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…
see the tail end of…
http://www.marketshadows.com/2012/07/23/986457/
Thanks, great link…here’s the tail end.
http://www.marketshadows.com/2012/07/23/986457/
“As of the latest data, no, they are not collectively rolling over. Here is the big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators. This chart clearly shows the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we’ve yet to set new highs, the trend has collectively been ever upward.”
Market Shadows (http://s.tt/1iHum)
All the above is true and then some. I spent 4 years (’65-’69)active in the US Army most in Special Operations (Green Beret) with a final rank of Captain; including a tour in Vietnam. My last duty assignment was as Deputy G2 for ft Campbell. I mentioned this only because of the training we got in insurgency and counterinsurgency. It is the option of many of us with this training that the current administration (almost all of them either Marxists or hard core socialists) are intentionally doing what they are doing to allow them to nullify the constitution and form a new government based on different principles.
Retired (2007) Lt Gen Boykin with impeccable credentials talks about this much better then I can so I would suggest you go to http://www.morningstartv.com/oak-initiative and he has a number of excellent posts explaining in detail what we with the training see happening. If you understand their objective then the path (financial and economic) we are now on makes perfect sense.
Your unsubstantiated charges of marxism and socialism harken to the McCarthite era where Communists were under every bed. Please, provide your sources, examples and the trust but verify content for your claims.
Well number one did you go to the sight I listed if not read the operating manuals for special operations then the following books (an old listing I’ve read more since)to start (I have read them all) come back and you will have enough background to understand the problem. One more I haven’t read is Cowards by Glen Beck it is heavily foot noted with references.
Politics …
Alinsky, Saul D., Rules For Radicals, A Pragmatic Primer for Realistic Radicals, New York: Vintage House, 1989, ISBN 978-0-679-72113-0
Aquinas, St Thomas, St. Thomas Aquinas on Politics and Ethics translated and edited by Paul E. Sigmund, New York: W.W. Norton & Company, 1988, ISBN 978-0-393-95243-8
Henry, Patrick, Robert Yates and Samuel Byron, The Anti-Federalist Papers, Pacific Publishing Studio, 2010, ISBN 978-1-4536-31348-0
Hobbes, Thomas, Leviathan, edited by Richard E. Flathman and David Johnson, New York: W.W. Norton & Company, 2005, ISBN 978-0-393-96798-2
Horowitz, David and Richard Poe, The Shadow Party, Nashville: Thomas Nelson, 2006, ISBN 978-1-5955-5103-0
Ketcham, Ralph, editor, The Anti-Federalist Papers and the Constitutional Convention Debates, New York; Signet Classic New American Library Penguin Putnam, Inc., 2003, ISBN 878-0-451-52884-1
Lieberman, Jethro K., The Evolving Constitution How the Supreme Court has Ruled on Issues from Abortion to Zoning, New York: Random House, 1992 ISBN 0-679-40630-5
Levin, Mark R., Liberty and Tyranny, A Conservative Manifesto, New York: Simon & Schuster, 2009, ISBN 978-1-4165-6285-6
Locke, John, The Selected political Writings of John Locke, edited by Paul E. Sigmund, New York: W.W. Norton & Company, 2005, ISBN 978-0-393-96451-6
Morgenson, Gretchen and Joshua Rosner, Reckless Endangerment, New York; Times Books Henry Holt and Company 2011 ISBN 978-0-8050-9120-5 (hardback)
Paine, Thomas, Common Sense, Rights of Man, and other essential Writings of Tomas Pain, New York: Penguin Group, 2003 ISBN 978-0-451-52889-6
Rossiter, Clinton, The Federalist Papers, London: Penguin Group, 2003 ISBN 978-0-451-52881-0,
Rousseau’s Political Writings, edited by Alan Ritter and Julia Conaway Bondanella, translated by Julia Conway Bondanella, New York: W.W. Norton & Company, 1988, ISBN 978-0-393-95651-1
Sigmund, Paul E., The Selected Political Writings of John Locke, New York, W.W Norton & Co., 2005 ISBN 978-0-393-96451-6
Skousen, W. Cleon, The Five Thousand Year Leap, 28 Great Ideas That Changed the World, Franklin: American Documents Publishing, 2009, ISBN 978-0-9815596-6-7
De Tocqueville, Alexis, Democracy in America, Volume 1 and 2, translated by Gerald E. Bevan introduction by Isaac Kramnick, London: Penguin Books, 2003, ISBN 978-0-14-044760-6
Economics …
Chambers, Edward J., Scott, Robert Haney, Smith, Roger S., Editor Mills, Edwin S., National Income Analysis & Forecasting, Glenview: Scott Foresman and Company, 1975, ISBN 0-673-05134-x
Drucker, Peter F. Post-Capitalist Society, New York: Harper Collins, 1993, ISBN 0-88730-661-6
Friedman, Milton & Rose Friedman, Free To Choose, New York: Harcourt Brace & Company, 1990, ISBN 0-15-633460-7 (pbk.)
Heinberg, Richard, The Party’s Over Oil, War and the Fate of Industrial Societies, Gabriola Island: New Society Publishers, 2006, ISBN 978-0-86571-529-5
Lomborg, Bjorn, The Skeptical Environmentalist, Measuring the Real World State of the World, Cambridge UK: Cambridge University Press, 2001, ISBN 0-521-01068-3
Malthus, Thomas Robert, An Essay on the Principle of Population 2nd Edition, A Norton Critical Edition, edited by Philip Appleman, W. W.. Norton & Company, New York 2004, ISBN 0-393-92410-6 (pbk.)
Karl Marx, Capital Volume 1, introduction Ernest Mandel, London: Penguin Books, 1990, ISBN 978-0-14-044568-8
Pristash, David Power Economics for the Next Generation, Cleveland: David Pristash, 1994, ISBN 0-9657318-0-4
Roberts, Paul, The End of Oil on the edge of a perilous new world, Boston: Houghton Mifflin, 2004, ISBN 978-0-6185-6211-4
Rosenberg, Nathan, Inside the Black Box: Technology and Economics, New York, Cambridge University Press, 1982, ISBN 0-521-27367-6
Skousen, Mark, The Big Three in Economics Adam Smith Karl Marx and John Maynard Keynes, New York: M.E. Sharpe, Inc., 2007, ISBN-10: 0-7656-1694-7 (cloth : alk, paper)
Smith, Adam, An inquiry into the nature and causes of The Wealth of Nations, New York: The Modern Library, 1994, ISBN 0-679-42473-3
Sowell, Thomas, Dismantling America, New York: Basic Books a member of Perseus Books Group, 2010 ISBN 978-0-465-02251-9
The world is in more than a recession, we are in a debt deflation depression.
Until we have enough sense to let over leveraged entities (people & businesses) fail (bankruptcy/default), that will not change.
We are not there yet. In fact, the process of healing the economy is just starting.
The default of PIIGS senior debt would be welcome news. Then let the dominoes fall.
I agree. The LIBOR scandal should cause the meltdown of these corrupt entities but I doubt it.
Dear Dr. X,
I enjoy reading your observations on The Daily Capitalist, but your assessment of the empty space at La Cumbre and State Streets is off the mark. That location has been a loser ever since the building was put up. Vacancies there have been a staple of the building’s unattractiveness rather than a harbinger of bad economic times.
DR.,
I only go down to State Street if I have no other choice, they made it into Dismal Land by the Sea and really doesn’t have the flavor and character it did in the old days. When the old Divers Den/Anacapa Dive Shop was turned into a Wine Bar, the character of the Funk Zone was lost forever, they ruin one section of town after another. I now have to travel all the way to Ventura, to access a full service Dive Shop, this is sacrilegious.
Santa Barbara, birth place of Kirby Morgan, General Aquadyne, Radon Boats, winner of the 1969 Transpacific Yacht Race and other events gives way to the 99cent store, Wine tasting and I have no interest.
On the Santa Barbara Mesa, the small Mesa Center has had vacancies for years, the property owners/management doubled the rents in a depression and think its fine to have vacant space. Gone are the Video store, Hallmark store, Pizza Place, Frosty Freeze, Optometrist . These storefronts sit vacant, some for 4 years. Talk about cutting your nose off to spite your face. I guess Retention is not in their vocabulary.
In my opinion vacant space is to be avoided.
The Paseo Nuevo lost some longtime small store tenants by raising rents during this time period, they just went around the corner to more reasonable rents.
When this event first started in 2008, I made retension adjustments on my residential income properties, 4 years latter I am backup to pre-2008 rates, weathered the storm and ready for the next, for now pricing is back in my corner and far superior to ZIRP.
I have never understood the Arrogance of Santa Barbara CRE, I don’t think they really get the number of years this Deflation Depression is going to last.
“I have never understood the Arrogance of Santa Barbara CRE…”
You’re not alone!