This Economic Porridge Is Just Right
Not too hot, not too cold but just right. It appears the economic porridge is just right with the release of 3.5% GDP growth in the fourth quarter. I just turned on tout TV to see Google's earnings and the wonderful Maria Bartiromo told us that this is the "Goldilocks" economy and Wall Street was rewarding an economy that was "just right".
The next time you turn on CNBC and someone is giving you their insight, ask yourself a question. Ask yourself what qualifications do they have on a particular topic. You don't have to be an expert to spot an expert. Think up your own questions. Let's look at an example. If they are talking about the semiconductor industry, is the person an executive in that industry? A former executive? Do they have a firm understanding of the semiconductor cycle? Do they understand where we are in that cycle? If not, do they have a technology background which might allow them to predict future trends in innovation? Are they quoting facts derived from channel checks? Have they talked to senior economists working for large semiconductor companies to get a pulse for business? Have they validated supply & demand which so significantly affects profits and pricing? etc, etc, etc. Or, are they simply a general talking head of Wall Street giving you a line of bull?
Back to "just right". Why are many industrial and transportation companies reporting growth is slowing? Given the January Chicago purchasing manager's index showed clear economic contraction for the first time in nearly four years, I'd say something doesn't add up. Could it be the porridge is too cold? Could it be that oil dropped because global demand is dropping? Could it be the Middle Eastern exchanges were crushed because of such a silly reason? It was recently announced global demand for oil dropped significantly amongst OECD nations for the first time in over twenty years. Is that a sign of growth? The last time it dropped albeit not significantly? 2002. Are we seeing the economic impact of substitution so rapidly? Do you drive a biofuels car? Hardly.
The glorious Wall Street machine has priced cyclicals and finance companies to perfection under the assumption the Fed will save the economy. Cyclicals had the highest concentration of lowered earnings guidance of any industry yet they are all at or near cycle highs. Likely not because earnings are great but because Wall Street is anticipating a rate cut. One guest this evening told us the broad market is 25% undervalued. Really? Now, money management and quant firm GMO tells us the broad small cap index will likely have a negative seven year return from here. That either portends a serious correction in the broad market or a serious rise in the broad market. Someone is seriously wrong and someone is seriously right. So, which is it? One of the most well respected money management firms globally with $140 billion in assets. The same firm which became bearish on equities before the 2000 crash. Or some "expert" on CNBC? As you can see, I have no bias and value all opinions regardless of how foolish they are. Remind me to re-allocate my portfolio to 100% small cap exposure.
Now, I wrote on here that manufacturing output was going to suffer in early 2007 because Ford & GM were telling us they were cutting first quarter production significantly. Nothing brilliant. Just common sense from what they told us months ago. Today, Ford made tentative projections of first quarter sales to be down 20%. With such high fix costs, Ford has to quickly rationalize their manufacturing base or bleed untold billions more. Because of this we are seeing massive layoffs in auto related industries. The propaganda machine will tell you manufacturing doesn't matter. But, it is still the biggest contributor to private gross output in the U.S.. Manufacturing remains a monstrous driver of wealth, innovation and employment in all economies. During a recent trip to Detroit, I was amazed at how downtown looked like the remains of World War III. Dozens of abandoned skyscrapers and nary a small business in the store fronts. Chicago's PMI is a telling sign of manufacturing weakness which is sure to spread. How far and how fast does it spread? Well, we'll get a national update tomorrow with the ISM numbers release. In the mean time, eat your porridge before it gets too cold.
The next time you turn on CNBC and someone is giving you their insight, ask yourself a question. Ask yourself what qualifications do they have on a particular topic. You don't have to be an expert to spot an expert. Think up your own questions. Let's look at an example. If they are talking about the semiconductor industry, is the person an executive in that industry? A former executive? Do they have a firm understanding of the semiconductor cycle? Do they understand where we are in that cycle? If not, do they have a technology background which might allow them to predict future trends in innovation? Are they quoting facts derived from channel checks? Have they talked to senior economists working for large semiconductor companies to get a pulse for business? Have they validated supply & demand which so significantly affects profits and pricing? etc, etc, etc. Or, are they simply a general talking head of Wall Street giving you a line of bull?
Back to "just right". Why are many industrial and transportation companies reporting growth is slowing? Given the January Chicago purchasing manager's index showed clear economic contraction for the first time in nearly four years, I'd say something doesn't add up. Could it be the porridge is too cold? Could it be that oil dropped because global demand is dropping? Could it be the Middle Eastern exchanges were crushed because of such a silly reason? It was recently announced global demand for oil dropped significantly amongst OECD nations for the first time in over twenty years. Is that a sign of growth? The last time it dropped albeit not significantly? 2002. Are we seeing the economic impact of substitution so rapidly? Do you drive a biofuels car? Hardly.
The glorious Wall Street machine has priced cyclicals and finance companies to perfection under the assumption the Fed will save the economy. Cyclicals had the highest concentration of lowered earnings guidance of any industry yet they are all at or near cycle highs. Likely not because earnings are great but because Wall Street is anticipating a rate cut. One guest this evening told us the broad market is 25% undervalued. Really? Now, money management and quant firm GMO tells us the broad small cap index will likely have a negative seven year return from here. That either portends a serious correction in the broad market or a serious rise in the broad market. Someone is seriously wrong and someone is seriously right. So, which is it? One of the most well respected money management firms globally with $140 billion in assets. The same firm which became bearish on equities before the 2000 crash. Or some "expert" on CNBC? As you can see, I have no bias and value all opinions regardless of how foolish they are. Remind me to re-allocate my portfolio to 100% small cap exposure.
Now, I wrote on here that manufacturing output was going to suffer in early 2007 because Ford & GM were telling us they were cutting first quarter production significantly. Nothing brilliant. Just common sense from what they told us months ago. Today, Ford made tentative projections of first quarter sales to be down 20%. With such high fix costs, Ford has to quickly rationalize their manufacturing base or bleed untold billions more. Because of this we are seeing massive layoffs in auto related industries. The propaganda machine will tell you manufacturing doesn't matter. But, it is still the biggest contributor to private gross output in the U.S.. Manufacturing remains a monstrous driver of wealth, innovation and employment in all economies. During a recent trip to Detroit, I was amazed at how downtown looked like the remains of World War III. Dozens of abandoned skyscrapers and nary a small business in the store fronts. Chicago's PMI is a telling sign of manufacturing weakness which is sure to spread. How far and how fast does it spread? Well, we'll get a national update tomorrow with the ISM numbers release. In the mean time, eat your porridge before it gets too cold.
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