upside cascade that brings in billions of dollars from the sidelines, pushing the SPX relentlessly higher. This could be one of those surprising rallies where you just never get a chance to buy in on a pull-back.
I know, it sounds implausible, but that's why it should happen. Ironically, Abby Joseph Cohen's year-end prediction is likely to be too low, but she got fired over it anyway. Even mighty Goldman Sachs panics at the bottom.”
that prediction certainly was weak but ecri's
wli is the main point here and it appears
that it has a reasonably good track record....
all i am saying is that grant may be persuaded
by such an index and see recovery in 6-10 months.....
unless someone knows that the wli is a total
piece of shit, then i think it's evidence
which should be included in forecasting economic
activity given its past record...
I'm a subscriber to Jim Grant's IRO. One thing you ought to know is that Jim's views are always right, but he is always early -- by 2 to 3 years. So subscribing to his newsletter is like buying new-vintage fine wine -- when you get his newsletter in the mail, tuck in in the closet for 3 years, and then open and read it. Then the timing and direction of his views would align.
So wrt to the latest bruhaha, I would say he is 2 to 3 years early, and the rebound he is looking for would be that much later. I also guess the base from which the SPX will have a real, sustainable, secular bounce would be in the 300 to 400 range, not the 900-1000 range here.
Saying Grant is right 3 years later is saying he's a stopped clock.
Ohhhhh!! Smackdown!
disclaimer: i did not read all the comments, so possibly this is redundant.
fyi, grant's did send out a compendium of recent articles to subscribers before their annual summer hiatus, and for the first time that i can remember told everyone to forward it to as many people as they saw fit. this is a massive about face for a publication that was at the forefront of digital locks to stop unauthorized dissemination. leads me to believe his subscriber base is crashing.
The pieces that Grant included in that "special" edition were selected with perfect hindsight and had some investment recommendations that made him look like Nostradamus. I have no idea if the rest of his calls were that accurate or not, but if they were he should have made so much money that he wouldn't need to publish a newsletter.
I've been reading "Grant's Interest Rate Obserber" for 30 years.
Blow him off at your own risk.
I agree, Grant has earned a lot of respect. The question is how persuasive did you think his piece in Saturday's WSJ was? I thought it was the weakest piece I've ever seen from him, but it's entirely possible time will prove me wrong. I just don't see how you get a big rally starting from record-high debt levels, double digit unemployment, tremendous excess capacity in many industries worldwide and stocks at very multiples of earnings.
Some great guys have lost "the touch" in the past...like he just appears to have done.
Been around decades seen 'em come and go.
I second the commenter above. I've read Grant for a long time and he is scary smart. And he doesn't write anything without considering it very carefully. As for a "crashing subscriber base"; not likely. The other people I know that read Grant would rather give up an arm than GIRO and frankly I feel the same way. Best research money I've ever spent.
I also think you need to view his call in context. He is not saying that everything is wine and roses. He's saying that the rebound in GDP will be bigger than expected. That's it. He doesn't say how long he expects that rebound to last or if it will be high quality growth. He just says that GDP will bounce big. Does anyone here really think GDP is a good indicator of how the economy is performing? Grant also says nothing in the article about the stock market. I'll bet anyone that he didn't write the headline.
And lastly, the vehemence with which Grant has been attacked for this article makes me think he's probably right. Anybody here ever hear of being a contrarian? Well, you can't be contrarian in an echo chamber. Get out of the zero hedge bubble for a while.
"Nobody from that era will recall that any year was particularly good — each one was just different shades of pain and sacrifice"
Actually, many (30-40%) saw it as somebody else's problem (sound familiar?) and were largely unaffected by it except when necessity required that they directly confronted it through a beggar, a soup kitchen, a Hooverville or a news-reel.
A good book is Studs Turkel's: "Hard Times"
These same conditions have existed in Mexico for some time and it should be clear that this is the new reality.
Technology and globalization require that only the top 40% produce, as is found in Mexico, and the rest are destined to be wards of the state or menial servants regardless of the education level.
Don't worry though, the lucky 40% in Mexico enjoy more comforts and amenities than a equal sampling in the US.
They have had fenced and gated McMansions for some time complete with a water filtration system and an electric generator to supplement the beautiful British built infrastructure systems built in the early 20th century.
(James Grant's Interest Rate Observer is always an anticipated read for this blogger. However an eyebrow did arch when I perused his article Saturday morning in the WSJ, 'From Bear to Bull.'
It seemed to be uncharacteristically slapdash and perhaps, conceptually, it was penned in anticipation of setting the tone at the Grant's conference which took place yesterday.
His first point:)
The deeper the slump, the zippier the recovery.
(That would certainly appear to be germane for the markets for as Rosie points out) ,
'Mr. Market has already moved to the bullish side of the debate having expanded valuation metrics to a point that is consistent with 4% real GDP growth and a doubling in earnings, to $83 EPS, which even the consensus does not expect to see until we are into 2012. We are more than fully priced as it is for mid-cycle earnings. '
(Or another way to look at it)
LEX Column
Financial Times
Sept 23
A fair price for an index equals the return on equity times book value per share multiplied by the price-to-earnings ratio. Using the long-run average p/e of 16 and book value per share of $451, the S&P 500 should trade at 867, or 18 per cent below today’s prices.
(So S&P broke the 2002 low and hit ~670. It is now at ~1070 and fair value is around ~870. Got symmetry?)
(The right honorable Mr. Grant's second point :)
To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."
(As a student of history, one might think Mr. Grant would look at that statement in an inverted fashion - for example, as written on this blog whilst imagining a conversation with Mr. Gann):
Gann :Your recent run from 1982 to 2000 was a bit larger in price gain than 1896-1929..and of course in less than half the time. However the 8 year bull in the 20s that ended on September 3, 1929 increased price by a factor of 6 while your 8 year run from 1992 to 2000 increased prices less than 4 times. After the greatest bull market in history, the greatest bear market in history must follow... my philosophy is that one must look back in order to determine how long the bear campaign might run. Going back over all the records, we find that the greatest bear market had lasted not more than 43 months and the smallest had been as short as 12 months. Some of them had culminated around 27 months,30 months,34 months and in extreme declines,anywhere from 36 to 43 months. You handed me cue cards describing the research since the Great Depression but I can't read your writing...'
AM : 13 recessions since 1929 lasted on average 10 months. The longest,the Great Depression, lasted 44 months. The third longest(1973-1975, 1981-1982) each lasted 16 months, and we're in the second longest and counting. How would you then compare our outcome given yours?
Gann : 'On July 8, 1932, the Dow Jones Averages made a low at 40 and 1/5. This was equal to the April 1897 low and was successfully tested. Several bear market lows were tested and broken on that campaign. In fact we can track a general uptrend of higher lows from this April 1897 and July 1932 low up through the May 2000 highs. This current bear market campaign with highs in March of 2000 and May of 2007 (2007 higher closing but lower intraday) has broken past support similar to our crash in 1929 and subsequent rally. The key will be to see what support holds. So far, the 2002 S&P 500 low of 768 obviously did not hold.'
(Relying on Mr. Darda for an economic prognostication should also carry a disclaimer that his crystal ball has resulted in broken glass being served, for example:)
WSJ
March 13, 2007
By Michael Darda
The Expanison continues
The latest jobs report is further evidence that the doomsayers aren't right about the state of the U.S. economy...
As always, prosperity has its discontents. With profits and productivity strongly outperforming compensation for most of this cycle, many of the usual suspects have emerged to call for higher tax rates on upper earners, caps on executive pay and other "equalizing" measures. But history shows that profit and productivity cycles always revert to the mean, with compensation playing catch up as the demand for labor rises and unemployment rates fall.
Some argue that the problems in the sub-prime mortgage market and manufacturing are only the beginning of a much broader and more intense slowdown that is likely to undermine the labor market and stifle consumption.
As the drags from housing and manufacturing abate sometime later in 2007, it is more likely than not that the economy will return to an above-trend growth rate powered by strong consumption (via a tight labor market), strong global growth (exports) and a pickup in capital spending (thanks to record profits and still-tight credit spreads).
(I am not sure why Mr. Grant keeps on calling Darda a non-conformist...)
(And Mr. Grant's third point ...)
Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute's long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983.
(That certainly seems like a good indicator, however ...)
NEW YORK, Sept 18 (Reuters) - A weekly gauge of future U.S. economic growth rose to a level last seen one year ago, while its annual growth rate hit a fresh record high, feeding hopes of a recovery immune to looming economic threats.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 126.2 in the week to Sept. 11 from an upwardly revised 126.0 the prior week, a figure ECRI originally reported as 125.4.
It was the group's highest index reading since Aug. 29, 2008, when it was 126.3.
(How did September 2008 turn out? Although the ECRI is a black-box it has been reported that stock prices are weighted as a forward indicator ...
Mr. Grant's conversion would be more persuasive if he had bothered to articulate how with falling rents, wages and house prices, large and growing structural employment, and stifling debt levels the recovery will zip up to what Mr. Market is pre-calculating.
Or perhaps surprise,surprise, once again, Mr. Market is Miscalculating. )