I want to share some updated thoughts here rather than in my trading blog because they tie into the broad theme that inadequate capital has been rebuilt following the “Great Recession” to allow a durable economic expansion in the U.S., and thus this sort of thinking makes it easy to accept the ECRI premise that unfortunately another recession is already underway here. I am accepting this view for investing purposes, though I am not an economist or cycle expert, so I have no independent opinion on whether NBER will or will not ultimately agree with ECRI’s “forecast” (by now it’s more of a “back-cast”).
Gallup.com’s daily polling shows a recent drop in average 14-day “discretionary” daily spending by Americans, down to a very low $65. Here is the LINK. Once you are on the site, you can obtain the precise historical numbers either by scrolling over the chart or by clicking on the box in the top right that contains the words “Download complete trend”. This data is now identical to that seen in July 2009, at the trough of the Great Recession– but consumer prices were much lower then. So consumption may be down significantly from then. Spending is now below that of one year ago. It is far below that of four years ago, when the recession was already in its eighth month. This is very disappointing.
Next, the stock of the top-tier homebuilder NVR collapsed Thursday, dropping well over 100 points, on disappointing sales, earnings forecast, contract cancellations last quarter, etc. This is especially notable because NVR’s core operations are around Washington, D.C. LINK
As I have said, homebuilding stocks have gotten ahead of their fundamentals; way ahead. The bad news for independent thinkers is that the other housing stocks stayed frothy (my view) despite NVR’s “miss”. Yes, housing is interest-sensitive, so in and of itself, low interest rates are good for housing. But lenders do require income to make mortgages, and with job growth and pay raises both meager, what will push housing ahead? Slightly lower mortgage rates than the already minuscule rates that have been in place for some time?
Many investors are in denial, or have convinced themselves that they are in the right stocks and thus someone else will take the hit in a stock market correction. They are in denial partly because almost no one believes that a new cyclical downturn is either underway or can begin this year. People see some full restaurants and if they are financially literate, they “know” that Ben Bernanke will rescue the economy with QE 3. When I ask friends if they see any signs of a new recession, they almost gape at me, so bizarre does the question appear. Much good news is therefore already priced into many markets.
The (over-)optimism that I see priced into housing stocks and many other stocks is something I see all around me in Santa Barbara.
I recently had a conversation with a young commercial real estate investor in Santa Barbara. I asked him about all the empty storefronts and entire buildings I continue to see around town. He didn’t see them, LOL. I mentioned that at Jack’s Bistro on upper State Street, where I often hang out with da boyz, almost the entirety of the downstairs of the two-story office bistro in which Jack’s is an anchor tenant has been empty for over a year. When I asked this young CRE aspirant to explain this, he responded more or less as follows- “Oh, what would you expect when it’s right by a shopping center anchored by Sears?” I dropped the conversation. Sears has been there for years and is just as unvisited as it always has been. This man is in denial. The CRE market clearly is sub-optimal here. If a new national recession is here, it will worsen.
The commercial center of Santa Barbara is State Street, and smack dab in the center of the downtown shopping district on State Street, across from Sak’s, we now see a Marshall’s. Sacre bleu! A bit down the street, moving toward the ocean, a 99 cent store has come in to what should be and has been the high-rent area (as Marshall’s is also in). We know that these sorts of deep discount stores do not pay high rents. Something is wrong, perhaps rotten. There is no recovery here in CRE, in this lovely post-industrial city that saw no overbuilding in the boom.
There is, however, a lot of Californians’ innate optimism in evidence. Housing, it is believed as a matter of faith here, will “recover”. But what will happen if another recession is upon us? I asked another friend who owns some residential real estate in the area last night what he thought. His answer was that Santa Barbara was immune, but that definitely another recession was present elsewhere in the country. Another friend who is in CRE was similarly optimistic, though his business is down year-on-year.
These are uh-oh signs. They prove nothing in a country as large as the United States, but I don’t like them.
At the peak of an economic cycle, things are optimally good. That’s why it’s the peak. Thus, by definition, things look and feel OK in the early stages of recession. If I understand my economic history, if a new recession has begun in the U.S., it would be the first one that had not seen a full recovery from the prior one. Even Paul Krugman’s cause celebre, the 1937 recession, only occurred after industrial production had scaled new heights.
If a recession is occurring now in the United States, this time is different.
We will simply have to see if cyclical weakness in the U.S. plus the various disasters in Europe lead to severe market and economic repercussions in the centers of global finance, London and New York.
Market bottoms occur when things are a mess and that mess is well-publicized. Think of all the gloomy headlines and pictures of Depression-era breadlines in the MSM a few months after Lehman collapsed. We are not “there” yet. If a U.S. recession is underway, yours truly is confident that we will get much closer to “there” than we are now.
Somehow, European stocks were up, on average, for each of the last seven weeks. A number of highly-valued tech IPOs were floated in the U.S. last week. Wall Street and London are acting as if happy days are here again. Interesting times…