May 14, 2009
Wednesday was a rough day on Wall Street. The Dow Jones Industrial Average dropped 184 points (just over two percent) to 8284; the Standard and Poor’s 500 index gave up over 24 points (2.69 percent) closing at 883.92 and the NASDAQ 100 index gave up 51.73 points (3.01 percent). One didn’t have to look very far to find the reason. At The Daily Beast website on Wednesday evening, item number 2 on the Cheat Sheet was a link to an article from The Wall Street Journal by Peter McKay, entitled: “Signs of Consumer Strain Hit Stocks”. The morning’s bad news was described by Mr. McKay in these terms:
The Commerce Department reported that retail sales fell 0.4% in April from the prior month, a steeper decline than the 0.1% gain economists expected. Sales in March were revised down, falling 1.3% instead of 1.2% as previously reported.
The Wall Street Journal also ran an article on this subject by Justin Lahart: “Retail Sales Stall on Consumer Caution”. Mr. Lahart’s piece underscored the message reverberating through the evening’s financial reporting:
Indeed, retail sales rose in January and February after sliding for six straight months. But those hopes were undermined by the 1.3% drop in retail sales in March as well as April’s decline.
The data suggest that a recovery won’t come until the second half of the year, and that when it does arrive it will be sluggish, said Michael Darda, an economist at MKM Partners in Stamford, Conn.
As I scanned through a number of websites to peruse the evening’s news stories, I was quite shocked to see the following headline on the Huffington Post blog, with screaming, bright red, upper-case, oversized font: “BLOOMBERG NEWS: CONSUMERS FEELING ‘INSPIRED’ TO SPEND MORE”. Huh? Just below the headline were three large photos. The photo on the left featured a lineup of luxurious yachts, reminiscent of what can be found along Indian Creek during the Miami Beach Boat Show. The middle picture showed that guy from Lifestyles of the Rich and Famous, raising a silver goblet in a toast to the photographer. The photo on the right depicted a headless woman, adorned in enough jewelry to turn Ruth Madoff green with envy. Had someone hacked into the HuffPo website and put this up as a gag? (Later in the evening, I checked back at the site. Although there was a new main headline relating to a different story, the link to the “inspired consumers” story was still there, although down the page.)
Clicking on the “inspired consumers” headline brought me to a story from Bloomberg News, entitled: “‘Good Bad’ Economy Inspires Consumers As Slump Eases”. “Good bad economy”? I had trouble figuring out what that meant because I lost my George Orwell Decoder Ring. Looking at this slice from the story told me enough about what they were trying to say:
Investor Exuberance
A Bloomberg survey of users on six continents showed that confidence in the global economy rose to the highest level in 19 months.
Antarctica and what five other continents?
The Huffington Post‘s BizarroWorld headline struck me as an attempt to imbue readers with a perception of Happy Days in Obamaland. That headline and its incorporated story reminded me of a point recently made by one of my favorite bloggers, Jr. Deputy Accountant:
You know, there are times when I wonder just how difficult it is to keep the PR machine running at full speed and keep the market propped up artificially and massage Goldman’s nuts all at once. Somehow, the powers-that-be are pulling it off, and I imagine that a large part of the dirty work, at least when it comes to PR, is taken care of by our moronic friends in mainstream media who feed up gems like this: Citi using most of TARP capital to make loans.
(As an aside: the reference to “Goldman” is Goldman Sachs, the second largest contributor to President Obama’s election campaign.)
Instead of relying on “the PR machine” to feed me propaganda about the economy, I rely on some of the sources included on this website’s blogroll. Most of the writers for those sites are credentialed professionals, regarded as experts in their field (as opposed to the dilettantes, who cheerlead for Wall Street in the mainstream media). One of these experts is Yves Smith of Naked Capitalism. If you want to keep up with what’s really happening in the financial world, I suggest that you read her blog.
The truth of what the economy has in store for us is not pretty. If you are ready to have a look at it, read Jeremy Grantham’s most recent report. His bottom line is that late this year or early next year there will be a stock market rally, bringing the Standard and Poor’s 500 index near the 1100 range. After that, get ready for seven really lean years:
A large rally here is far more likely to prove a last hurrah — a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s. The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world.
Unfortunately, it’s already too late for President Obama to accept the following rationale from Mr. Grantham’s essay:
We should particularly not allow ourselves to be intimidated by the financial mafia into believing that all of the failing financial companies — or very nearly all — had to be defended at all costs. To take the equivalent dough that was spent on propping up, say, Goldman or related entities like AIG (that were necessary to Goldman’s well being), as well as the many other incompetent banks and spending it instead on really useful, high return infrastructure and energy conservation and oil and coal replacement projects would seem like a real bargain for society. Yes, we would certainly have had a very painful temporary economic hit from financial and other bankruptcies if we had decided to let them go, but given the proven resilience of economies, it would still have seemed a better long-term bet.
After reading Jeremy Grantham’s recent quarterly letter, ask yourself this: Do you feel “inspired” to spend more?
Getting It Right
October 29, 2009
For some reason, a large number of people continue to rely on the advice of stock market prognosticators, long after those pundits have proven themselves unreliable, usually due to a string of erroneous predictions. The best example of this phenomenon is Jim Cramer of CNBC. On March 4, Jon Stewart featured a number of video clips wherein Cramer wasn’t just wrong — he was wildly wrong, often when due diligence on Cramer’s part would have resulted in a different forecast. Nevertheless, some individuals still follow Cramer’s investment advice.
This summer’s stock market rally made many of us feel foolish. John Carney of The Business Insider compiled a great presentation entitled “The Idiot-Maker Rally” which focused on 15 stock market gurus “who now look like fools” because they remained in denial about the rally, while those who ignored them made loads of money.
One guy who got it right was a gentleman named Jeremy Grantham. His asset management firm, GMO, is responsible for investing over $85 billion of its clients’ funds. On May 14, I discussed Mr. Grantham’s economic forecast from his Quarterly Letter, published at the end of this year’s first quarter. At that time, he predicted that in late 2009 or early 2010, there would be a stock market rally, bringing the Standard and Poor’s 500 index near the 1100 range. As you probably know, we saw that happen last week. Unfortunately, he was not particularly optimistic about what would follow:
Mr. Grantham’s Quarterly Letter for the third quarter of 2009 was recently published by his firm, GMO. This document is essential reading for anyone who is interested in the outlook for the stock market and our economy. Grantham is sticking with his prediction for “seven lean years” which he expects to commence at the conclusion of the current rally:
Scary as that may sound, Mr. Grantham does not believe that the S&P 500 will reach a new low, surpassing the Hadean level of 666 reached last March. On page 4 of the report, Grantham expressed his view that the current “fair value” of the S&P 500 “is now about 860”.
What I particularly enjoyed about the latest GMO Quarterly Letter was Grantham’s discussion of the factors that brought our economy to where it is today. In doing so, he targeted some of my favorite culprits: Alan Greenspan (who was pummeled on page 3), Larry Summers, Turbo Tim Geithner (who “sat in the very engine room of the USS Disaster and helped steer her onto the rocks”), Goldman Sachs and finally: Ben Bernanke — whose nomination to a second term as Federal Reserve chairman was treated with well-deserved outrage.
The report included a supplement (beginning at page 10) wherein Mr. Grantham discussed the imperative need to redesign our financial system:
Grantham’s suggested changes include forcing banks to spin off their “proprietary trading” operations, wherein a bank trades investments on behalf of its own account, usually in breach of the fiduciary duties it owes its customers. He also addressed the need to break up those financial institutions considered “too big to fail”. (As an aside, the British government has now taken steps to break up its banks that pose a systemic risk to the entire financial structure.) Grantham’s final point concerned the need for public oversight, to prevent the “regulatory capture” that has helped maintain this intolerable status quo.
Jeremy Grantham is a guy who gets it right. Our leaders need to pay more serious attention to him. If they don’t — we should vote them out of office.