One of the great lessons of investing is that earnings matter. Banal? Trite? Tautological, even? Sure. But it’s amazing how folks lose sight of such a simple thing in times like these.
Open any financial periodical, on any given day this year, and you’ll read about how this “recovery” is a weak one relative to history (even though GDP is at new all-time highs). And in those same publications you’ll find stories buried in the back pages about earnings that continue to beat expectations.
So, there’s a disconnect for many in terms of understanding why or how the market has been so strong the last couple years. Many have gotten into the modus of believing economic metrics like unemployment, durable goods orders, services indexes, sentiment indexes, even GDP itself, are proxies for how stocks will do. They are not—economic indicators are not earnings. Econ metrics, of course, are relevant in understanding how earnings will come in (and because I work for a top down money manager, I tend to believe that stuff matters more than many), but they are not a straight proxy for earnings.
Simply, this is a time where earnings are zooming globally (and continue to—so far 2Q reports have trounced expectations), but other parts of the economy are not (like employment). This is actually pretty typical as new bull markets and early to mid cycle economic recoveries go—corporations get leaner and more efficient faster than the broader economy, with their prosperity rising before it’s reflected in the aggregate economists’ numbers. This is particularly true right now as governments (federal all the way on down to municipal) are still contracting and laying folks off. The private sector has fared better lately. The net result is mushy, and masks booming earnings growth.
The lesson: don’t ignore macro economic news, but don’t take your eye off the earnings of publically traded firms, which continue to be robust globally—those are telling a much different tale than today’s “slow recovery” gurus realize.
Back in April, I highlighted a phenomenon scrambling investors’ minds by the score: people were seeing so-called “black swans” everywhere:
Sorry, but Japan’s earthquake (devastating as it was in human terms), or the problems of the Middle East are not only NOT Black Swans, they’re not all that uncommon. I challenge someone—anyone—to find a year where some major geopolitical, geological, financial, or otherwise big scary event didn’t happen. The world is full of them through history—now is no different than any other, though folks always feel the present moment is “different this time”. Goodness gracious, 1998—a fabulous year for stocks—was also the year of Long Term Capital Management, among other things like the Russian Ruble problems and Asian banking issues.
As I said on Fisher Investments’ MarketMinder months ago, the whole point of a real black swan (if they exist at all) is that they’re hugely rare. Note that recent events did not crater the markets—they were grey pigeons.
To my mind, the issue of the US debt ceiling is archetypal Grey Pigeon drama—one that’s played itself out scores of times in US history, has never sunk global markets, yet folks fret about it often. Now we’re getting theories about Swans hopped up on some kind of hallucinogen to make them glow: Forget About Black Swans, the One Floating Ahead is Neon.
Scary as it might feel, today’s US debt ceiling drama is a classic, not a new thing. Grey Pigeons are flying again.
He never gets as much fanfare as Adam Smith, and tends to get pushed aside by contemporaries like Von Mises these days, but Frédéric Bastiat is one of the great humanistic economists ever, and his work should be on every serious econ student’s desk.
A free marketer, yes, but also one of the great prose writers of the dismal science. This wasn’t just ornament; he believed verbal rhetoric and reason was as much a part of proper economic thought as math-based empiricism. That makes for a rare breed today.
And while it’s impossible to know what he’d think of the state of today’s economic thought, I’m quite certain he’d be pleased to see the proliferation of capitalism and the astounding wealth creation the world has seen since his time.
Here’s a great little primer on him from the weekend’s WSJ:
A world where lumbering global bureaucracies work less effectively and swiftly than individual countries pursuing their own trade destinies is a world I like living in. With the Doha round of talks stuck in quicksand (the more they meet and talk it seems the more they sink), it likely never occurred to many that trade never needed an elite entity governing it in the first place. (Mind you, global trade is surging again these days, with or without the WTO.)
And then wouldn’t it be grand if next mercantilist individual countries digested this same lesson and let their constituent trading companies go free of tariffs and other similar trade obstructions? That would be an even better world for all.
Think for a moment about the perversity of this headline:
It’s perverse because it’s misinformation. The recovery is over. US GDP is at nominal and real all-time highs. There’s, of course, nothing wrong with musing about somewhat slower-than-expected growth so far this year, or pondering why unemployment remains stubbornly high; but the simple reality is the recovery ended some time ago to make way for a new expansion.
If you haven’t been to Café Hayek, it’s worth a visit. It’s one of the leading economics blogs, with a heavy skew toward free markets, complexity and emergence, and snarky, snappy writing. Don Boudreax (the main writer) is a professor at George Mason University , and his views are inflammatory, smart, and informed. Even if you disagree, for those who follow economics closely, it’s worth a check in at least once in awhile.
If you want to understand how supply side economics really works—how great companies create great products and conjure demand (not the other way around)—study the rise of ESPN. A true supply side triumph of the era.