June 26. 2024
“The excess savings Americans stored away during the pandemic ran dry months ago, and the US economy is feeling the effect.” So saith today’s Bloomberg, on the heels of annualized economic growth being revised up to 1.4%. Consumer-facing companies are atrophying. Certain large tech companies are holding fast, although their stocks are generally doing much better than their businesses. FedEx had a big earnings beat a couple of days ago, which is great but once again, echoes of 1999. The growth nowadays is B2B not B2C. Because, as Bloomberg suggests, and as I’ve written previously, the American consumer is statistically maxed out, and so too the “real” economy.
Behold three more headlines from this morning’s Bloomberg:
US Recurring Jobless Claims Rise to Highest Since End of 2021
Orders for US Business Equipment Match Biggest Drop This Year
Empty Offices Risk Wiping Out $250 Billion in Commercial Property Value
The markets are steady since all of these data points imply that interest rates should go down, which may indeed stimulate the financial economy. But while people are trading stocks and options and crypto at record levels, and institutions are feverishly doing one another’s laundry via unprecedented debt issuances, there is evidence that the largest financial engine of all, mortgages, is sputtering as people shelter in place—either because they’re paying much lower rates than are now available or because there’s no inventory because everyone else is sheltering in place. The exception, at least according to one major homebuilder, is the cohort of baby boomers who want to reduce their fixed expenses to pay for higher variable ones, healthcare most of all. They’ve been christened “downshifters.” How timely.
A cohort of wealthy boomers does not mean a wealthy country, at least not necessarily, because household wealth is roughly three-quarters financial. Its rise and fall is therefore ephemeral, i.e. based on price movements, and dependent on the inventories/floats of stocks and homes and bonds more than anything. When thought leaders rhapsodize about how much wealth has been confabulated, referencing the market capitalization of housing or crypto or speculative stocks, I want to know what they were doing around 2001 and 2009.
With the real economy in retreat, we are doomed to a a flat market—or worse—eventually. Which is actually a very good thing for the price/value investor, as soon as the momentum crowd stops crowding into the few growth stocks left. It’s a lot easier to find bargains once the dust has settled than pick winners amid a stampede.
Whither the “smart money”? Those who deploy other people’s money love turnarounds, of course, and unleashing “hidden” value via activism and lawuits. Also, there is growth to be found in the Asian markets, along with currency and political risks. Blackstone is reportedly reentering India in a big way, while Nike is selling thousand-dollar Air Jordans in China, where the economy is still forecast to grow around 5% this year. I like Nike’s odds better, but we’ll see.
I don’t read about many institutions jumping on the downshifting trend. Yet even in a Depression, people do not stop spending money, they just reallocate. An economy is not binary, like the stock market, buy or sell. It’s spend the same or spend less or spend more. The poor may depend more on entitlements, their choices may narrow, while the rich can be proactive and sensitive, say trading in the BMW for a Subaru. Or maybe they spend at the airport Duty Free Shop rather than the local mall. In any case, the economy rolls on regardless of their choices. The money just flows to different places at different volumes, and the US economy remains a river of epic proportions, even when trickling. Uncertainty should create opportunity but prices are historically high because the market no longer believes in uncertainty so cigar butts and wallflowers are still rare. At such a time it boggles the mind that a money market account has a higher yield than an S&P 500 index fund.
We need an economic renaissance to justify current prices, so both the government and investors are throwing money at whatever is popular, not unlike the Saudis and sometimes with the Saudis. Now the Middle East has empty soccer stadiums and we have giant empty lots where factories were supposed to appear. Infrastructure investment sounds fantastic, you cannot argue against it or you’ll lose your job, but the infrastructure must support something productive, not just a better sports stadium or a faster road to the beach or a bullet train to Vegas or a data center that requires virtually no humans. Theoretically we could reshore production of so many things, except that educated GenZers are just not that interested in making circuit boards and iPads. I think that their parents’ fetish with passive income has proved contagious. They’d rather intern at a crypto exchange and retire in their twenties than learn a skill and work into their sixties or beyond. It’s no coincidence that Donald Trump’s big economic proposal is tariffing imports rather than taxing productive endeavors. Of course this is a fantasy, everyone paying our bills for us, but so was that Foxconn plant in Wisconsin. We may require a new generation with a new perspective but that’s gonna take a while.
Meanwhile the cruise ships are at 104% capacity (per Carnival Cruise Lines) and the offices are only three-quarters full (per Moody’s). We think of consumption driving production, but it works the other way around too, it’s more like a virtuous cycle or a perpetual motion machine. When future growth evaporates, the machine pauses in anticipation. And for the investor, there are no more birds in the bush but only the one in the hand: value. So the bargain hunt continues.
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