Seth Klarman Expains When "Investing Is At Its Hardest" And Why He Is Not Joining The Momentum TradeSubmitted by Tyler Durden on 05/05/2013 09:35 -0400
If you thought that Baupost's Seth Klarman would be the next to join twitter, #timestamp his minute-holding trades, ignore the money-losing ones, trumpet his winners, always make money, scream at all those who don't agree with his "strategy", and otherwise become what is known these days as a (momentum) investor, we have some bad news: it's not happening. Here's why.
Monday's income and spending (and implicitly 'saving') data provided plenty of fodder at the headline level for any and every opinion. We explained in great detail just how weak the data really was (here and here). But the following two charts suggest that any optimism of organic consumption-led exuberance is completely misplaced. Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff's David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one. But apart from that, everything is fine...
A lot of Americans know that the US government is out of control. Anyone who has cared enough to study the US Constitution even a little knows this. Still, very few of these people are taking any significant action, and largely because of one error: They are waiting for “the good guys” to show up and fix things. Some think that certain groups of politicians will pull it together and fix things, or that one magnificent politician will ride in to fix things. Others think that certain members of the military will step in and slap the politicians back into line. And, we're sure there are other variations. There are several problems with this. The sad truth: No one is going to ride in and save you. If you want things to get better, then YOU will have to make them better. YOU will have to stand up and take the arrows, yourself. Liberty, at this stage of human development, requires risk and pain.
Confused about the latest disconnect between reality and propaganda, this time affecting the (foreclosure-stuffed) housing "recovery" which has become the only upside that the bulls can point to when demonstrating the effectiveness of QE now that the latest attempt at economic recovery has failed miserably both in the US and globally? Gluskin Sheff's David Rosenberg is here to clear any confusion.
The world remains transfixed in the belief that the Federal Reserve can 'prime' the economic pump one more time via monetizing trillion-dollar deficits ad nauseum, inflate its balance sheet to unprecedented levels, and still successfully exit from this largesse leaving behind a 'better' place for mankind. Judging by crescendo of cognitive dysfunction, the nominal price level of US equities can dismiss current weakness since we just have to wait a little longer (and print a little moar) and the old normal growth will rise phoenix-like from the ashes of our post-debt-super-cycle world. The truth is far simpler - US equity markets are not valued on earnings (LTM, current, or forward); they are not priced off discounted dividends; there is no discounting of macro upturns; or great rotations. Since the crisis began, there is only one thing that matters, as Gluskin Sheff's David Rosenberg notes from this stunning chart, "the NYSE Market Cap, this cycle, actually went up dollar for dollar with the expansion of the Fed's pregnant balance sheet."
One of the many things holding the nation back at the moment is the complete lack of incentive to be a creative, productive and honest member of society versus the tremendous incentive to be a corrupt, thieving, lackey for the establishment. In a free market system, with a strict set of rules governing the game that is applied to everyone equally, market signals and incentives exist for companies to create a great product and to meet customer needs with great service. In contrast, within a crony capitalist system, the primary incentive is to get as close as possible to political and corporate power in order to financially benefit from their oligarchical ownership of the controlled economy. It is only within a completely disconnected from reality, crony, fraudulent economy where you could have a situation in which hospitals actually earn much larger profit margins from making mistakes and harming their patients, than from providing excellent care.
Back in 2010, Goldman's Jan Hatzius, fresh on the heels of QE2, committed rookie Economist mistake 101, and mistook a centrally-planned market response to what then was a record liquidity infusion, for an improvement in the economy (a move we appropriately mocked at the time, as it was quite clear that the Fed's intervention meant the economy was getting worse not better). It took him about 4 months to realize the folly of his ways and realize no recovery for the US or anyone else was on the horizon. He then wised up for a couple of years until some time in December he did the very same mistake again, and once again jumped the shark, forecasting an improvement to the US economy in 2013, albeit in the second half (after all nobody want to predict an improvement in the immediate future: they will be proven wrong very soon) based on consumer strength when in reality the only "reaction function" was that of the market to the Fed's QE4 (or is it 5, and does it even matter any more?). Four months later we get this...
Back in 2012, amid "intense pressure from Obama" including an appeal for its passage in his 2012 State of the Union address, Congress passed the Stop Trading on Congressional Knowledge (STOCK) Act (with 96-3 theatrical votes in the Senate, and 417-2 even more theatrical votes in the House) - a bill prohibiting the use of non-public information for private profit, including insider trading by members of Congress and other government employees. It is unclear why until 2012 it was perfectly legal for congress to trade on inside information, something we pointed out in May 2011 when we wrote that a "A Hedge Fund Comprised Of Junior Congressional Democrats Should Outperform The Market By 9%" as it turned out flagrant insider trading abuse occurred mostly within the democrat ranks of the House (compared to a mere 2%+ outperformance by Congressional stock trading republicans). It turns out that any cynical skepticism regarding Congress' ability and willingness to police itself was well founded, as last night the House eliminated a "key requirement of the insider trading law for most federal employees, passing legislation exempting these workers, including congressional staff, from a rule scheduled to take effect next week that mandated online posting of financial transactions."
While hope springs eternal that the US housing sector 'record-inventory-compression and foreclosure-stuffed' 'recovery' will become self-sustaining, there are two rather disappointing 'facts' to ruin the 'fiction' that all is well. As Gluskin Sheff's David Rosenberg notes, not only are mortgage applications for new purchases stalling rather notably from a 'red-hot' +16% YoY in January to a mere +3% in the last week; but an even more critical indicator of housing's health just turned negative after providing hope for the last 14 months. The year-over-year growth in bank-wide real estate credit has turned down again - after first turning positive in February of 2012. So the first (and second) derivative of real-estate credit is now on the down-swing - not the stuff of sustainable housing recoveries.
Sam Zell: "This is a very treacherous market," thanks to the giant tsunami of liquidity, "the problems of 2007 haven't been dealt with," and given the poor macro data and earnings, "we are suffering through another irrational exuberance," leaving the entire CNBC audience speechless when he concludes, "the stock market feels like the housing market of 2006."
Over the past four years one of the dominant "deflationists" has been Gluskin Sheff's David Rosenberg. And, for the most part, his corresponding thesis - long bonds - has been a correct and lucrative one, if not so much for any inherent deflation in the system but because of the Fed's actual control of the entire bond curve and Bernanke's monetization of the primary deflationary signal the 10 and certainly the 30 Year bond. The endless purchases of these two security classes, coupled with periodic flights to safety into the bond complex have validated his call. Until now.
The World Gold Council noted that central banks increased gold buying 17% to 534.6 tons last year.
Central banks are among the shrewd investors who buy gold bullion on dips. It was reported that South Korea bought 20 tonnes of gold last month rumoured to be below the $1,600/oz mark. This is the first purchase this year for South Korea, after they purchased 30 tonnes in 2012. Previously they purchased in July 2012 at the same price levels.
... And can't find it: "The reason why the past four years has been so dismal, over and beyond the failure of the labour market to fully recover among other things, is that we have gone through the weakest period in the post-WWII era in terms of growth in the private sector capital stock. We invented the Internet and spent years after spreading its applications and co-mingling the technology with labour so as to bolster multi-factor productivity. But that golden age was 10-15 years ago. Despite some really impressive stuff going on in the biomedical field to be sure, and what Apple has done in terms of introducing its array of impressive consumer gadgets, growth in the private sector capital stock since 2009 has been the softest on record."
The ongoing message from the mainstream media, analysts and most economists is that the economy has turned the corner and we are set for substantially stronger growth in the coming year. While that sounds great on the surface the economic data has yet to hint at such a robust recovery. What is worrisome is that CNBC has started using the term "Goldilocks economy" again which is what we were hearing as we approached the peak of the market in early 2008. As David Rosenberg pointed out in his morning missive: "Maybe, it's just this: so long as there is a positive sign in front of any economic metric, no matter how microscopic, all is good. After all, you can't be 'sort of in recession' - it's like being pregnant... either you are or you are not." The bottom line is that ex-artificial stimulus, and other fiscal supports, there is little in the way of an economic recovery currently going on. In order for the economy to reach "escape velocity" it will be on the back of sharply rising employment and wages which are needed to prime consumer spending. This is not happening as the the gap between wages and rising cost of living continues to drive the consumer to shore up that shortfall with more debt.