Hey, earnings have kicked off and the markets are trying very hard to break through the resistance channel which has capped them for a mind-numbing 18 months. Let’s be patient as we can be somewhat confident there will be a few potholes in this earnings season and we need to be ready to take advantage of them while others will see them as negative short-term.
The interesting (and often overlooked) part about this “walking in quicksand” period is that history shows these things finally resolve themselves to the upside – sometimes explosively – even if painful and frustrating in the short-term.
The Barbell Economy is at work under the noise – make certain you are aware of it.
I am praying that we get one more dip – one more panic – one more summer swoon. Maybe all three if we are lucky. Why?
Keep it simple. Look back over time and ponder these two thoughts at every single red dot on the charts below:
“What did it look like 3, 5 or 10 years later?”
“Were I to act by building for the long-term (while others fear) during the those periods, no matter how terrifying it might have seemed at the time, would I be better off 3, 5 and 10 years down the road?”
I know – you are thinking, “Mike, it’s so different now than it was 200 years ago.”
Good point. So let’s ask the same questions of a smaller period of time:
I think you will find that all the red dots (in either time period) represented some very difficult periods. Once again – we are in one of those periods. Once again, when we speak 3, 5 and 10 years from now – we will indeed likely find the same result.
We will be mesmerized by new problems later. They will be the worst we have ever seen. The numbers will be larger, losses will be painful and setbacks will seem insurmountable.
We will not recall how bad we felt over the last 18 months. We will not remember how terrified we were in late February – just 6 weeks ago when bullish readings were LOWER than in March of 2009!
The chart above shows you that the masses in the most followed survey were more afraid in February 2016 than they were in March 2009 – 10,000 DOW points ago.
Taking The Bait
Every earnings season for the last year+, analysts have ratcheted their expectations downward as they track guidance from companies. The energy sector was going to take everything down. Yes, the energy sector was temporarily decimated. In time, that sector will restructure and learn to be very profitable at much lower oil prices than in recent years past.
Meanwhile, quarter after quarter, most of the other companies continue to beat those estimates. It’s like dangling fresh bait in front of a bass with scars given how many hooks he has taken the bait on and been caught.
Why do you think they have become robotic in this manner?
Fear sells better for everyone. There is unlikely an analyst at work today who is prepared to be caught by another surprise implosion like 2008 and 2009. The answer has become simple – just assume 2008 and 2009 are always right around the corner. Stay armed, stay defensive, stay fearful, stay ready to leap into the foxhole or run for the hills.
The public, in turn, follows the taking of the bait in different ways. Keep tons of cash idle – buy gold, buy bonds at 50+ times earnings and shun stocks on any dip. Sell into each mini panic. Be fearful of cheap oil and a fluttering China. Think about tomorrow instead of 10 years from now when you will need the money.
It all works – it all sells – it all feels better.
But….as those charts show us for many years – it does not work very well.
I find the chart above interesting as it tracks massive change under the surface – which too few investors allow to unfold.
Generational shifts take awhile to adjust and take hold. They do not happen overnight – but they do take hold and drive massive shifts in sectors. We are witnessing the surface indications of those events right now – and have been for about 2 years now.
Everyone likes to point to the chart above and speak of the tepid recovery we have witnessed. They speak of doom easily. They speak of the darkness that awaits our every economic move. “It will never work out” is second only in expense to investors to the all famous thought, “it’s never been this bad.”
Today we are indeed below trend of GDP growth. Heck, they have even created a tool at the Atlanta Fed which supposedly calculates GDP in real-time. Ha. Right.
The chart above shows you we have seen this before. Oddly enough, the other time has something in common with today: Generational shift.
In the early 80’s, the largest generation of people to ever impact our economy began to hit the system. As the baton was being passed then – notice that GDP growth was “under trend” as well.
Today, the new largest generation of people to ever hit the US economy is setting their feet in the blocks, getting ready to run their race and preparing to grab the baton from the Baby Boom.
Do not mistake this for the end of the world.
Do not fall for the gimmick from SocGen geniuses.
Ponder this instead:
Imagine for a moment you were investing back at the last demographic shift of this magnitude. Imagine further that you become enmeshed with all the mess present in the late 70’s and early 80’s.
Lastly imagine how foolish it would appear now if you had thought then,
“I am not going to invest at DOW 1400 because it has never been this high before and the future looks dark.”
I accept and agree that it is very uncomfortable given all the terrible indications out there flashing in front of our eyes. But that is the way it always is….
By the way, in case you are younger than I am and may not recall in all this mess what it looked like after the last time our GDP was “under-trend” for a few years as noted above, I enclose one last little chart.
(I have kept in the closing section from an earlier note to drive home the points – let them sink in for your benefit.)
So what is holding the economy back?
First – $8 trillion dollars sitting idle in the bank – fearful of investing in a dark future.
I am shocked none of the current candidates are covering this at all in the campaign rhetoric but it is pretty basic – and provides a slew of solutions to work into the system:
Turn the focus instead to fiscal policy as I opened this note referencing.
Central banks have done pretty much all they can.
Make investing for growth positive again.
Make investing for productivity effective again.
Reward forward-thinking risk takers. It is what built this country and built this world we live in today.
What’s standing in the way of progress?
Burdensome regulations, high marginal tax rates, intrusive government, subsidies for uneconomical green projects and most of all, that set of emotions which holds such great control over the perception of our future:
Massive fear and uncertainty.
Surprise Is To The Upside – Not Downside
The funny thing about all of these trepidations is that markets have always feared downsides – right? Except history tells us the same thing – over and over and over.
Things improve over time.