Earnings continue to roll in as economic landscapes which will drive decades of new activity continue their underlying shift. If it feels as confusing as it was back in the late 70’s and early 80’s – don’t fret.
The problem with generational shift?
It takes time and its impact lasts for decades. In a world of day-trading, headlines by the milli-second, HFT impact, volume explosions, hair-trigger interpretations and media dissecting of all data from every direction you peer, suggesting we focus on the much larger issues at hand is, well, a yawner.
Telling ourselves that 50 million kids will move out of their parents’ homes and look for their own household in the next 3 to 10 years here in the US is not nearly as sexy as telling you the specific reason that XYZ Corp missed by 3 cents and how the last 90 days did not go so well for them. It just does not feel the same.
But, it is far more important to know the former than the latter for a long-term investor.
It has been 35+ years since we have witnessed something this dynamic – this powerful – this overlooked.
While just out and more will be read shortly, GDP reports were slightly lower than “expected” even as massive shifts are being digested. GDP growth in Q1 was 0.5% and missed consensus forecasts for 0.7%. Growth in Q4 was 1.4%.
Gross domestic purchase readings were a stronger 0.9%. In addition, the Fed’s preferred inflation measure – the core PCE price deflator – rose by 2.1%, the fastest pace since Q1 of 2012.
Near-term drags on the headlines appear to be net trade, which subtracted 0.33% from growth amid a strong dollar.
While too many fret over whether or not oil will ever get back to $100, too many more will miss the engineering, tools, advances and service/product shifts of future transport, future energy channels and future communications. Saudi Arabia is finally getting it – but that will be a painful process.
Let’s Face It
Yes…the number of active drilling rigs in the U.S. has plunged by almost 80% since late 2014, in direct response to lower oil prices. This illustrates the power of market prices, since lower prices have worked to discourage oil exploration and production, while at the same time encouraging more oil consumption.
However, crude oil production in the U.S. has declined by just 7% since last June. Meaning, it is now only up 93% in the previous six years. You see a 5 register on the price of crude and the floodgates will open again.
There will be a time when we will stand at a plug for the same 7 minutes we currently stand at a pump. We will exchange far fewer dollars for the same end result – 300 miles or so of movement.
The question we should be asking ourselves is not whether oil will return to $100.
Instead it is maybe, what will the economy do with the hundreds of billions of dollars it no longer needs to spend on gasoline – for example.
Thank The Fears….
As noted in your Members Area, rampant dim and fearful views of the future have not just helped corporations do massive work on their collective balance sheets (countries too). The consumer gets a swipe as well to take advantage of still low rates as deep-seeded fears remain in the markets.
The chart above shows that fixed mortgage rates are within inches of all-time record lows. There may never be a better time to refinance a mortgage or take out a new mortgage. Gen Y will thank us for a great pathway laid out ahead for home-ownership.
Applications for new mortgages have surged by almost 50% since late 2014, largely in response to low and declining mortgage rates.
This reflects a significant improvement in housing market fundamentals – and the beginning of yet another wave of change to flood us with surprises as Gen Y begins to “move on up”.
Sorry Mr. Bogle. Greatly respect you – but the world ahead is far brighter than recent headlines suggest.
Speaking of Fears
The chart above shows the huge “risk” spike early in the year when emotions swayed the crowd into thinking that cheap oil would take the entire world down with it.
Not. (But let’s hope for another panic about it anyway)
Credit spreads have since subsided, as well as fear in general. Most of the fear was concentrated in the oil patch, and rising oil prices have brought a sigh of relief to the entire corporate bond market.
Look for a new range – we stand by our $30-$80 noted nearly two years ago now.
While the World Stays Nervous
It’s easy to get lost in the messiness of headlines. The chart below shows us something different. The Bloomberg Financial Conditions Index tells us conditions remain relatively healthy. Sure, they are still shy of what they have been during earlier periods when markets were optimistic and economic growth was stronger.
However, I have added a line in red – above it is where we have spent the better part of the last 35 years – and we are above it.
Misunderstanding Generation Y?
Older generations have historically despised the younger ones as frivolous, good-for-nothing, and responsible for ruining the world.
The perception of millennials (Generation Y) today is no different.
Recently, I read one telephone survey found that 71% of Americans believe millennials to be selfish, while another 65% find them entitled. People make sweeping generalizations about millennials, ranging from how all they do is spend their parents’ money to just calling them flat out losers.
As is almost always the case, the facts are different – and we can benefit form them:
I have posted a piece in your Members area inside but the summary should help:
Part of what makes people go bug-eyed when it comes to millennials is that they’re so incredibly hard to pin down. Not really. They are our kids : ) They will make massive changes – just like we did. Everything will change. Just like it did when we grew up and took the baton.
Instead of focusing on millennials-at-large, it is critical for us to look more specifically at size of the audience and where it will move as life goes on.
So, before assuming millennials are lazy, ill-informed narcissists, get to know your future customers (and bosses) as deeply as possible.
Understand the challenges and opportunities related to coming-of-age in today’s society.
Understand the differences between being fresh out of college, looking for a more challenging job and settling down to start a family.
These realities are so different, yet they all get bucketed into the same stereotype.
Make sure you know the Barbell Economy as it is just getting rolling – and will be here for the next 30+ years!
By looking a bit closer, you may be pleasantly surprised by the diversity and passion coming from today’s young adults.
As the data show, they are some of the most competitive, altruistic and educated people this planet has ever seen.
Bottom line: Let’s pray for another panic.
And be prepared to take advantage of it while most will run and again, mistakenly, assume the worst.