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.
Remember when stress tests were all the rage and we felt the world economic order was hanging on the results of such things? I do, it was the spring of 2009—not so long ago. Back then, this headline would have incited mass consternation at best, and mild panic at worst.
Nowadays, it’s barely worth a shrug. We’re over it. “Systemic failure”, that ubiquitous catchphrase of the last couple years barely gets a shrug any longer. Now, I know what you’re thinking: “Here comes the didactic tirade about how we’re about to repeat the same mistakes as just a couple years ago.”
Nope, the opposite. This is to remind folks that not only did the world not end in 2008, but actually much of the system proved much stronger than many believed (the economic and capital markets recovery simply couldn’t have happened so strongly and for this long were it otherwise), and that much of the doomsday talk never materialized. It’s vogue to want to hold folks accountable (Why Isn’t Anyone From Wall Street in Jail?) for the bear market, but why not call out the folks who kept investors out of the now ~100% run up in stocks since the bottom?
I’m being facetious, of course. But only a little. The world didn’t end; it wasn’t different this time.
Friday’s report that US GDP grew an annualized 3.2% in Q4 is by now common news. Less commonly reported: Real GDP officially past its 2007 peak—the economic “recovery” can now be called an “expansion.” Also, according to Thomson Reuters, 71% of S&P500 companies have beaten 4Q earnings estimates so far, and the one year forward P/E of the market is 13.3.
These facts were overshadowed by Egypt news last week. But we note that January was a fairly turbulent geopolitical month (Jasmine revolution, Chinese President visits US, Egypt, Moscow bombings, Ivory Coast, et al), and yet global markets absorbed those body blows pretty well, not to mention renewed inflation fears in China/Brazil, and a nasty UK GDP report, and the ongoing PIIGS problems.
Something to keep an eye on this year: a handful of pros are expecting financials (mostly banks) to heavily consolidate in 2011. Past drivers through the decades had to do with high consolidation tied to the S&L crisis and eras of deregulation.
This time around, if there is a big wave of mergers, it won’t be from pure form deregulation; that much seems obvious. True, clarity on new regulation will come this year, and the dangers of even more regulation seem low, but neither of those serve as a real catalyst.
If a wave of bank M&A does happen it’ll probably be because, coming off the crisis, mid- and big-sized banks will find themselves better capitalized than they realized and looking for easy, accretive profits. If so, they can just start scooping up smaller assets at still very attractive prices.
As any good commercial banking exec knows, there’s always an investment banker waiting in the wings to find a way to get a deal done.
Spent: Sex, Evolution, and Consumer Behavior – Geoffrey Miller
Exile on Main Street (1972, Deluxe Remastered Edition – 2010) – The Rolling Stones
Life – Keith Richards and James Fox
Those dirty, filthy riffs. Those twangy, mangy licks. Those dissonant, pungent, partial chords. Keith Richards embodied rock and roll’s 1960s transition: bearing the new standard like a Young Turk and simultaneously paying homage to the roots of it all—Muddy Waters, Memphis, London and the mods, man! A hallmark of great pop artistry, particularly in music, is to be archetypal yet impossible to replicate.* And to this day, nobody really ever sounded like the Stones. You know it’s them in a bar or two.
But like all pop iconoclasm, it wasn’t just the art—it was the symbol. Keith Richards represents an indelible slice of Baby Boomerism, his life an embodiment of a whole generation—namely, its Dionysian dark side. This is reflected brilliantly in his autobiography, Life, one of the best books of its kind. Not because the drugged-out stories are so great (we’ve heard ‘em all by now anyway), but Richards writes like he plays—it’s rhythmic, punchy prose that moves on the page like a song. If you need a break from the newspapers and business books, this is a great choice.
Or you can get the Stones experience via different senses by picking up the recently remastered album, Exile on Main Street. It’s further down the line in their musical development from early hits like Satisfaction, but before they really kicked into high gear with Wild Horses and You Can’t Always Get What You Want. Richards is totally free on these tracks—it’s a folksy, bluesy mix of jams. The whole thing has a primordial feel to it.
As I made my way through these, I also happened to be reading Geoffrey Miller’s new book, Spent, about the evolutionary psychological underpinnings of consumerism. Exile on Main Street—the title alone—has its similarities:
Always took candy from strangers,
Didn’t wanna get me no trade.
Never want to be like Papa,
Working for the boss every night and day.
If that isn’t a nutshell view of how folks view today’s debt (candy), protectionism (trade), and Baby Boomers’ general relationship to their parents’ as Greatest Generation (Papa), I don’t know what is. And then, today’s general mood about the economy:
Feel so hypnotized, can’t describe the scene.
It’s all mesmerized all that inside me.
The sunshine bores the daylights out of me.
Chasing shadows moonlight mystery.
Headed for the overload,
Splattered on the dirty road,
Kick me like you’ve kicked before,
I can’t even feel the pain no more.
Miller’s book reaches back to this visceral, Stones-like place: positing, as most evolutionary psychology books do, that the key to understanding consumers is looking at how their brains are wired. That is, humans, like all animals, live to mate, and consumerism is at heart a ritual of display—showing how “fit” we are to attract the best mates. It’s all very sex, drugs, and…well, you get it.
This view makes a lot of sense, and Miller has done the most complete job to date enumerating humanity’s instinctual need to make a display of itself and how that translates into modern consumerism. He takes Steven Pinker’s ideas about instinctual behavior forward, even as he harkens back to Carl Jung’s archetypal psychology. There’s all sorts of interesting tidbits about how we gauge intelligence, why being conscientious is ultimately a show of good genes, and so on.
But, as with most books of their kind, this one often goes too far. Certainly, instinct represents one shade of consumerism (and a significant one at that), but it’s not the whole thing. Sorry, I didn’t get my iPhone just to show off to the world or my girlfriend—it’s just a really awesome gadget that makes other things like email and mobile internet way easier. And it’s fun.
Also, there’s no concept of progress here. Miller spends the introduction arguing that a cavewoman of millennia ago is probably as happy or happier than we are today. I’ll buy the notion that psychologically the world is more complex and difficult now, but the simple reality is that innovation and capitalism has taken much of humanity to new, better heights. I’d rather have my psychological neuroses than be in danger of starving (or being eaten myself!).
That said, Miller describes the concept of marketing in a way most do not, but is pinpoint correct: Marketing is not simply advertising, marketing is understanding what your clients want/need and being able to deliver that product. Marketing is the most important part of business acumen for an executive; it’s not just for Mad Men. The only other place I can recall this vital business lesson articulated so well is Ken Fisher’s first book, Super Stocks, going all the way back to 1984.
Also, Miller spends a good deal of time explaining that “fitness” displays have many false signals. Much ostensible virility, like what kind of car a guy drives, actually doesn’t prove the case at all, but tries to by proxy. This idea correlates very nicely with how many (to my view) can be fooled by what good investments really are. A true, “fit” investment is something that produces value, like a share of stock in a profitable company. But stuff like baseball cards, artwork, heck, even gold (for the most part), isn’t productive. Their value is assigned completely by human psychology—those human desires. Which doesn’t make them worthless by a long shot, of course, but if you take out the psychology, you don’t have much. Even Picasso’s worth is in the eye of the beholder. But though market prices gyrate, owning a share of a great company ultimately has a more tangible claim to value because the firm produces useful goods and services and, unlike a Picasso, adjusts to customer tastes (back to that marketing thing!). Maybe that seems like semantics, but give me the productive company any day as an investment.
The most important lesson of Spent is that the popular current view of “the consumer”** is wrong. All this hand-wringing in the media about “when will the consumer come back…they’re all tapped out!” is sheer nonsense. Human demand is eternal—it cannot be satiated, only stifled for brief periods. It will return because it’s inherent to who we are—it doesn’t need to be “stimulated.” What needs stimulus in a recession are the suppliers—incentives to make goods for people to consume. There will always be folks to buy things if the products are marketed competitively.
That was the whole crux of the Rolling Stones. They didn’t just get lucky. In archetypal rock star fashion, those guys played till their fingers bled, performed for empty halls, lived in poverty and only for the music for years. All that “market research” showed Mick and Keith how to write great songs people wanted to hear. From there? You know the story. Rock and roll was never the same—but no chance it was just Tumbling Dice.
* One of the great innovations Richards brought to mainstream rock was alternative tuning. He would tune his guitar to an open “A” chord, allowing him to play many chords only partially fretted. This effect created dissonances and atonal results that helped produce his signature sound.
** Minor pet peeve: Who ever decided it was “the consumer”? Basically all media says it this way. Isn’t it just “consumers”? There isn’t one giant person opening their maw to consume all things, is there?
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
- So far a recovery in employment hasn’t had anything to do with the bull market or the economic recovery. See this week’s (or this year’s) returns relative to the new higher unemployment number.
- Few will see it this way, but history could very well show that the US —more or less—did things right once the crisis hit. At the outset, huge liquidity provisions to keep the system afloat, and once the recovery took hold a few years later it looks like we’ll get extended tax cuts and probably even some spending cuts. QE2 notwithstanding (granted, that’s a BIG notwithstanding), that’s actually a pretty good way to navigate a financial crisis on in to a recovery.
- One of my favorite things is to read Fed commentary literature—it’s some of the best speculative writing since Ray Bradbury. Everyone thinks they “know” what Ben is “really” trying to say in his speeches. Ignore that stuff and act according to what is done, not said.
- A worthwhile read: Who Pays for Big Government?
- Russia hosting the World Cup will be less a grand display of the country and its prospects and more like a last gasp on the global stage.
- A thought-provoking and worthwhile opinion piece from Gerald O’Driscoll Jr. in today’s WSJ on whether we even need a central bank, and how the world might look without one.
- EU business confidence recently hit an all-time high. The EU economy will grow nicely this year and projected next year too. It’s a bizarre dichotomy right now between European sovereign troubles and their recovering/thriving private economies.
- The ECB extending unlimited lifelines to banks one quarter at a time doesn’t really help much at this point—knowing you’ve got a backstop for another 3 months doesn’t address the real issues. Although, it’s probably good that they didn’t sunset the program. That the ECB is buying Portuguese and Irish bonds right now is fine enough, but the scale of the purchases as of right now is way smaller than previous programs—it’s not a big initiative at this moment. Maybe it’ll grow…
- …you can think about the debt crisis in poker terms: Ben Bernanke’s got a terrible bluff—usually telegraphing his moves well in advance. Trichet’s got a great poker face, sometimes even misdirecting the public before making a move. He says he doesn’t expect another big stimulus initiative by the ECB—I wouldn’t hold my breath on that, particularly with EU finance ministers meeting in a few days.
- One of the main reasons for Europe ’s current fiscal problems is political. Have a look at Prime Minister Zapatero in Spain —he’s getting more unpopular by the day. Meanwhile, he’s got to figure out a way to make his budget work and support the smaller Spanish banks with dwindling political capital. Tough to get things done in that environment.
- An interesting thing about Obama and his administration is that they’re nothing if not persistent. Initiatives like the Healthcare laws and parts of FinReg looked DOA and yet eventually got done. And now the South Korean trade pact—which looked all but dead a week ago after the tepid G20 summit—now looks like it could actually get done again. That’s a good thing…the US has woefully under-participated in new free trade pacts this year where the rest of the globe’s done tons.
- Surprisingly profound quote of the Day: “It’s always here and now my friend, it ain’t once upon a time!” – David Lee Roth
- Here’s one of the most important articles of the year: Economists’ Grail: Post-Crash Model. Simply, any economist worth their salt knows that the nature of complexity and accelerating change means math as it exists today in no way is able to predict the direction of markets or economies. The world is too big and deep and complex and has been for a very long time. So it becomes a profession of probabilities. These Sisyphus-ian attempts at math blended with psychology are noble, but a losing endeavor for those who must make practical predictions…like investors.
- The euro sovereign debt thing ain’t over. Just don’t expect it to spark a new bear market. One of the oddities about the European situation right now is the disconnect from government finances and their actual economies. Ireland is set to grow +4% in 2011, and much of Europe is firmly in recovery. Germany ’s economy and stock market are up, as is European economic sentiment. Most of the rest of the world looks poised to post modest stock market gains for the year. That’s important because just a few months ago experts were declaring that asset markets were all unprecedentedly highly correlated. Yet, at least on a country basis for equities, there’s going to be some significant dispersion this year. Italy is down almost as much as Spain and Portugal , but Germany , Sweden , and others are doing just fine.
- Germany does a lot of its exporting to other European countries that use the euro. So, expect them to keep talking tough publically about other euro countries in fiscal trouble, but ultimately lending their support. Maybe the only way it breaks down is if Germany itself becomes fiscally endangered, in which case you can bet they probably won’t be willing to go down with the ship. But we’re nowhere near that right now.
- Obama’s proposed two year freeze on federal pay seems fine, but speaks to the overall lack of incentive to produce that comes with working for the government—pay isn’t based on any sort of output that I can see. This is also a clear signal to my view of Obama’s upcoming move to the middle to get reelected in 2012. Watch for a compromise on tax cut extensions to come next.
- The revelation that Russia has moved missiles near NATO territory isn’t going to rankle markets now, but it’s worth noting. With the SMART treaty in jeopardy, this is a sterling example of how frisky Russia could get given their desperate population aging and economic problems—which will only get worse over time. Desperate countries do desperate things and look for last gasps at power on the international stage. Eastern Europe is prime territory for that drama over the next decade.
- The brewing row in Florida over a phosphate mine and environmentalism is a global non-issue. If the US doesn’t do it, countries like Morocco , Tunisia , and China will provide all phosphate the world needs and more—and reap the benefits. Phosphate is used in everything from batteries to fertilizer, and the world will have a big need for it in the decades to come.
- Note that the Wikileaks scandal is a non-issue to markets, and really not that big a deal generally. Why? Most of the stuff in those leaks are all things most well-informed citizens of the world more or less expected to be going on anyway. Rumors have surfaced that next on the Wikileaks hit list are confidential docs from a big commercial bank. Same principle probably applies there too—will be damaging to whoever gets hit, but the global markets will likely mostly shrug it off, if it happens at all.
Well, Halloween passed, and I couldn’t let it go without doing some reading of the macabre variety. So I read about the history of US autos. There’s enough zombies, witches, and Frankensteins (The Ford Expedition! It’s alllliiiivee!!!) in there to keep you from sleeping for a week.
Of particular, gory interest is the way US autos came to be politicized and unionized through a decades-long decline. It’s not atypical for big industries, closely thought of as national assets to become so. Pundits hemmed and hawed over this in the US the last few years, but on the global scene nationalization and “protection” of jobs via big companies is about as old as the corporation itself. Still, the plight of the US auto industry is truly a unique tale. Make no mistake—these companies should have been bankrupted, totally refashioned, de-pensioned and de-unionized, and generally revamped years ago, and would be far more competitive today if they had. We’re not talking 3 years ago, we’re talking 25 or 30. The ironic part is that while politicization surely contributed to the inexorable decline of US autos—awkwardly and lumberingly and often bizarrely—it also helped these undead zombies stave off true death for a very long time.
The US automakers—between CAFE laws and scores of costs heaped on by the United Auto Workers (UAW)—just don’t have a fighting chance and haven’t for a long time. Foreign automakers totally missed the SUV craze of the ‘90s, and Toyota dealt with braking system fiascos in the last couple years—a misstep means lower earnings for them, not doom. These days, a bad product offering or an economic downturn means utter catastrophe for GM. So when you hear auto execs and politicians saying they need tariffs or better negotiations to buy parts to remain competitive, or when they whine it was the recession and financial crisis that caused their ruin…don’t believe any of it. US automakers’ cost per car manufactured is higher than basically anywhere else because of politicization and the costs of unionization. Toyota makes a lot of cars here too—they just don’t have the same UAW-related costs GM does.
All of this is starkly apparent in Paul Ingrassia’s Crash Course. The book’s bulk centers mostly on the last 10 years and emphasizes the bailouts, but the first few chapters are a sort of “CliffsNotes” to US auto manufacturing history—tightly written and often entertaining. This concise history provides a necessary framework for understanding the bailout. Crash Course argues the seeds of US auto death were planted decades ago and calls the “corporate oligopoly and union monopoly” of US autos a “recipe for disaster.” Indeed. Ingrassia adeptly recreates the feeling that so many still hold: the very fabric of the US economy is tied to GM, Chrysler, and Ford. That view hails from when the US economy was less diverse and manufacturing still king. These days autos aren’t all—not even close—but our attachment to the auto legacy drives them to be heavily politicized.
Crash Course is filled with fun details. To read about Robert McNamara’s start at Ford before he got to the Pentagon, the Corvair debacle and the rise of Ralph Nader as a political persona, important industrial innovations like the catalytic converter, the machismo and hubris of Lee Iacocca—these and many other tidbits we all know but don’t frequently remember are vital to understanding the state of automakers today.
By contrast, Steven Rattner’s Overhaul skips those details and speaks directly to the transactions and politics of the 2009 auto bailouts. Put the two books together, and it’s a ripping good (but often harrowing) tale.
Malcolm Gladwell recently reviewed Overhaul in the New Yorker. He points out that Rattner, the “Car Czar” of the Obama administration, is two things: A finance guy (a dealmaker) and a political wannabe. A third thing: As the Car Czar, he was the Van Helsing to GM’s Dracula. But those two facts explain a lot about Overhaul. As accounts of financial deals go, Overhaul is adequate. But it’s a very “safe” book. It reads like a political memoir of someone who expects to hold office again. To Rattner, Larry Summers and Tim Geithner are really nice guys, Obama is nothing but brilliant and courageous, and no one is much of a bad guy except Rick Wagoner—the former GM CEO whom Rattner deposed and the safest guy to trash. Maybe it’s all true, but don’t we read these “insider” accounts to get insight on how these folks really operate and speak? It’s too much to believe they’re all angels.
Those who’ve written professionally know that editors can sometimes give odd instructions to gussy up the prose (finance writing isn’t generally as exciting as romance novels). One envisions Mr. Rattner’s editor asking for more gritty details folks will relate to. Rattner seems to have complied by recounting the things he and his colleagues ate. Every couple pages we’re told about McDonald’s sandwiches that were scarfed or breakfast burritos consumed in the wee hours. But otherwise, personal detail is scarce. That’s probably because Mr. Rattner published this book in the midst of a personal legal battle, so he sticks to the facts.
All this no doubt defangs the book some, but doesn’t fully nullify it. Big Macs aside, Rattner describes complex capital structures, negotiations with unions and bondholders, and the process of finding a new CEO for GM precisely but in terms non-finance wonks will understand. It’s striking, in fact, how similar Rattner and Ingrassia’s adjectives describing the nonchalance and arrogance of GM management are.
Chrysler is now basically owned by Fiat and the unions, a revamped GM will go public soon, and Ford managed to survive and seems to be okay. A frightful tale. Autos have done pretty well in 2010—at least they’re on the mend—but I’d wager trouble’s in their future again. Maybe the next recession, maybe not. But sometime. Defined benefit pension plans and powerfully influential unions rank among the most ambitious social experiments of the 20th century, but they’re still far overwrought today. Unless US autos can reform those parts, they’ll rank among the undead again.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
|*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.|
I was thinking back to about this time last year, and recalling how many believed galloping inflation would be overtaking us by now. It hasn’t. Also, about a year ago, many believed—and this is a part of the New Great Depression narrative that today’s on its last legs—that we’d have all sorts of renewed trade wars, leading to the end of this most recent wave of globalization, and thus another reason for persistent economic stagnation. Surely, we didn’t read many who believed global trade would be a major reason for better than expected growth in 2010, as has been the case. From page A1 of the 9/13 Wall Street Journal:
World trade has come roaring back. The total volume of global imports and exports fell 21% between April 2008 and May 2009, the largest decline since the 1930s. By this June, trade was back to within 2% of its old peak. The collapse and rebound in trade played an important role in the global recession and recovery; now it may be the key to how strongly the global economy can grow.