The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
The preacher man says it’s the end of time
And the Mississippi River, she’s a-goin’ dry
The interest is up and the stock market’s down
And you only get mugged if you go downtown
- Hank Williams, Jr.
The "glass half-empty" crowd always has a large cheering section, but the '08 Liquidity Crisis has an added power to their message.
Because "no one" saw the liquidity issues coming and "everyone" was caught off guard, the fearmongers are experiencing a heyday not unlike the San Francisco Giants.
Unfortunately for them, the preconditions to doom are untrue.
In many recent books — but especially Michael Lewis' The Big Short — several big-time investors made huge returns betting against not only the housing market, but each and every market that tumbled thereafter. The thought that someone was on the other side of all those long positions, we are told, is fantastic and impressive.
But as a long-time bond trader, I can tell you that with no exception every trade has two sides.
Q: "Why is the market up?"
A: "More buyers than sellers!"
Has there ever been a more idiotic statement?
Today, you can pick your poison of economic doom in a variety of forms. In no particular order, some of them are:
- Inflation: With the Fed pressing more and more on the accelerator and events in Africa driving oil prices upward, this story has great legs. Forget that just a year ago, Fed critics were worried about deflation and were screaming for the Fed to do more.
- Sovereign Instability: From debt burdens to revolutions, it seems no country is protected from possible overthrow. Even in the U.S., the rhetoric between our relatively calm parties has reached a screeching pitch (or so we are told). If governments aren’t stable, what is?
- Gold: Well, it's anything but stable, but the screaming gold prices of the past several years are used as a barometer of panic in the world over. If panic continues, gold will go up, but what will you use it for in the end? Warren Buffett summed up my views here last week saying, "If you took all of the gold in the world…it would be worth about $7 trillion…you could have all the farmland in the United States for about $2.5 trillion, seven ExxonMobils, and you could have $1 trillion of walking around money… maybe call me crazy but I’ll take the farmland and the ExxonMobils." Don’t forget that $1 trillion on the side, Warren!
- Food Prices: Absolutely on the rise, but what you don't typically see reported is the fact that rice prices are only up about 3 percent in the last 12 months. At the same time, the United Nations declared a decline of 79 billion people who are in the category of "undernourished" in 2010 vs. 2009. Seems like an important statistic in the debate on food prices.
- Oil: Down some 30 percent from three years ago. Enough said?
- Muni Defaults: There is some talk about allowing states to default on their obligations for the first time ever and with CDS spreads widening, it's clear the markets are paying attention to this possibility. The famed Nouriel Roubini says there could be $100 billion in defaults and Meredith Whitney showed up on the radar last December with her estimate of "hundreds of billions of dollars" in projected defaults. This sum, while fantastical on the state stage, is a minor drop in the bucket nationally. Who doesn’t think the federal government will bail out the states if needed?
- Banking: This issue is still hanging around given the FDIC's continued activity closing banks (157 in 2010) and the continued perception that "banks aren’t lending." In our case, this is patently false, as we grew our loan book over 30 percent last year responding to our clients’ needs. It's likely if there are creditworthy borrowers (and underwriting-worthy lenders) at other banks, lending would pick up as well. In any case, the fear of another banking crisis remains — likely more out of etched memories than anything else.
And there are many more (anyone heard about the deficit lately?) Yet the economy plugs on. People continue to go to work (8 million fewer though); goods and services continue to be produced (same amount as when those 8 million people were working); taxes are paid; and trade occurs.
Don’t let the hype get you down. Many of these challenges are offset by other strengths in the economy or they are false to begin with. Keeping our heads down and remaining engaged for our own betterment (within the laws of the land and of nature, of course) will always lead to good things.
The U.S. jobless rate fell to 8.9 percent in February, the lowest in almost two years, as employers added 192,000 jobs for the month. Manufacturing, construction, and transportation were among the industries that added workers, a sign that the recovery is growing in strength.
Service industries grew more than anticipated in February, revealing that the U.S. expansion is moving beyond manufacturing. The ISM non-manufacturing index increased to 59.7, the highest level since August of 2005. Other reports today showed consumer confidence held near a three-year high last week as more Americans said their finances were in good shape, and claims for jobless benefits unexpectedly dropped.
Notes from the Fed's Beige book showed that the economy grew modestly. There was a slight improvement to the weak job market and businesses reported rising costs. In the survey of regional economies, the data shows that all 12 districts are expanding. Retail sales, one of the biggest drivers of the economy, rose in most areas and manufacturing showed solid growth. Eleven of the 12 districts described their regions as expanding, improving or experiencing modest growth. The Chicago region reported that their pace of recovery was not as strong.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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