I am endlessly amazed at the mentality of many on Wall Street. So many times in the past few weeks we have heard, “Now is the time to buy! We have oversold markets!” Today we see the markets drop another 4-5%! To me those rallying cries sound an awful lot like the tail wagging the dog. They seem to consistently ignore economic reality. As Michael Lewis, a favorite author of mine wrote in Vanity Fair recently, “It’s the economy Dummkopf!”
The bad news:
- Unemployment is getting worse
- Manufacturing is slowing and productivity has declined for two straight quarters. This is an indicator that the employment situation may get worse yet as companies will need to shed labor rather than see their margins deteriorate.
- Home sales continue to fall. In California sales dropped 4.1% month-over-month in July with prices falling 7.6% on a year-over-year basis.
- Real wages continue to fall
- Europe is facing a potential banking crisis that will hurt us as well. Yesterday we learned that an unidentified European bank borrowed $500m for the first time in six months from the European Central Bank at a higher rate than what other banks would pay to borrow dollars from fellow lenders. This is an ominous sign!
- PPI and CPI are showing inflationary pressures which puts the Fed in a tough spot. Unemployment numbers and economic slowing indicate Bernanke would like to initiate a QE3, but any hint of inflation will give the hawks on the FOMC ammunition against another round.
- Growth expectations are so low that the 10 year U.S. Treasury bond has plunged to a new all-time low of less than 2%! Imagine that? Being willing to accept 2% return over the next 10 years. Not exactly a rosy picture.
- U.S. economy has contracted in four of the past six months.
- Global growth slowing. Hong Kong 2Q GDP contracted. Chinese industrial production contracted 0.4% month-over-month. Eurozone GDP came in at 0.2% (below expectations) with Germany almost flat at 0.1%. France is now flat as well.
The good news:
- Unlike in 2007/2008, companies are braced for economic slowing and a credit crisis. As much as D.C. likes to complain about how businesses aren’t hiring, it is prudent for companies to build up a shield of cash to prepare for the turbulence we see on the horizon.
- U.S. banks are in a stronger position than back in 2007/2008.
- Families have been deleveraging now since the last crash and many are better prepared to weather the next storm.
Bottom Line: For those who are patient and prepared, opportunities will present themselves.